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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 001-14057
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 61-1323993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
680 South Fourth Street
Louisville, KY 40202-2412
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 2000
----------------------------- -----------------------------
Common stock, $0.25 par value 69,937,473 shares
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1 of 37
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (restated):
Condensed Consolidated Statement of Operations -- for the three
months ended March 31, 2000 and 1999 ........................... 3
Condensed Consolidated Balance Sheet -- March 31, 2000
and December 31, 1999........................................... 4
Condensed Consolidated Statement of Cash Flows -- for the
three months ended March 31, 2000 and 1999...................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 36
2
KINDRED HEALTHCARE, INC
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 2000 and 1999
(Unaudited)
(In thousands, except per share amounts)
(Restated - see Note 2)
--------------------
2000 1999
-------- --------
Revenues............................................................ $715,456 $700,232
-------- --------
Salaries, wages and benefits........................................ 405,313 403,894
Supplies............................................................ 93,398 84,997
Rent................................................................ 76,220 75,452
Other operating expenses............................................ 122,589 112,561
Depreciation and amortization....................................... 17,902 22,285
Interest expense.................................................... 16,239 19,536
Investment income................................................... (1,206) (631)
-------- --------
730,455 718,094
-------- --------
Loss before reorganization costs and income taxes................... (14,999) (17,862)
Reorganization costs................................................ 3,065 2,312
-------- --------
Loss before income taxes............................................ (18,064) (20,174)
Provision for income taxes.......................................... 500 50
-------- --------
Loss from operations................................................ (18,564) (20,224)
Cumulative effect of change in accounting for start-up costs........ - (8,923)
-------- --------
Net loss................................................... (18,564) (29,147)
Preferred stock dividend requirements............................... (261) (261)
-------- --------
Loss to common stockholders................................ $(18,825) $(29,408)
======== ========
Loss per common share:
Basic:
Loss from operations.......................................... $ (0.27) $ (0.29)
Cumulative effect of change in accounting for start-up costs.. - (0.13)
-------- --------
Net loss................................................... $ (0.27) $ (0.42)
======== ========
Diluted:
Loss from operations.......................................... $ (0.27) $ (0.29)
Cumulative effect of change in accounting for start-up costs.. - (0.13)
-------- --------
Net loss................................................... $ (0.27) $ (0.42)
======== ========
Shares used in computing loss per common share:
Basic............................................................ 70,240 70,326
Diluted.......................................................... 70,240 70,326
See accompanying notes.
3
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
(Restated)
--------------------------
March 31, December 31,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 141,906 $ 148,350
Accounts receivable less allowance for loss......................... 317,185 324,135
Inventories......................................................... 29,817 28,956
Insurance subsidiary investments.................................... 39,376 16,483
Income taxes........................................................ 8,109 8,884
Other............................................................... 70,393 65,076
----------- -----------
606,786 591,884
Property and equipment, at cost...................................... 611,560 615,160
Accumulated depreciation............................................. (250,089) (243,526)
----------- -----------
361,471 371,634
Goodwill less accumulated amortization............................... 171,001 173,818
Investment in affiliates............................................. 16,255 15,874
Assets held for sale................................................. 16,343 17,217
Other................................................................ 65,217 65,547
----------- -----------
$ 1,237,073 $ 1,235,974
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $ 89,428 $ 101,219
Salaries, wages and other compensation.............................. 151,810 159,482
Due to third party payors........................................... 64,840 52,205
Other accrued liabilities........................................... 83,753 83,967
----------- -----------
389,831 396,873
Professional liability risks......................................... 78,737 72,785
Deferred credits and other liabilities............................... 13,618 11,178
Liabilities subject to compromise.................................... 1,177,992 1,159,417
Series A preferred stock (subject to compromise)..................... 1,743 1,743
Stockholders' equity (deficit):
Common stock, $0.25 par value; authorized 180,000 shares;
issued 70,228 shares -- March 31 and 70,278 shares -- December 31.. 17,557 17,570
Capital in excess of par value...................................... 667,090 667,078
Accumulated deficit................................................. (1,109,495) (1,090,670)
----------- -----------
(424,848) (406,022)
----------- -----------
$ 1,237,073 $ 1,235,974
=========== ===========
See accompanying notes.
4
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
(Restated)
--------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net loss......................................................................... $(18,564) $(29,147)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................. 17,902 22,285
Provision for doubtful accounts............................................... 8,801 6,725
Reorganization costs.......................................................... 3,065 2,312
Cumulative effect of change in accounting for start-up costs.................. - 8,923
Other......................................................................... 3,586 1,871
Changes in operating assets and liabilities:
Accounts receivable........................................................ (1,851) (11,472)
Inventories and other assets............................................... (2,697) 9,068
Accounts payable........................................................... (387) 10,934
Income taxes............................................................... 775 3,421
Due to third party payors.................................................. 12,635 (194)
Other accrued liabilities.................................................. 21,746 12,254
-------- --------
Net cash provided by operating activities before reorganization costs... 45,011 36,980
Payment of reorganization costs.................................................. (2,348) (923)
-------- --------
Net cash provided by operating activities............................... 42,663 36,057
-------- --------
Cash flows from investing activities:
Purchase of property and equipment............................................... (8,250) (24,492)
Sale of assets................................................................... 2,354 3,267
Surety bond deposits............................................................. (3,947) -
Net change in investments........................................................ (22,570) 5,083
Collection of notes receivable................................................... 1,468 -
Other............................................................................ 234 (767)
-------- --------
Net cash used in investing activities................................... (30,711) (16,909)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt...................................................... (5,711) (6,758)
Payment of debtor-in-possession deferred financing costs......................... (600) -
Payment of deferred financing costs.............................................. - (901)
Other............................................................................ (12,085) (29,756)
-------- --------
Net cash used in financing activities................................... (18,396) (37,415)
-------- --------
Change in cash and cash equivalents................................................. (6,444) (18,267)
Cash and cash equivalents at beginning of period.................................... 148,350 34,551
-------- --------
Cash and cash equivalents at end of period.......................................... $141,906 $ 16,284
======== ========
Supplemental information:
Interest payments................................................................ $ 3,444 $ 11,324
Income tax refunds............................................................... 275 3,371
See accompanying notes.
5
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
Kindred Healthcare, Inc. ("Kindred" or the "Company") (formerly Vencor,
Inc.) provides long-term healthcare services primarily through the operation
of nursing centers and hospitals. At March 31, 2000, the Company's health
services division operated 320 nursing centers (40,915 licensed beds) in 31
states and a rehabilitation therapy business. The Company's hospital division
operated 56 hospitals (4,931 licensed beds) in 23 states and an institutional
pharmacy business.
The Company and substantially all of its subsidiaries filed voluntary
petitions for protection under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") on September 13, 1999. The Company currently is
operating its businesses as a debtor-in-possession subject to the jurisdiction
of the United States Bankruptcy Court in Delaware (the "Bankruptcy Court").
Accordingly, the condensed consolidated financial statements of the Company have
been prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted
accounting principles applicable to a going concern, which assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. The condensed consolidated financial statements do not include any
adjustments that might result from the resolution of the Chapter 11 Cases (as
defined) or other matters discussed in the accompanying notes. The Company's
continued operating losses, liquidity issues and the Chapter 11 Cases raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern and the
appropriateness of using the going concern basis of accounting are dependent
upon, among other things, (i) the Company's ability to comply with the terms of
the DIP Financing (as defined), (ii) confirmation of a plan of reorganization
under the Bankruptcy Code, (iii) the Company's ability to achieve profitable
operations after such confirmation, and (iv) the Company's ability to generate
sufficient cash from operations to meet its obligations. The plan of
reorganization and other actions during the Chapter 11 Cases could change
materially the amounts currently recorded in the condensed consolidated
financial statements. See Note 4.
On May 1, 1998, Ventas, Inc. ("Ventas") completed the spin-off (the "Spin-
off") of its healthcare operations to its stockholders through the distribution
of Vencor common stock. Ventas retained ownership of substantially all of its
real property and leases such real property to the Company pursuant to four
master lease agreements. In anticipation of the Spin-off, the Company was
incorporated on March 27, 1998 as a Delaware corporation. For accounting
purposes, the consolidated historical financial statements of Ventas became the
historical financial statements of the Company upon consummation of the Spin-
off. Any discussion concerning events prior to May 1, 1998 refers to the
Company's business as it was conducted by Ventas prior to the Spin-off.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which was required to be
adopted in fiscal years beginning after June 15, 1999. In June 1999, FASB
delayed the effective date of SFAS 133 for one year. Management has not
determined the effect, if any, of SFAS 133 on the Company's consolidated
financial statements.
The accompanying unaudited condensed consolidated financial statements do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
1999 filed with the Securities and Exchange Commission on Form 10-K.
6
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION (Continued)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the Company's customary accounting practices
and the provisions of SOP 90-7. Management believes that the financial
information included herein reflects all adjustments necessary for a fair
presentation of interim results and, except for the costs described in Notes 3
and 6, all such adjustments are of a normal and recurring nature.
As disclosed in its 1999 Form 10-K, the Company realigned its Vencare
ancillary services business in the fourth quarter of 1999. Vencare's
rehabilitation, speech and occupational therapies were integrated into the
Company's health services division, and its institutional pharmacy business was
assigned to the hospital division. Vencare's respiratory therapy and certain
other ancillary businesses were discontinued. The accompanying condensed
consolidated financial statements reflect the realignment of the former Vencare
business for all periods presented.
Effective January 1, 2000, the Company adopted an amortization period of 20
years from date of acquisition for goodwill. Prior thereto, the Company
generally amortized such costs over 40 years.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On August 14, 2001, the Company announced that it will restate certain of
its previously issued consolidated financial statements. The Company recently
determined that an oversight related to the allowance for professional liability
risks had occurred in its consolidated financial statements beginning in 1998.
The oversight resulted in the understatement of the provision for professional
liability claims in 1998, 1999 and 2000 because the Company did not record a
reserve for claims incurred but not reported at the respective balance sheet
dates. The cumulative understatement of professional liability claims reserves
approximated $5 million at December 31, 1998, $28 million at December 31, 1999
and $39 million at December 31, 2000. The restatement had no effect on
previously reported cash flows from operations.
The unaudited condensed consolidated financial statements included herein
amend those previously included in the Company's Quarterly Report on Form 10-Q
for the three months ended March 31, 2000. Consolidated financial statement
information and related disclosures included in these amended unaudited
condensed consolidated finacial statements reflect, where appropriate, changes
resulting from the restatement.
7
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
The effect of the restatement on the Company's previously issued
unaudited condensed consolidated financial statements follows (in thousands,
except per share amounts):
Three months ended March 31,
-------------------------------------------------------
2000 1999
---------------------------- ------------------------
As previously As As previously As
reported restated reported restated
-------------- ---------- -------------- -----------
Loss from operations........................................... $(15,771) $(18,564) $(14,670) $(20,224)
Net loss....................................................... (15,771) (18,564) (23,593) (29,147)
Loss per common share:
Basic:
Loss from operations....................................... $ (0.23) $ (0.27) $ (0.21) $ (0.29)
Net loss................................................... (0.23) (0.27) (0.34) (0.42)
Diluted:.....................................................
Loss from operations....................................... $ (0.23) $ (0.27) $ (0.21) $ (0.29)
Net loss................................................... (0.23) (0.27) (0.34) (0.42)
March 31, 2000 December 31, 1999
--------------------------- ----------------------------
As previously As As previously As
reported restated reported restated
------------- ------------ -------------- -----------
Professional liability risks................................... $ 48,231 $ 78,737 $ 45,072 $ 72,785
Total liabilities.............................................. 1,629,672 1,660,178 1,612,540 1,640,253
Accumulated deficit............................................ (1,078,989) (1,109,495) (1,062,957) (1,090,670)
Stockholders' deficit.......................................... (394,342) (424,848) (378,309) (406,022)
NOTE 3 -- ACCOUNTING CHANGE
Effective January 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), which requires the Company to
expense start-up costs, including organizational costs, as incurred. In
accordance with the provisions of SOP 98-5, the Company wrote off $8.9 million
of such unamortized costs as a cumulative effect of change in accounting
principle in the first quarter of 1999.
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 cases have been consolidated for purposes of joint
administration under Case Nos. 99-3199 (MFW) through 99-3327 (MFW)
(collectively, the "Chapter 11 Cases"). The Company currently is operating its
businesses as a debtor-in-possession subject to the jurisdiction of the
Bankruptcy Court.
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the condensed consolidated balance sheet as
liabilities subject to compromise. The Company currently is paying the post-
petition claims of all vendors and providers in the ordinary course of business.
8
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
In connection with the Chapter 11 Cases, the Company entered into a $100
million debtor-in-possession financing agreement (the "DIP Financing") with a
bank group led by Morgan Guaranty Trust Company of New York (collectively, the
"DIP Lenders"). The Bankruptcy Court granted final approval of the DIP Financing
on October 1, 1999. The DIP Financing, which was initially scheduled to mature
on March 13, 2000, is comprised of a $75 million tranche A revolving loan (the
"Tranche A Loan") and a $25 million tranche B revolving loan (the "Tranche B
Loan"). Interest is payable at prime rate plus 2 1/2% on the Tranche A Loan and
prime rate plus 4 1/2% on the Tranche B Loan.
Available aggregate borrowings under the Tranche A Loan were initially
limited to $45 million in September 1999 and increased to $65 million in
October, $70 million in November and $75 million thereafter. Pursuant to a
recent amendment to the DIP Financing, the aggregate borrowing limitations under
the Tranche A Loans are limited to approximately $68 million until maturity.
Borrowings under the Tranche B Loan require the approval of lenders holding at
least 75% of the credit exposure under the DIP Financing. The DIP Financing is
secured by substantially all of the assets of the Company and its subsidiaries,
including certain owned real property. The DIP Financing contains standard
representations and warranties and other affirmative and restrictive covenants.
As of March 31, 2000, there were no outstanding borrowings under the DIP
Financing.
Since the consummation of the DIP Financing, the Company and the DIP Lenders
have agreed to several amendments to the DIP Financing. These amendments
approved various changes to the DIP Financing including (i) extending the period
of time for the Company to file its plan of reorganization, (ii) approving
certain transactions and (iii) revising the Company's cash plan originally
submitted with the DIP Financing. In December 1999, the Company informed the DIP
Lenders that it planned to record a significant charge to earnings in the fourth
quarter of 1999 related to the valuation of accounts receivable that could have
resulted in noncompliance with certain covenants in the DIP Financing requiring
minimum Consolidated EBITDAR and a minimum Net Amount of Eligible Accounts (both
as defined in the DIP Financing). In connection with the third amendment to the
DIP Financing, the Company received a waiver from compliance with these
covenants of the DIP Financing through February 14, 2000. The Company received
subsequent waivers from compliance with these covenants in later amendments. In
connection with the amendment to the DIP Financing dated February 23, 2000, the
parties agreed, among other things, to (i) extend the maturity date of the DIP
Financing until June 30, 2000, (ii) extend the period of time for the Company to
file its plan of reorganization to May 1, 2000, and (iii) revise certain
financial covenants. The Bankruptcy Court granted approval of this amendment to
the DIP Financing on March 10, 2000.
At December 31, 1999, the Company was not in compliance with the DIP
Financing covenant related to the minimum Net Amount of Eligible Accounts
(accounts receivable). Since there were no outstanding borrowings under the DIP
Financing at December 31, 1999, the event of default had no effect on the
Company's 1999 consolidated financial statements. Effective April 12, 2000, the
Company and the DIP Lenders agreed to an additional amendment to the DIP
Financing to revise the covenant related to the minimum Net Amount of Eligible
Accounts. In this amendment, the DIP Lenders also waived all events of default
regarding this covenant that occurred prior to the date of the amendment.
On April 26, 2000, the Company and the DIP Lenders agreed to an additional
amendment to the DIP Financing to permit the Company to seek an extension to
file its plan of reorganization through June 15, 2000 and to permit sales of
surplus personal property.
9
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
On November 4, 1999, the Company received approval (subject to certain
conditions) to implement a management retention plan (the "Management Retention
Plan") to enhance the ability of the Company to retain key management employees
during the reorganization period. Under the Management Retention Plan, bonuses
aggregating $7.3 million will be awarded to certain key management employees
based upon various percentages of their annual salary. The Management Retention
Plan provides that the retention bonuses be paid in three equal amounts upon:
(i) the Bankruptcy Court's approval of the Management Retention Plan, (ii) the
effective date of the plan of reorganization and (iii) three months following
the effective date of the plan of reorganization.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. The automatic stay does not
necessarily apply to certain actions against Ventas for which the Company has
agreed to indemnify Ventas in connection with the Spin-off. In addition, the
Company may assume or reject executory contracts, including lease obligations,
under the Bankruptcy Code. Parties affected by these rejections may file claims
with the Bankruptcy Court in accordance with the reorganization process.
As previously disclosed, the Company is developing a plan of reorganization
through negotiations with key parties including its senior bank lenders (the
"Senior Lenders"), the holders of the Company's $300 million 9 7/8% Guaranteed
Senior Subordinated Notes due 2005 (the "1998 Notes"), Ventas and the Department
of Justice (the "DOJ"), acting on behalf of the Health Care Financing
Administration ("HCFA") and the Department of Health and Human Services' Office
of the Inspector General ("HHS"). A substantial portion of pre-petition
liabilities are subject to settlement under the plan of reorganization to be
submitted by the Company.
The plan of reorganization must be voted upon by the impaired creditors of
the Company and approved by the Bankruptcy Court. There can be no assurance that
the plan of reorganization to be proposed by the Company will be approved by the
requisite holders of claims, confirmed by the Bankruptcy Court or that it will
be consummated. If the plan of reorganization is not accepted by the required
number of impaired creditors and the Company's exclusive right to file and
solicit acceptance of a plan of reorganization ends, any party in interest may
subsequently file its own plan of reorganization for the Company. The Bankruptcy
Court currently has extended the Company's exclusive right to submit a plan of
reorganization through May 16, 2000.
On May 11, 2000, the Company filed a motion to extend its exclusive right to
submit a plan of reorganization through July 18, 2000. The hearing on this
motion is scheduled for May 31, 2000. The Company has requested an interim
order from the Bankruptcy Court to maintain the Company's exclusive right to
file a plan of reorganization until the motion is decided.
In support of its motion, the Company informed the Bankruptcy Court that it
has continued to make progress in its reorganization proceedings. In addition,
the motion notes that the Company has reached an understanding with certain of
the Senior Lenders, certain holders of the 1998 Notes and the advisors to the
official committee of unsecured creditors regarding the broad terms of a plan of
reorganization. The Company also has continued to engage in discussions with
Ventas to obtain its support for a consensual plan of reorganization and is
simultaneously pursuing alternatives based upon the possible outcome of those
negotiations. The Company also informed the Bankruptcy Court that it has
continued its conversations with the DOJ regarding a settlement of ongoing
investigations and the negotiation of other agreements with the Company. In
addition, the motion further notes that the Company has filed amended schedules
of unsecured creditors and has made progress in reviewing and analyzing pre-
petition claims against the Company.
10
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
A plan of reorganization must be confirmed by the Bankruptcy Court after
certain findings required by the Bankruptcy Code are made by the Bankruptcy
Court. The Bankruptcy Court may confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or equity
holders if certain requirements of the Bankruptcy Code are satisfied. As
previously announced, the Company has indicated that any plan of reorganization
will result in the Company's common stock having little, if any, value.
Events Leading to Reorganization
The Company reported a net loss from operations in 1998 aggregating $578
million, resulting in certain financial covenant violations under the Company's
$1.0 billion bank credit facility (the "Credit Agreement"). Namely, the
covenants regarding minimum net worth, total leverage ratio, senior leverage
ratio and fixed charge coverage ratio were not satisfied at December 31, 1998.
Prior to the commencement of the Chapter 11 Cases, the Company received a series
of temporary waivers of these covenant violations. The waivers generally
included certain borrowing limitations under the $300 million revolving credit
portion of the Credit Agreement. The final waiver was scheduled to expire on
September 24, 1999.
The Company was informed on April 9, 1999 by HCFA that the Medicare program
had made a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. On April 21, 1999, the Company reached an
agreement with HCFA to extend the repayment of such amounts over 60 monthly
installments (the "HCFA Agreement"). Under the HCFA Agreement, monthly payments
of approximately $1.5 million commenced in May 1999. Beginning in December 1999,
the balance of the overpayments bears interest at a statutory rate approximating
13.4%, resulting in a monthly payment of approximately $2.0 million through
March 2004. If the Company is delinquent with two consecutive payments, the HCFA
Agreement will be defaulted and all subsequent Medicare reimbursement payments
to the Company may be withheld. Amounts due under the HCFA Agreement aggregate
$75.3 million and have been classified as liabilities subject to compromise in
the Company's condensed consolidated balance sheet at March 31, 2000. The
Company has received Bankruptcy Court approval to continue to make the monthly
payments under the HCFA Agreement during the pendency of the Chapter 11 Cases.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The failure to pay interest
resulted in an event of default under the 1998 Notes.
In accordance with SOP 90-7, outstanding borrowings under the Credit
Agreement ($509 million) and the principal amount of the 1998 Notes ($300
million) are presented as liabilities subject to compromise in the Company's
condensed consolidated balance sheet at March 31, 2000. If the Chapter 11 Cases
had not been filed, the Company would have reported a working capital deficit
approximating $895 million at March 31, 2000. The condensed consolidated
financial statements do not include any adjustments that might result from the
resolution of the Chapter 11 Cases or other matters discussed herein. During the
pendency of the Chapter 11 Cases, the Company is continuing to record the
contractual amount of interest expense related to the Credit Agreement. No
interest costs have been recorded related to the 1998 Notes since the filing of
the Chapter 11 Cases. Contractual interest expense not accrued for the 1998
Notes during the first quarter of 2000 was $7.4 million.
As previously reported, the Company has been informed by the DOJ that the
Company and Ventas are the subjects of ongoing investigations into various
Medicare reimbursement issues, including hospital cost reporting issues, Vencare
billing practices and various quality of care issues in the hospitals and
nursing centers formerly operated by Ventas and currently operated by the
Company. The Company has cooperated fully in these investigations. The DOJ has
informed the Company that it has intervened in several pending qui tam actions
11
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Events Leading to Reorganization (Continued)
asserted against the Company and/or Ventas in connection with these
investigations. The Company and Ventas are engaged in active discussions with
the DOJ that may result in a resolution of some or all of the DOJ investigations
including the pending qui tam actions. In addition, the DOJ has filed proofs of
claims with respect to certain alleged claims in the Chapter 11 Cases. The
Company believes that the DOJ's intervention in these actions will facilitate
the ability of the parties to reach a final resolution. Such a resolution with
the DOJ could include a payment to the Federal government which could have a
material adverse effect on the Company's liquidity and financial position. See
Note 10.
Agreements with Ventas
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off (the
"Spin-off Agreement"). The Company was seeking a reduction in rent and other
concessions under its lease agreements with Ventas (the "Master Lease
Agreements"). On March 31, 1999, the Company and Ventas entered into a
standstill agreement (the "Standstill Agreement") which provided that both
companies would postpone through April 12, 1999 any claims either may have
against the other. On April 12, 1999, the Company and Ventas entered into a
second standstill agreement (the "Second Standstill") which provided that
neither party would pursue any claims against the other or any other third party
related to the Spin-off as long as the Company complied with certain rent
payment terms. The Second Standstill was scheduled to terminate on May 5, 1999.
The Company and Ventas also agreed that any statutes of limitations or other
time-related constraints in a bankruptcy or other proceeding that might be
asserted by one party against the other would be extended and tolled from April
12, 1999 until May 5, 1999 or until the termination of the Second Standstill
(the "Tolling Agreement").
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently, the
Company and Ventas entered into further amendments to the Second Standstill and
the Tolling Agreement to extend the time during which no remedies may be pursued
by either party and to extend the date by which the Company may cure its failure
to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
a stipulation (the "Stipulation") which provides for the payment by the Company
of a reduced monthly rent of approximately $15.1 million beginning in September
1999. The Stipulation was approved by the Bankruptcy Court. The difference
between the $18.9 million base rent under the Master Lease Agreements and the
reduced monthly rent is being accrued as an administrative expense subject to
compromise in the Chapter 11 Cases. Unpaid August 1999 rent of approximately
$18.9 million will constitute a claim by Ventas in the Chapter 11 Cases which
claim is potentially subject to dispute. During the pendency of the Chapter 11
Cases, the Company is recording the contractual amount of the $18.9 million
monthly base rent.
The Stipulation also continues to toll any statutes of limitations or other
time constraints in a bankruptcy proceeding for claims that might be asserted by
the Company against Ventas. The Stipulation automatically renews for one-month
periods unless either party provides a 14-day notice of termination. The
Stipulation also may be terminated prior to its expiration upon a payment
default by the Company, the consummation of a plan of reorganization or the
occurrence of certain defaults under the DIP Financing.
12
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Agreements with Ventas (Continued)
The Stipulation also provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off.
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may seek to pursue claims against Ventas arising
out of the Spin-off and seek judicial relief barring Ventas from exercising any
remedies based on the Company's failure to pay some or all of the rent to
Ventas. The Company's failure to pay rent or otherwise comply with the
Stipulation, in the absence of judicial relief, would result in an "Event of
Default" under the Master Lease Agreements. Upon an Event of Default under the
Master Lease Agreements, assuming Ventas were to be granted relief from the
automatic stay by the Bankruptcy Court, the remedies available to Ventas
include, without limitation, terminating the Master Lease Agreements,
repossessing and reletting the leased properties and requiring the Company to
(i) remain liable for all obligations under the Master Lease Agreements,
including the difference between the rent under the Master Lease Agreements and
the rent payable as a result of reletting the leased properties or (ii) pay the
net present value of the rent due for the balance of the terms of the Master
Lease Agreements. Such remedies, however, would be subject to the supervision of
the Bankruptcy Court.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims, treatment under the plan of reorganization and other events.
Payment terms for these amounts will be established in connection with the plan
of reorganization.
The Company has received approval from the Bankruptcy Court to pay pre-
petition and post-petition employee wages, salaries, benefits and other employee
obligations. The Bankruptcy Court also approved orders granting authority, among
other things, to pay pre-petition claims of certain critical vendors, utilities
and patient obligations. All other pre-petition liabilities are classified in
the condensed consolidated balance sheet as liabilities subject to compromise.
13
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Liabilities Subject to Compromise (Continued)
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases follows (in thousands):
March 31, December 31,
2000 1999
---------- -----------
Long-term debt:
Credit Agreement...................... $ 509,143 $ 506,114
1998 Notes............................ 300,000 300,000
Amounts due under the HCFA Agreement.. 75,295 80,296
8 5/8% Senior Subordinated Notes...... 2,391 2,391
Unamortized deferred financing costs.. (12,338) (12,626)
Other................................. 3,884 4,592
---------- ----------
878,375 880,767
---------- ----------
Due to third party payors.............. 112,694 112,694
Accounts payable....................... 32,990 33,693
Accrued liabilities:
Interest.............................. 56,027 45,521
Ventas rent........................... 45,133 33,884
Other................................. 52,773 52,858
---------- ----------
153,933 132,263
---------- ----------
$1,177,992 $1,159,417
========== ==========
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
NOTE 5 -- REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third party payors.
A summary of first quarter revenues by payor type follows (in thousands):
2000 1999
-------- --------
Medicare........................................... $263,877 $254,392
Medicaid........................................... 222,513 218,625
Private and other.................................. 243,653 243,548
-------- --------
730,043 716,565
Elimination........................................ (14,587) (16,333)
-------- --------
$715,456 $700,232
======== ========
NOTE 6 -- REORGANIZATION COSTS
Reorganization costs include professional fees incurred in connection with
the Company's restructuring activities of $3.1 million for the first quarter of
2000 and $2.3 million for the first quarter of 1999.
NOTE 7 -- EARNINGS PER SHARE
Basic and diluted earnings per common share are based upon the weighted
average number of common shares outstanding. No incremental shares are included
in the calculations of the diluted loss per common share since the result would
be antidilutive.
14
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- BUSINESS SEGMENT DATA
The Company operates two business segments: the health services division and
the hospital division. The health services division operates nursing centers
and a rehabilitation therapy business. The hospital division operates hospitals
and an institutional pharmacy business. The Company defines operating income as
earnings before interest, income taxes, depreciation, amortization and rent.
Operating income reported for each of the Company's business segments excludes
allocations of corporate overhead.
The following table sets forth the Company's revenues, operating results and
assets by business segment (in thousands):
First Quarter
------------------------------
2000 1999
---------- ----------
Revenues:
Health services division:
Nursing centers........................................... $ 412,703 $ 398,374
Rehabilitation services................................... 34,377 54,365
Other ancillary services.................................. (5) 16,263
Elimination............................................... (18,091) (34,205)
---------- ----------
428,984 434,797
Hospital division:
Hospitals................................................. 253,591 238,522
Pharmacy.................................................. 47,468 43,246
---------- ----------
301,059 281,768
---------- ----------
730,043 716,565
Elimination of pharmacy charges to Company nursing centers.. (14,587) (16,333)
---------- ----------
$ 715,456 $ 700,232
========== ==========
Income (loss) from operations (restated):
Operating income (loss):
Health services division:
Nursing centers......................................... $ 68,712 $ 54,963
Rehabilitation services................................. 486 6,847
Other ancillary services................................ 130 3,596
---------- ----------
69,328 65,406
Hospital division:
Hospitals............................................... 55,398 57,198
Pharmacy................................................ (1,200) 3,951
---------- ----------
54,198 61,149
Corporate overhead........................................ (29,370) (27,775)
Reorganization costs...................................... (3,065) (2,312)
---------- ----------
Operating income...................................... 91,091 96,468
Rent........................................................ (76,220) (75,452)
Depreciation and amortization............................... (17,902) (22,285)
Interest, net............................................... (15,033) (18,905)
---------- ----------
Loss before income taxes.................................... (18,064) (20,174)
Provision for income taxes.................................. 500 50
---------- ----------
$ (18,564) $ (20,224)
========== ==========
March 31, 2000 December 31, 1999
-------------- -----------------
Assets:
Health services division.................................. $ 494,858 $ 489,316
Hospital division......................................... 342,366 337,218
Corporate................................................. 399,849 409,440
---------- ----------
$1,237,073 $1,235,974
========== ==========
15
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- INCOME TAXES
The provision for income taxes is based upon management's estimate of taxable
income or loss for the year and includes the effect of certain non-deductible
items such as goodwill amortization and the recording of additional deferred tax
valuation allowances.
The provision for income taxes for the first quarter of 2000 and 1999
includes charges of $5.9 million and $4.0 million, respectively, related to the
deferred tax valuation allowance. In addition, the Company recorded a valuation
allowance of $3.4 million in the first quarter of 1999 related to the change in
accounting for start-up costs. At March 31, 2000, the deferred tax valuation
allowance included in the Company's condensed consolidated balance sheet
aggregated $365.9 million.
NOTE 10 -- LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow:
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 Cases have been styled In re: Vencor, Inc., et al., Debtors
and Debtors in Possession, Case Nos. 99-3199 (MFW) through 99-3327 (MFW),
Chapter 11, Jointly Administered. See Note 4 for further discussion of the
Chapter 11 Cases.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Spin-off Agreement. The Company was seeking a reduction in rent
and other concessions under its Master Lease Agreements with Ventas. On March
31, 1999, the Company and Ventas entered into the Standstill Agreement which
provided that both companies would postpone through April 12, 1999 any claims
either may have against the other. On April 12, 1999, the Company and Ventas
entered into the Second Standstill which provided that neither party would
pursue any claims against the other or any other third party related to the
Spin-off as long as the Company complied with certain rent payment terms. The
Second Standstill was scheduled to terminate on May 5, 1999. Pursuant to the
Tolling Agreement, the Company and Ventas also agreed that any statutes of
limitations or other time-related constraints in a bankruptcy or other
proceeding that might be asserted by one party against the other would be
extended and tolled from April 12, 1999 until May 5, 1999 or until the
termination of the Second Standstill. As a result of the Company's failure to
pay rent, Ventas served the Company with notices of nonpayment under the Master
Lease Agreements. Subsequently, the Company and Ventas entered into further
amendments to the Second Standstill and the Tolling Agreement to extend the time
during which no remedies may be pursued by either party and to extend the date
by which the Company may cure its failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the Stipulation which provides for the payment by the Company of a reduced
monthly rent of approximately $15.1 million beginning in September 1999. The
Stipulation was approved by the Bankruptcy Court. The Stipulation also continues
to toll any statutes of limitations or other time constraints in a bankruptcy
proceeding for claims that might be asserted by the Company against Ventas. The
Stipulation automatically renews for one-month periods unless either party
provides a 14-day notice of termination. The Stipulation also may be terminated
prior to its expiration upon a payment default by the Company, the consummation
of the plan of reorganization or the occurrence of certain defaults under the
DIP Financing. The Stipulation also provides that the Company will continue to
fulfill its indemnification obligations arising from the Spin-off.
16
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may seek to pursue claims against Ventas arising
out of the Spin-off and seek judicial relief barring Ventas from exercising any
remedies based on the Company's failure to pay some or all of the rent to
Ventas. The Company's failure to pay rent or comply with the Stipulation, in the
absence of judicial relief, would result in an "Event of Default" under the
Master Lease Agreements. Upon an Event of Default under the Master Lease
Agreements, assuming Ventas were to be granted relief from the automatic stay by
the Bankruptcy Court, the remedies available to Ventas include terminating the
Master Lease Agreements, repossessing and reletting the leased properties and
requiring the Company to (i) remain liable for all obligations under the Master
Lease Agreements, including the difference between the rent under the Master
Lease Agreements and the rent payable as a result of reletting the leased
properties or (ii) pay the net present value of the rent due for the balance of
the terms of the Master Lease Agreements. Such remedies, however, would be
subject to the supervision of the Bankruptcy Court.
The Company's subsidiary, TheraTx, Incorporated ("TheraTx") is a plaintiff in
a declaratory judgment action entitled TheraTx, Incorporated v. James W. Duncan,
Jr., et al., No. 1:95-CV-3193, filed in the United States District Court for the
Northern District of Georgia and currently pending in the United States Court of
Appeals for the Eleventh Circuit, No. 99-11451-FF. The defendants have asserted
counterclaims against TheraTx under breach of contract, securities fraud,
negligent misrepresentation and fraud theories for allegedly not performing as
promised under a merger agreement related to TheraTx's purchase of a company
called PersonaCare, Inc. and for allegedly failing to inform the
defendants/counterclaimants prior to the merger that TheraTx's possible
acquisition of Southern Management Services, Inc. might cause the suspension of
TheraTx's shelf registration under relevant rules of the Securities and Exchange
Commission (the "Commission"). The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest in
the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both have appealed the court's rulings. The Company
is defending the action vigorously.
The Company is pursuing various claims against private insurance companies
who issued Medicare supplement insurance policies to individuals who became
patients of the Company's hospitals. After the patients' Medicare benefits are
exhausted, the insurance companies become liable to pay the insureds' bills
pursuant to the terms of these policies. The Company has filed numerous
collection actions against various of these insurers to collect the difference
between what Medicare would have paid and the hospitals' usual and customary
charges. These disputes arise from differences in interpretation of the policy
provisions and Federal and state laws governing such policies. Various courts
have issued various rulings on the different issues, some of which have been
adverse to the Company and most of which have been appealed. The Company intends
to continue to pursue these claims vigorously. If the Company does not prevail
on these issues, future results of operations and liquidity would be materially
adversely affected.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company's predecessor against the
Company and Ventas and certain current and former executive officers and
directors of the Company and Ventas. The complaint alleges that the Company,
Ventas and certain current and former executive officers of the Company and
Ventas during a
17
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
specified time frame violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act"), by, among other things, issuing to
the investing public a series of false and misleading statements concerning
Ventas' then current operations and the inherent value of its common stock. The
complaint further alleges that as a result of these purported false and
misleading statements concerning Ventas' revenues and successful acquisitions,
the price of the common stock was artificially inflated. In particular, the
complaint alleges that the defendants issued false and misleading financial
statements during the first, second and third calendar quarters of 1997 which
misrepresented and understated the impact that changes in Medicare reimbursement
policies would have on Ventas' core services and profitability. The complaint
further alleges that the defendants issued a series of materially false
statements concerning the purportedly successful integration of Ventas' recent
acquisitions and prospective earnings per share for 1997 and 1998 which the
defendants knew lacked any reasonable basis and were not being achieved. The
suit seeks damages in an amount to be proven at trial, pre-judgment and post-
judgment interest, reasonable attorneys' fees, expert witness fees and other
costs, and any extraordinary equitable and/or injunctive relief permitted by law
or equity to assure that the plaintiff has an effective remedy. In December
1998, the defendants filed a motion to dismiss the case. The court converted the
defendants' motion to dismiss into a motion for summary judgment and granted
summary judgment as to all defendants. The plaintiff appealed the ruling to the
United States Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). On
April 24, 2000, the Sixth Circuit affirmed the district court's dismissal of the
action on the grounds that the plaintiff failed to state a claim upon which
relief could be granted. On May 8, 2000, the plaintiff filed a petition for
rehearing or a rehearing en banc with the Sixth Circuit. The Company is
defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The complaint
alleges that the defendants damaged the Company and Ventas by engaging in
violations of the securities laws, engaging in insider trading, fraud and
securities fraud and damaging the reputation of the Company and Ventas. The
plaintiff asserts that such actions were taken deliberately, in bad faith and
constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., discussed
above. The suit seeks unspecified damages, interest, punitive damages,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the Company and Ventas have an effective remedy. The Company
believes that the allegations in the complaint are without merit and intends to
defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a class
consisting of all persons who sold shares of Transitional Hospitals Corporation
("Transitional") common stock during the period from February 26, 1997 through
May 4, 1997, inclusive. The complaint alleges that Transitional purchased shares
of its common stock from members of the investing public after it had received a
written offer to acquire all of Transitional's common stock and without making
the required disclosure that such an offer had been made. The complaint further
alleges that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had reached
an advanced stage with actual firm offers at substantial premiums to the trading
price of Transitional's stock having been made which were actively being
considered by Transitional's Board of Directors. The complaint asserts claims
pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and common
law principles of negligent misrepresentation and names as defendants
18
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. In June 1998, the court granted the Company's motion
to dismiss with leave to amend the Section 10(b) claim and the state law claims
for misrepresentation. The court denied the Company's motion to dismiss the
Section 14(e) and Section 20(a) claims, after which the Company filed a motion
for reconsideration. On March 23, 1999, the court granted the Company's motion
to dismiss all remaining claims and the case was dismissed. The plaintiff has
appealed this ruling. The Company is defending this action vigorously.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of Los
Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various causes
of action arising out of the Company's sale and lease of several nursing centers
to Lenox in 1997. Lenox subsequently removed certain of its causes of action and
refiled these claims before the United States District Court for the Western
District of Kentucky in a case entitled Lenox Healthcare, Inc. v. Vencor, Inc.,
et al., Case No. 3:99 CV-348-H. The Company has asserted counterclaims,
including RICO claims, against Lenox in the Kentucky action. The Company
believes that the allegations made by Lenox in both complaints are without merit
and intends to defend these actions vigorously. Lenox and its subsidiaries filed
for protection under Chapter 11 of the Bankruptcy Code on November 3, 1999. The
Company has not determined the effect, if any, such filing will have on the
Company's financial condition, results of operations or liquidity. By virtue of
both the Company's and Lenox's separate filings for Chapter 11 protection, the
two Lenox actions and the Company's counterclaims are stayed.
The Company has been informed by the DOJ that the Company and Ventas are the
subjects of ongoing investigations into various Medicare reimbursement issues,
including hospital cost reporting issues, Vencare billing practices and various
quality of care issues in the hospitals and nursing centers formerly operated by
Ventas and currently operated by the Company. These investigations include some
matters for which the Company indemnified Ventas in the Spin-off. In cases where
neither the Company nor any of its subsidiaries are defendants but Ventas is the
defendant, the Company had agreed to defend and indemnify Ventas for such claims
as part of the Spin-off. The Stipulation entered into with Ventas provides that
the Company will continue to fulfill its indemnification obligations arising
from the Spin-off. The Company has cooperated fully in the investigations.
The DOJ has informed the Company that it has intervened in several pending
qui tam actions asserted against the Company and/or Ventas in connection with
these investigations. The Company and Ventas are engaged in active settlement
discussions with the DOJ that may result in a resolution of some or all of the
DOJ investigations including the pending qui tam actions. In addition, the DOJ
has filed proofs of claims with respect to certain alleged claims in the Chapter
11 Cases. Such a resolution with the DOJ could include a payment to the Federal
government which could have a material adverse effect on the Company's liquidity
and financial position. However, there can be no assurance that a settlement or
other resolution will be consummated with the DOJ.
The following is a summary of the qui tam actions pending against the Company
and/or Ventas in which the DOJ has intervened. In connection with the DOJ's
intervention, the courts ordered these previously non-public actions to be
unsealed. Certain of the actions described below name other defendants in
addition to the Company and Ventas.
19
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
(a) The Company, Ventas and the Company's subsidiary, American X-Rays, Inc.
("AXR"), are defendants in a civil qui tam action styled United States ex rel.
Doe v. American X-Rays Inc., et al., No. LR-C-95-332, pending in the United
States District Court for the Eastern District of Arkansas and served on AXR
on July 7, 1997. The DOJ intervened in the suit which was brought under the
Federal Civil False Claims Act and added the Company and Ventas as
defendants. The Company acquired an interest in AXR when The Hillhaven
Corporation ("Hillhaven") was merged into the Company in September 1995 and
purchased the remaining interest in AXR in February 1996. AXR provided
portable X-ray services to nursing centers (including some of those operated
by Ventas or the Company) and other healthcare providers. The civil suit
alleges that AXR submitted false claims to the Medicare and Medicaid programs.
The suit seeks damages in an amount of not less than $1,000,000, treble
damages and civil penalties. The Company has defended this action vigorously.
The court has dismissed the action based upon the possible pending settlement
between the DOJ and Vencor and Ventas. In a related criminal investigation,
the United States Attorney's Office for the Eastern District of Arkansas
("USAO") indicted four former employees of AXR; those individuals were
convicted of various fraud related counts in January 1999. AXR had been
informed previously that it was not a target of the criminal investigation,
and AXR was not indicted. However, the Company received several grand jury
subpoenas for documents and witnesses which it moved to quash. The USAO has
withdrawn the subpoenas which rendered the motion moot.
(b) The Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"),
Ventas and Hillhaven (former parent company to Medisave), are the defendants
in a civil qui tam action styled United States ex rel. Danley v. Medisave
Pharmacies, Inc., et al., No. CV-N-96-00170-HDM, filed in the United States
District Court for the District of Nevada on March 15, 1996. The plaintiff
alleges that Medisave, an institutional pharmacy provider, formerly owned by
Ventas and owned by the Company since the Spin-off: (1) charged the Medicare
program for unit dose drugs when bulk drugs were administered and charged
skilled nursing facilities more for the same drugs for Medicare patients than
for non-Medicare patients; (2) improperly claimed special dispensing fees that
it was not entitled to under Medicaid; and (3) recouped unused drugs from
skilled nursing facilities and returned these drugs to its stock without
crediting Medicare or Medicaid, all in violation of the Federal Civil False
Claims Act. The complaint also alleges that Medisave had a policy of offering
kickbacks, such as free equipment, to skilled nursing centers to secure and
maintain their business. The complaint seeks treble damages, other unspecified
damages, civil penalties, attorneys' fees and other costs. The Company
disputes the allegations in the complaint. The defendants intend to defend
this action vigorously.
(c) Ventas and the Company's subsidiary, Vencare, Inc. ("Vencare"), among
others, are defendants in the action styled United States ex rel. Roberts v.
Vencor, Inc., et al., No. 3:97CV-349-J, filed in the United States District
Court for the Western District of Kansas on June 25, 1996 and consolidated
with the action styled United States of America ex rel. Meharg, et al. v.
Vencor, Inc., et al., No. 3:98SC-737-H, filed in the United States District
Court for the Middle District of Florida on June 4, 1998. The complaint
alleges that the defendants knowingly submitted and conspired to submit false
claims and statements to the Medicare program in connection with their
purported provision of respiratory therapy services to skilled nursing center
residents. The defendants allegedly billed Medicare for respiratory therapy
services and supplies when those services were not medically necessary, billed
for services not provided, exaggerated the time required to provide services
or exaggerated the productivity of their therapists. It is further alleged
that the defendants presented false claims and statements to the Medicare
program in violation of the Federal Civil False Claims Act, by, among other
things, allegedly causing skilled nursing centers with which they had
respiratory therapy contracts, to present false claims to Medicare for
respiratory therapy services and supplies. The complaint seeks treble damages,
other unspecified damages, civil penalties, attorneys' fees and other costs.
The Company disputes the allegations in the complaint. The defendants intend
to defend this action vigorously.
20
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et al.,
No. 97-10400-GAO, filed in the United States District Court for the District
of Massachusetts on October 15, 1998, the Company's subsidiary, Transitional,
and two unrelated entities, Gambro Healthcare, Inc. and Dialysis Holdings,
Inc., are defendants in this suit alleging that they violated the Federal
Civil False Claims Act and the Medicare and Medicaid antikickback, antifraud
and abuse amendments (the "Antikickback Amendments") and committed common law
fraud, unjust enrichment and payment by mistake of fact. Specifically, the
complaint alleges that a predecessor to Transitional formed a joint venture
with Damon Clinical Laboratories to create and operate a clinical testing
laboratory in Georgia that was then used to provide lab testing for dialysis
patients, and that the joint venture billed at below cost in return for
referral of substantially all non-routine testing in violation of the
Antikickback Amendments. It is further alleged that a predecessor to
Transitional and Damon Clinical Laboratories used multiple panel testing of
end stage renal disease rather than single panel testing that allegedly
resulted in the generation of additional revenues from Medicare and that the
entities allegedly added non-routine tests to tests otherwise ordered by
physicians that were not requested or medically necessary but resulted in
additional revenue from Medicare in violation of the Antikickback Amendments.
Transitional has moved to dismiss the case. Transitional disputes the
allegations in the complaint and is defending the action vigorously.
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM (Mcx),
filed in the United States District Court for the Central District of
California on June 13, 1997. The plaintiff alleges that the defendant violated
the Federal Civil False Claims Act by submitting false claims to the Medicare,
Medicaid and CHAMPUS programs by allegedly: (1) falsifying patient bills and
submitting the bills to the Medicare, Medicaid and CHAMPUS programs, (2)
submitting bills for intensive and critical care not actually administered to
patients, (3) falsifying patient charts in relation to the billing, (4)
charging for physical therapy services allegedly not provided and pharmacy
services allegedly provided by non-pharmacists, and (5) billing for sales
calls made by nurses to prospective patients. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorneys' fees and other
costs. Defendants dispute the allegations in the complaint. The Company, on
behalf of itself and Ventas, intends to defend this action vigorously.
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997. Ventas
is alleged to have knowingly violated the Federal Civil False Claims Act by
submitting and conspiring to submit false claims to the Medicare program. The
complaint alleges that Ventas: (1) fabricated diagnosis codes by ordering
medically unnecessary services, such as respiratory therapy; (2) changed
referring physicians' diagnoses in order to qualify for Medicare
reimbursement; and (3) billed Medicare for oxygen use by patients regardless
of whether the oxygen was actually administered to particular patients. The
complaint further alleges that Ventas paid illegal kickbacks to referring
health care professionals in the form of medical consulting service agreements
as an alleged inducement to refer patients, in violation of the Federal Civil
False Claims Act, the Antikickback Amendments and the Stark provisions. It is
additionally alleged that Ventas consistently submitted Medicare claims for
clinical services that were not performed or were performed at lower actual
costs. The complaint seeks unspecified damages, civil penalties, attorneys'
fees and costs. Ventas disputes the allegations in the complaint. The Company,
on behalf of Ventas, intends to defend the action vigorously.
21
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States of America intervened in this civil qui tam lawsuit on May 17, 1999. On
July 23, 1999, the United States filed its amended complaint in the lawsuit
and added the Company as a defendant. The lawsuit alleges that the Company and
Ventas knowingly submitted false claims and false statements to the Medicare
and Medicaid programs including, but not limited to, claims for reimbursement
of costs for certain ancillary services performed in defendants' nursing
centers and for third party nursing center operators that the United States
alleges are not properly reimbursable costs through the hospitals' cost
reports. The lawsuit involves the Company's hospitals which were owned by
Ventas prior to the Spin-off. The complaint does not specify the amount of
damages sought. The Company and Ventas dispute the allegations in the amended
complaint and intend to defend this action vigorously.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al.,
filed in the Eastern District of Missouri on May 25, 1999, the defendants
include the Company, Vencare, and Ventas. The defendants allegedly submitted
and conspired to submit false claims for payment to the Medicare and CHAMPUS
programs, in violation of the Federal Civil False Claims Act. According to the
complaint, the Company, through its subsidiary, Vencare, allegedly (1) over
billed for respiratory therapy services, (2) rendered medically unnecessary
treatment, and (3) falsified supply, clinical and equipment records. The
defendants also allegedly encouraged or instructed therapist to falsify
clinical records and over prescribe therapy services. The complaint seeks
treble damages, other unspecified damages, civil penalties, attorneys' fees
and other costs. The Company disputes the allegations in the complaint and
intends to defend this action vigorously.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its two
subsidiaries, Vencare and Vencor Hospice, Inc., are alleged to have violated
the Federal Civil False Claims Act by obtaining improper reimbursement from
Medicare concerning the treatment of hospice patients. Defendants are alleged
to have obtained inflated Medicare reimbursement for admitting, treating
and/or failing to discharge in a timely manner hospice patients who were not
"hospice appropriate." The complaint further alleges that the defendants
obtained inflated reimbursement for providing medications for these hospice
patients. The complaint alleges damages in excess of $1,000,000. The Company
disputes the allegations in the complaint and intends to defend vigorously the
action.
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, Vencor Operating, Inc., Ventas,
Hillhaven and Medisave, are alleged to have presented or caused to be
presented false or fraudulent claims for payment to the Medicare program in
violation of, among other things, the Federal Civil False Claims Act. The
complaint alleges that Medisave, a subsidiary of the Company which was
transferred from Ventas to the Company in the Spin-off, systematically up-
charged for drugs and supplies dispensed to Medicare patients. The complaint
seeks unspecified damages, civil penalties, interest, attorneys' fees and
other costs. The Company disputes the allegations in the complaint and intends
to defend this action vigorously.
22
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- LITIGATION (Continued)
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to submit
false claims and statements to Medicare, Medicaid, and other Federal and state
funded programs during a period commencing in 1993. The conduct complained of
allegedly violates the Federal Civil False Claims Act, the California False
Claims Act, the Florida False Claims Act, the Tennessee Health Care False
Claims Act, and the Illinois Whistleblower Reward and Protection Act.
Defendant allegedly submitted improper and erroneous claims to Medicare,
Medicaid and other programs, for improper or unnecessary services and services
not performed, inadequate collections efforts associated with billing and
collecting bad debts, inflated and nonexistent laboratory charges, false and
inadequate documentation of claims, splitting charges, shifting revenues and
expenses, transferring patients to hospitals that are reimbursed by Medicare
at a higher level, failing to return duplicate reimbursement payments, and
improperly allocating hospital insurance expenses. In addition, the complaint
alleges that the defendants were inconsistent in their reporting of cost
report data, paid kickbacks to increase patient referrals to hospitals, and
incorrectly reported employee compensation resulting in inflated employee
401(k) contributions. The complaint seeks unspecified damages. The Company
disputes the allegations in the complaint and intends to defend this action
vigorously.
In connection with the Spin-off, liabilities arising from various legal
proceedings and other actions were assumed by the Company and the Company agreed
to indemnify Ventas against any losses, including any costs or expenses, it may
incur arising out of or in connection with such legal proceedings and other
actions. The indemnification provided by the Company also covers losses,
including costs and expenses, which may arise from any future claims asserted
against Ventas based on the former healthcare operations of Ventas. In
connection with its indemnification obligation, the Company has assumed the
defense of various legal proceedings and other actions. The Stipulation entered
into with Ventas provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off.
The Company is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is unable to predict
the ultimate outcome of pending litigation and regulatory investigations. In
addition, there can be no assurance that the DOJ, HCFA or other regulatory
agencies will not initiate additional investigations related to the Company's
businesses in the future, nor can there be any assurance that the resolution of
any litigation or investigations, either individually or in the aggregate, would
not have a material adverse effect on the Company's results of operations,
liquidity or financial position. In addition, the above litigation and
investigations (as well as future litigation and investigations) are expected to
consume the time and attention of the Company's management and may have a
disruptive effect upon the Company's operations.
NOTE 11 -- THIRD PARTY SETTLEMENTS
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. Cost reports are filed annually in settlement of amounts
due to or from the various agencies administering the reimbursement programs.
These cost reports indicated amounts due from the Company aggregating $58
million. This liability arose during 1999 as part of the Company's routine
settlement of Medicare reimbursement overpayments. Such amounts are classified
as liabilities subject to compromise in the condensed consolidated balance sheet
and, accordingly, no funds were disbursed by the Company in settlement of such
pre-petition liabilities.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
Certain statements made in this Form 10-Q/A, including, but not limited to,
statements containing the words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ materially from
the Company's expectations as a result of a variety of factors, including,
without limitation, those discussed below. Such forward-looking statements are
based on management's current expectations and include known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the Company's actual results or performance to differ
materially from any future results or performance expressed or implied by such
forward-looking statements. Factors that may affect the plans or results of the
Company include, without limitation, the ability of the Company to continue as a
going concern; the delays or the inability to complete the Company's plan of
reorganization; the ability of the Company to operate pursuant to the terms of
the DIP Financing; the ability of the Company to operate successfully under the
Chapter 11 Cases; risks associated with operating a business in Chapter 11;
adverse actions which may be taken by creditors and the outcome of various
bankruptcy proceedings; adverse developments with respect to the Company's
liquidity or results of operations; the Company's ability to attract patients
given its current financial position; the ability of the Company to attract and
retain key executives and other personnel; the effects of healthcare reform and
legislation on the Company's business strategy and operations; the Company's
ability to control costs, including labor costs, in response to the prospective
payment system; adverse developments with respect to the Company's settlement
discussions with the DOJ concerning ongoing investigations; and the dramatic
increase in the costs of defending and insuring against alleged patient care
liability claims. Many of these factors are beyond the control of the Company
and its management. The Company cautions investors that any forward-looking
statements made by the Company are not guarantees of future performance. The
Company disclaims any obligation to update any such factors or to announce
publicly the results of any revisions to any of the forward-looking statements
to reflect future events or developments.
General
The business segment data in Note 8 of the Notes to Condensed Consolidated
Financial Statements should be read in conjunction with the following discussion
and analysis.
The Company provides long-term healthcare services primarily through the
operation of nursing centers and hospitals. At March 31, 2000, the Company's
health services division operated 320 nursing centers (40,915 licensed beds) in
31 states and a rehabilitation therapy business. The Company's hospital
division operated 56 hospitals (4,931 licensed beds) in 23 states and an
institutional pharmacy business.
Vencare Realignment. As disclosed in its 1999 Form 10-K, the Company
realigned its Vencare ancillary services business in the fourth quarter of 1999.
Vencare's rehabilitation, speech and occupational therapies were integrated into
the Company's health services division, and its institutional pharmacy business
was assigned to the hospital division. Vencare's respiratory therapy and
certain other ancillary businesses were discontinued. Financial and operating
data presented in the following discussion and analysis reflect the realignment
of the former Vencare business for all periods presented.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General (Continued)
Reorganization. On September 13, 1999, the Company and substantially all of
its subsidiaries filed voluntary petitions for protection under Chapter 11 of
the Bankruptcy Code. The Company currently is operating its businesses as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. The
Company's continued operating losses, liquidity issues and the Chapter 11 Cases
raise substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern and the
appropriateness of using the going concern basis of accounting are dependent
upon, among other things, (i) the Company's ability to comply with the terms of
the DIP Financing, (ii) confirmation of the plan of reorganization under the
Bankruptcy Code, (iii) the Company's ability to achieve profitable operations
after such confirmation, and (iv) the Company's ability to generate sufficient
cash from operations to meet its obligations. The plan of reorganization and
other actions during the Chapter 11 Cases could change materially the amounts
currently recorded in the condensed consolidated financial statements. See Note
4 of the Notes to Condensed Consolidated Financial Statements.
Spin-off. On May 1, 1998, Ventas completed the Spin-off through the
distribution of Vencor common stock to its stockholders. Ventas retained
ownership of substantially all of its real property and leases such real
property to the Company pursuant to the Master Lease Agreements. In anticipation
of the Spin-off, the Company was incorporated on March 27, 1998. For accounting
purposes, the consolidated historical financial statements of Ventas became the
historical financial statements of the Company upon consummation of the Spin-
off. Any discussion concerning events prior to May 1, 1998 refers to the
Company's business as it was conducted by Ventas prior to the Spin-off.
The condensed consolidated financial statements have been prepared on the
basis of accounting principles applicable to going concerns and contemplate the
realization of assets and settlement of liabilities and commitments in the
normal course of business. The condensed consolidated financial statements do
not include any adjustments that might result from the resolution of the Chapter
11 Cases or other matters discussed herein.
Results of Operations
Regulatory Changes
Legislative and regulatory activities in the long-term healthcare industry
have had a significant negative impact on the Company's operating results.
The Balanced Budget Act of 1997 (the "Budget Act"), contains extensive
changes to the Medicare and Medicaid programs intended to reduce the projected
amount of increase in payments under those programs over a five year period.
Virtually all spending reductions come from reimbursements to providers and
changes in program components. The Budget Act has affected adversely the
revenues in each of the Company's operating divisions.
The Budget Act established a prospective payment system ("PPS") for nursing
centers for cost reporting periods beginning on or after July 1, 1998. While
most nursing centers in the United States became subject to PPS during the first
quarter of 1999, all of the Company's nursing centers adopted PPS on July 1,
1998. During the first three years, the per diem rates for nursing centers are
based on a blend of facility-specific costs and Federal costs. Thereafter, the
per diem rates will be based solely on Federal costs. The payments received
under PPS cover all services for Medicare patients including all ancillary
services, such as respiratory therapy, physical therapy, occupational therapy,
speech therapy and certain covered pharmaceuticals.
In November 1999, the Balanced Budget Refinement Act (the "BBRA") was enacted
to provide a measure of relief for some of the impact of PPS. The BBRA makes
temporary adjustments in payments for the care of higher acuity patients,
adjusts payment categories up by 4% for two years beginning in October 2000 and
allows nursing centers to transition more rapidly to the Federal payment rates.
The BBRA also imposes a two-year moratorium on certain therapy limitations for
skilled nursing center patients. All of these measures will expire at the end of
2002.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Regulatory Changes (Continued)
Including the effect of the BBRA, revenues recorded under PPS in the
Company's health services division are substantially less than the cost-based
reimbursement it received before the enactment of the Budget Act.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division by reducing incentive payments pursuant to the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), allowable costs for
capital expenditures and bad debts, and payments for services to patients
transferred from a general acute care hospital. The reductions in allowable
costs for capital expenditures became effective October 1, 1997. The reductions
in the TEFRA incentive payments and allowable costs for bad debts became
effective between May 1, 1998 and September 1, 1998. The reductions for payments
for services to patients transferred from a general acute care hospital became
effective October 1, 1998. These reductions have had a material adverse impact
on hospital revenues. In addition, these reductions also may affect adversely
the hospital division's ability to develop additional long-term care hospitals
in the future.
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients has declined dramatically. As previously discussed,
Medicare reimbursements to nursing centers under PPS include substantially all
services provided to patients, including ancillary services. Prior to the
implementation of PPS, the costs of such services were reimbursed under cost-
based reimbursement rules. The decline in the demand for ancillary services is
mostly attributable to efforts by nursing centers to reduce operating costs. As
a result, many nursing centers are electing to provide ancillary services to
their patients though internal staff or are seeking lower acuity patients who
require less ancillary services. In response to PPS and a significant decline in
the demand for ancillary services, the Company realigned its Vencare division in
the fourth quarter of 1999 by integrating the rehabilitation, speech and
occupational therapies into the health services division and assigning the
institutional pharmacy business to the hospital division. Vencare's respiratory
therapy and other ancillary businesses were discontinued.
There also continues to be state legislative proposals that would impose more
limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and to
make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals. Regulatory changes in the Medicare and
Medicaid reimbursement systems applicable to the hospital division also are
being considered. There also are a number of legislative proposals including
cost caps and the establishment of Medicaid prospective payment systems for
nursing centers. Moreover, by repealing the Boren Amendment, the Budget Act
eases existing impediments on the states' ability to reduce their Medicaid
reimbursement levels.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that payments
under governmental and private third-party payor 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. In addition,
there can be no assurance that facilities operated by the Company, or the
provision of services and supplies by the Company, will meet the requirements
for participation in such programs.
There can be no assurance that future healthcare legislation or other changes
in the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the Company's results of operations,
liquidity and financial position.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Health Services Division - Nursing Centers
Revenues increased 4% to $413 million in the first quarter of 2000 from $398
million in the same quarter of 1999. The increase was primarily attributable to
a 1% increase in patient days and price increases from Medicaid and private
payors. Medicare revenues per patient day under PPS were $292 in the first
quarter of 2000 compared to $293 in the first quarter a year ago. The decline
resulted primarily from lower average acuity levels of the Company's nursing
center Medicare patients.
Nursing center operating income increased 25% to $69 million in the first
quarter of 2000 from $55 million last year. A substantial portion of the
improvement resulted from growth in revenues and operating efficiencies related
to the fourth quarter 1999 Vencare realignment. However, costs related to
professional liability risks and doubtful accounts rose $6 million compared to
the first quarter of 1999. In the aggregate, operating costs (wages, benefits,
supplies and other expenses) per patient day declined slightly from a year ago.
During the first quarter of 2000, the Company entered into agreements to
manage 27 additional nursing centers. The impact of these transactions was not
significant.
Health Services Division - Rehabilitation Services
Revenues declined 37% to $34 million in the first quarter of 2000 from $54
million a year ago. The decline in revenues was primarily attributable to
continued reductions in demand for ancillary services in response to fixed
reimbursement rates under PPS. Approximately one-half of the revenue decline
was attributable to Company-operated nursing centers. Under PPS, the
reimbursement for ancillary services provided to nursing center patients is a
component of the total reimbursement allowed per nursing center patient. As a
result, many nursing center customers (including the Company's nursing centers)
have elected to provide ancillary services to their patients through internal
staff and no longer contract with outside parties for ancillary services.
Operating income declined to $0.5 million in the first quarter of 2000 from
$7 million last year. The reduction in operating income reflects a continued
decline in customer demand resulting from PPS. In addition, effective January
1, 2000, revenues for rehabilitation services provided to Company-operated
nursing centers approximate the costs of providing such services. Accordingly,
first quarter 2000 operating results do not reflect any operating income related
to intercompany transactions. While the health services division will continue
to provide rehabilitation services to nursing center customers, revenues and
operating income related to these services may continue to decline.
Health Services Division - Other Ancillary Services
Other ancillary services refers to certain ancillary businesses (primarily
respiratory therapy) that were discontinued as part of the Vencare realignment
in the fourth quarter of 1999.
Hospital Division - Hospitals
Revenues increased 6% to $254 million in the first quarter of 2000 from $239
million in the same period a year ago. The increase was primarily attributable
to 6% growth in patient days. While aggregate revenues per patient day were
relatively unchanged from a year ago, the Company's revenues from non-government
sources grew approximately 6% per patient day in part as a result of price
increases.
Medicare revenues per patient day declined 2% in the first quarter of 2000
from the same quarter a year ago. Medicare revenues recorded by the Company's
hospitals in prior years included reimbursement for expenses related to certain
costs associated with hospital-based ancillary services previously provided by
the Vencare division to its nursing center customers. As part of its ongoing
investigations, the DOJ has objected to including such costs on the Medicare
cost reports filed by the Company's hospitals. Medicare revenues related to the
reimbursement of such costs aggregated $7 million in the first quarter of
1999. In connection with the continued settlement discussions
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Hospital Division - Hospitals (Continued)
with the DOJ, the Company has agreed to discontinue recording such revenues and
has excluded such costs from the Medicare cost reports since September 1, 1999.
Hospital operating income declined 3% to $55 million in the first quarter of
2000 from $57 million in the first quarter of 1999. Despite an increase in
patient days, hospital operating costs per patient day increased 3% to $729 from
$709, most of which was attributable to growth in labor costs. Operating income
also was adversely impacted by the previously discussed reduction in Medicare
reimbursement for hospital-based ancillary services.
Hospital Division - Pharmacy
Revenues increased 10% to $47 million in the first quarter of 2000 compared
to $43 million a year ago. The increase resulted primarily from growth in the
number of nursing center customers.
The Company's pharmacies reported an operating loss of $1 million in the
first quarter of 2000 compared to an operating profit of $4 million in the same
period of the prior year. Supply costs as a percentage of revenues rose to 66%
in the first quarter of 2000 from 54% in 1999. Management believes that the
deterioration in operating income in the first quarter of 2000 was primarily
attributable to pricing pressures associated with PPS.
Corporate Overhead
Operating income for the Company's operating divisions excludes allocation of
corporate overhead. These costs aggregated $29 million and $28 million in the
first quarter of 2000 and 1999, respectively. As a percentage of revenues
(before eliminations), the overhead ratio was 4% in the first quarter of 2000
compared to 3.9% in the same period of 1999.
Capital Costs
The Company leases substantially all of its facilities. Depreciation and
amortization, rents and net interest costs aggregated $109 million in the first
quarter of 2000 compared to $117 million last year. While rents were relatively
unchanged, depreciation and amortization declined primarily as a result of
significant write-offs of property, equipment and goodwill in the fourth quarter
of 1999 in connection with the Company's valuation of its long-lived assets. On
January 1, 2000, the Company changed its goodwill amortization period from 40
years to 20 years from date of acquisition. The impact of this change was not
material. See Note 1 of the Notes to Condensed Consolidated Financial
Statements.
During the pendency of the Chapter 11 Cases, the Company is continuing to
record the contractual amount of interest expense related to the Credit
Agreement and the rents due to Ventas under the Master Lease Agreements. No
interest costs have been recorded related to the 1998 Notes since the filing of
the Chapter 11 Cases. Contractual interest expense not accrued for the 1998
Notes in the first quarter of 2000 was approximately $7 million.
Income Taxes
The provision for income taxes is based upon management's estimate of taxable
income or loss for the year and includes the effect of certain non-deductible
items such as goodwill amortization and the recording of additional deferred tax
valuation allowances.
The provision for income taxes for the first quarter of 2000 and 1999
includes charges of $6 million and $4 million, respectively, related to the
deferred tax valuation allowance. In addition, the Company recorded a valuation
allowance of $3 million in the first quarter of 1999 related to the change in
accounting for start-up costs. At March 31, 2000, the deferred tax valuation
allowance included in the Company's condensed consolidated balance sheet
aggregated $366 million.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Consolidated Results
The Company reported a pretax loss from operations before reorganization
costs in the first quarter of 2000 of $15 million, compared to $18 million in
the first quarter of 1999. Reorganization costs include professional fees
incurred in connection with the Company's restructuring activities totaling $3
million and $2 million for the respective first quarter of 2000 and 1999.
The net loss from operations in the first quarter of 2000 aggregated $19
million compared to $20 million in the first quarter of 1999. In addition, the
Company recorded a $9 million charge in the first quarter of 1999 to reflect an
accounting change for start-up costs. See Note 3 of the Notes to Condensed
Consolidated Financial Statements.
Liquidity
As previously discussed, the Company and substantially all of its
subsidiaries filed voluntary petitions for protection under Chapter 11 of the
Bankruptcy Code on September 13, 1999.
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the condensed consolidated balance sheet as
liabilities subject to compromise. The Company currently is paying the post-
petition claims of all vendors and providers in the ordinary course of business.
The Company currently is operating its businesses as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. In connection with the
Chapter 11 Cases, the Company entered into the DIP Financing aggregating $100
million. The Bankruptcy Court granted final approval of the DIP Financing on
October 1, 1999. The DIP Financing, which was initially scheduled to mature on
March 13, 2000, is comprised of the Tranche A Loan and the Tranche B Loan.
Interest is payable at prime rate plus 2 1/2% on the Tranche A Loan and prime
rate plus 4 1/2% on the Tranche B Loan.
Available aggregate borrowings under the Tranche A Loan were initially
limited to $45 million in September 1999 and increased to $65 million in
October, $70 million in November and $75 million thereafter. Pursuant to a
recent amendment to the DIP Financing, the aggregate borrowing limitations under
the Tranche A Loans are limited to approximately $68 million until maturity.
Borrowings under the Tranche B Loan require the approval of lenders holding at
least 75% of the credit exposure under the DIP Financing. The DIP Financing is
secured by substantially all of the assets of the Company and its subsidiaries,
including certain owned real property. The DIP Financing contains standard
representations and warranties and other affirmative and restrictive covenants.
As of March 31, 2000, there were no outstanding borrowings under the DIP
Financing.
Since the consummation of the DIP Financing, the Company and the DIP Lenders
have agreed to several amendments to the DIP Financing. These amendments
approved various changes to the DIP Financing including (i) extending the period
of time for the Company to file its plan of reorganization, (ii) approving
certain transactions and (iii) revising the Company's cash plan originally
submitted with the DIP Financing. In December 1999, the Company informed the DIP
Lenders that it planned to record a significant charge to earnings in the fourth
quarter of
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
1999 related to the valuation of accounts receivable that could have resulted in
noncompliance with certain covenants in the DIP Financing requiring minimum
Consolidated EBITDAR and a minimum Net Amount of Eligible Accounts (both as
defined in the DIP Financing). In connection with the third amendment to the DIP
Financing, the Company received a waiver from compliance with these covenants of
the DIP Financing through February 14, 2000. The Company received subsequent
waivers from compliance with these covenants in later amendments. In connection
with the amendment to the DIP Financing dated February 23, 2000, the parties
agreed, among other things, to (i) extend the maturity date of the DIP Financing
until June 30, 2000, (ii) extend the period of time for the Company to file its
plan of reorganization to May 1, 2000, and (iii) revise certain financial
covenants. The Bankruptcy Court granted approval of this amendment to the DIP
Financing on March 10, 2000.
At December 31, 1999, the Company was not in compliance with the DIP
Financing covenant related to the minimum Net Amount of Eligible Accounts
(accounts receivable). Since there were no outstanding borrowings under the DIP
Financing at December 31, 1999, the event of default had no effect on the
Company's 1999 consolidated financial statements. Effective April 12, 2000, the
Company and the DIP Lenders agreed to an additional amendment to the DIP
Financing to revise the covenant related to the minimum Net Amount of Eligible
Accounts. In this amendment, the DIP Lenders also waived all events of default
regarding this covenant that occurred prior to the date of the amendment.
On April 26, 2000, the Company and the DIP Lenders agreed to an additional
amendment to the DIP Financing to permit the Company to seek an extension to
file its plan of reorganization through June 15, 2000 and to permit sales of
surplus personal property.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. The automatic stay does not
necessarily apply to certain actions against Ventas for which the Company has
agreed to indemnify Ventas in connection with the Spin-off. In addition, the
Company may assume or reject executory contracts, including lease obligations,
under the Bankruptcy Code. Parties affected by these rejections may file claims
with the Bankruptcy Court in accordance with the reorganization process.
As previously disclosed, the Company is developing a plan of reorganization
through negotiations with key parties including its Senior Lenders, the holders
of the 1998 Notes, Ventas and the DOJ, acting on behalf of HCFA and HHS. A
substantial portion of pre-petition liabilities are subject to settlement under
the plan of reorganization to be submitted by the Company.
The plan of reorganization must be voted upon by the impaired creditors of
the Company and approved by the Bankruptcy Court. There can be no assurance that
the plan of reorganization to be proposed by the Company will be approved by the
requisite holders of claims, confirmed by the Bankruptcy Court or that it will
be consummated. If the plan of reorganization is not accepted by the required
number of impaired creditors and the Company's exclusive right to file and
solicit acceptance of a plan of reorganization ends, any party in interest may
subsequently file its own plan of reorganization for the Company. The Bankruptcy
Court currently has extended the Company's exclusive right to submit a plan of
reorganization through May 16, 2000.
On May 11, 2000, the Company filed a motion to extend the Company's exclusive
right to submit a plan of reorganization through July 18, 2000. The hearing on
this motion is scheduled for May 31, 2000. The Company has requested an interim
order from the Bankruptcy Court to maintain the Company's exclusive right to
file a plan of reorganization until the motion is decided.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
In support of its motion, the Company informed the Bankruptcy Court that it
has continued to make progress in its reorganization proceedings. In addition,
the motion notes that the Company has reached an understanding with certain of
the Senior Lenders, certain holders of the 1998 Notes and the advisors to the
official committee of unsecured creditors regarding the broad terms of a plan of
reorganization. The Company also has continued to engage in discussions with
Ventas to obtain its support for a consensual plan of reorganization and is
simultaneously pursuing alternatives based upon the possible outcome of those
negotiations. The Company also informed the Bankruptcy Court that it has
continued its conversations with the DOJ regarding a settlement of ongoing
investigations and the negotiation of other agreements with the Company. In
addition, the motion further notes that the Company has filed amended schedules
of unsecured creditors and has made progress in reviewing and analyzing pre-
petition claims against the Company.
A plan of reorganization must be confirmed by the Bankruptcy Court after
certain findings required by the Bankruptcy Code are made by the Bankruptcy
Court. The Bankruptcy Court may confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or equity
holders if certain requirements of the Bankruptcy Code are satisfied. As
previously announced, the Company has indicated that any plan of reorganization
will result in the Company's common stock having little, if any, value.
The Company was informed on April 9, 1999 by HCFA that the Medicare program
had made a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. On April 21, 1999, the Company entered into the
HCFA Agreement under which monthly payments of approximately $1.5 million
commenced in May 1999. Beginning in December 1999, the balance of the
overpayments bears interest at a statutory rate approximating 13.4%, resulting
in a monthly payment of approximately $2.0 million through March 2004. If the
Company is delinquent with two consecutive payments, the HCFA Agreement will be
defaulted and all subsequent Medicare reimbursement payments to the Company may
be withheld. Amounts due under the HCFA Agreement aggregate $75.3 million and
have been classified as liabilities subject to compromise in the Company's
condensed consolidated balance sheet at March 31, 2000. The Company has
received Bankruptcy Court approval to continue to make the monthly payments
under the HCFA Agreement during the pendency of the Chapter 11 Cases.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims, treatment under the plan of reorganization and other events.
Payment terms for these amounts will be established in connection with the plan
of reorganization.
The Company has received approval from the Bankruptcy Court to pay pre-
petition and post-petition employee wages, salaries, benefits and other employee
obligations. The Bankruptcy Court also approved orders granting authority, among
other things, to pay pre-petition claims of certain critical vendors, utilities
and patient obligations. All other pre-petition liabilities are classified in
the condensed consolidated balance sheet as liabilities subject to compromise.
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
Cash Flows
Since the filing of the Chapter 11 Cases, cash flows from operations have
allowed the Company to fund post-petition obligations, sustain adequate
liquidity levels and minimize borrowings under the DIP Financing. Cash flows
from operations before reorganization costs totaled $45 million in the first
quarter of 2000 compared to $37 million in the first three months of 1999.
Prior period cash flows were reduced by $12 million in connection with the
settlement of certain litigation. There can be no assurance, however, that the
Company can maintain its current liquidity levels during the pendency of the
Chapter 11 Cases.
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. Cost reports are filed annually in settlement of amounts
due to or from the various agencies administering the reimbursement programs.
These cost reports indicated amounts due from the Company aggregating $58
million. This liability arose during 1999 as part of the Company's routine
settlement of Medicare reimbursement overpayments. Such amounts are classified
as liabilities subject to compromise in the condensed consolidated balance sheet
and, accordingly, no funds were disbursed by the Company in settlement of such
pre-petition liabilities.
Capital Resources
Capital expenditures totaled $8 million and $24 million in the first three
months of 2000 and 1999, respectively. Capital expenditures could approximate
$100 million in 2000. Management believes that its capital expenditure program
is adequate to improve and equip existing facilities.
Capital expenditures in both periods were financed through internally
generated funds. At March 31, 2000, the estimated cost to complete and equip
construction in progress approximated $16 million. There can be no assurance
that the Company will have sufficient resources to finance its capital
expenditures program in 2000.
Other Information
The Company is a party to certain material litigation. See Note 10 of the
Notes to Condensed Consolidated Financial Statements.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
(Restated)
----------------------------------------------------------------------
1999 Quarters First
--------------------------------------------- Quarter
First Second Third Fourth Year 2000
-------- -------- -------- ---------- ---------- --------
Revenues............................... $700,232 $688,892 $681,924 $ 594,593 $2,665,641 $715,456
-------- -------- -------- ---------- ---------- --------
Salaries, wages and benefits........... 403,894 392,748 393,535 376,050 1,566,227 405,313
Supplies............................... 84,997 85,799 81,484 95,509 347,789 93,398
Rent................................... 75,452 76,088 77,423 76,157 305,120 76,220
Other operating expenses............... 112,561 134,743 122,502 594,607 964,413 122,589
Depreciation and amortization.......... 22,285 21,612 24,126 25,173 93,196 17,902
Interest expense....................... 19,536 20,032 26,030 14,844 80,442 16,239
Investment income...................... (631) (642) (673) (3,242) (5,188) (1,206)
-------- -------- -------- ---------- ---------- --------
718,094 730,380 724,427 1,179,098 3,351,999 730,455
-------- -------- -------- ---------- ---------- --------
Loss before reorganization costs
and income taxes..................... (17,862) (41,488) (42,503) (584,505) (686,358) (14,999)
Reorganization costs................... 2,312 4,547 5,443 6,304 18,606 3,065
-------- -------- -------- ---------- ---------- --------
Loss before income taxes............... (20,174) (46,035) (47,946) (590,809) (704,964) (18,064)
Provision for income taxes............. 50 50 50 350 500 500
-------- -------- -------- ---------- ---------- --------
Loss from operations................... (20,224) (46,085) (47,996) (591,159) (705,464) (18,564)
Cumulative effect of change in
accounting for start-up costs....... (8,923) - - - (8,923) -
-------- -------- -------- ---------- ---------- --------
Net loss..................... (29,147) (46,085) (47,996) (591,159) (714,387) (18,564)
Preferred stock dividend
requirements......................... (261) (262) (261) (262) (1,046) (261)
-------- -------- -------- ---------- ---------- --------
Loss to common
stockholders............... $(29,408) $(46,347) $(48,257) $ (591,421) $ (715,433) $(18,825)
======== ======== ======== ========== ========== ========
Loss per common share:
Basic:
Loss from operations............. $ (0.29) $ (0.66) $ (0.69) $ (8.39) $ (10.03) $ (0.27)
Cumulative effect of change in
accounting for start-up costs.. (0.13) - - - (0.13) -
-------- -------- -------- ---------- ---------- --------
Net loss..................... $ (0.42) $ (0.66) $ (0.69) $ (8.39) $ (10.16) $ (0.27)
======== ======== ======== ========== ========== ========
Diluted:
Loss from operations............. $ (0.29) $ (0.66) $ (0.69) $ (8.39) $ (10.03) $ (0.27)
Cumulative effect of change in
accounting for start-up costs.. (0.13) - - - (0.13) -
-------- -------- -------- ---------- ---------- --------
Net loss..................... $ (0.42) $ (0.66) $ (0.69) $ (8.39) $ (10.16) $ (0.27)
======== ======== ======== ========== ========== ========
Shares used in computing loss
per common share:
Basic............................ 70,326 70,395 70,438 70,463 70,406 70,240
Diluted.......................... 70,326 70,395 70,438 70,463 70,406 70,240
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands)
1999 Quarters First
-------------------------------------------- Quarter
First Second Third Fourth Year 2000
-------- -------- -------- --------- ---------- --------
Revenues:
Health services division:
Nursing centers................ $398,374 $397,930 $399,907 $ 398,033 $1,594,244 $412,703
Rehabilitation services........ 54,365 50,234 46,088 45,044 195,731 34,377
Other ancillary services....... 16,263 12,855 10,477 3,932 43,527 (5)
Elimination.................... (34,205) (34,564) (31,770) (27,728) (128,267) (18,091)
-------- -------- -------- --------- ---------- --------
434,797 426,455 424,702 419,281 1,705,235 428,984
Hospital division:
Hospitals...................... 238,522 234,868 230,682 146,476 850,548 253,591
Pharmacy....................... 43,246 42,951 40,707 44,589 171,493 47,468
-------- -------- -------- --------- ---------- --------
281,768 277,819 271,389 191,065 1,022,041 301,059
-------- -------- -------- --------- ---------- --------
716,565 704,274 696,091 610,346 2,727,276 730,043
Elimination of pharmacy charges
to Company nursing centers.... (16,333) (15,382) (14,167) (15,753) (61,635) (14,587)
-------- -------- -------- --------- ---------- --------
$700,232 $688,892 $681,924 $ 594,593 $2,665,641 $715,456
======== ======== ======== ========= ========== ========
Income (loss) from operations
(restated):
Operating income (loss):
Health services division:
Nursing centers............. $ 54,963 $ 55,027 $ 51,722 $ 7,416 $ 169,128 $ 68,712
Rehabilitation services..... 6,847 8,311 5,191 (17,458) 2,891 486
Other ancillary services.... 3,596 1,035 1,333 (1,798) 4,166 130
-------- -------- -------- --------- ---------- --------
65,406 64,373 58,246 (11,840) 176,185 69,328
Hospital division:
Hospitals................... 57,198 58,443 52,871 (36,462) 132,050 55,398
Pharmacy.................... 3,951 3,289 585 (7,483) 342 (1,200)
-------- -------- -------- --------- ---------- --------
61,149 61,732 53,456 (43,945) 132,392 54,198
-------- -------- -------- --------- ---------- --------
Corporate overhead............ (27,775) (29,676) (27,299) (24,197) (108,947) (29,370)
Unusual transactions.......... - (20,827) - (391,591) (412,418) -
Reorganization costs.......... (2,312) (4,547) (5,443) (6,304) (18,606) (3,065)
-------- -------- -------- --------- ---------- --------
Operating income (loss).... 96,468 71,055 78,960 (477,877) (231,394) 91,091
Rent............................. (75,452) (76,088) (77,423) (76,157) (305,120) (76,220)
Depreciation and amortization.... (22,285) (21,612) (24,126) (25,173) (93,196) (17,902)
Interest, net.................... (18,905) (19,390) (25,357) (11,602) (75,254) (15,033)
-------- -------- -------- --------- ---------- --------
Loss before income taxes......... (20,174) (46,035) (47,946) (590,809) (704,964) (18,064)
Provision for income taxes....... 50 50 50 350 500 500
-------- -------- -------- --------- ---------- --------
$(20,224) $(46,085) $(47,996) $(591,159) $ (705,464) $(18,564)
======== ======== ======== ========= ========== ========
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
1999 Quarters First
------------------------------------------ Quarter
First Second Third Fourth Year 2000
--------- --------- --------- --------- ---------- ---------
Nursing Center Data:
End of period data:
Number of nursing centers:
Leased and owned......... 280 280 280 282 280
Managed.................. 13 13 13 13 40
--------- --------- --------- --------- ---------
293 293 293 295 320
========= ========= ========= ========= =========
Number of licensed beds:
Leased and owned......... 36,924 36,726 36,675 36,912 36,653
Managed.................. 1,661 1,661 1,661 1,661 4,262
--------- --------- --------- --------- ---------
38,585 38,387 38,336 38,573 40,915
========= ========= ========= ========= =========
Revenue mix %:
Medicare..................... 28 27 24 26 26 28
Medicaid..................... 47 48 51 50 49 48
Private and other............ 25 25 25 24 25 24
Patient days (excludes managed
facilities):
Medicare..................... 380,748 366,272 339,303 349,965 1,436,288 398,329
Medicaid..................... 1,867,554 1,911,111 1,967,721 1,972,577 7,718,963 1,918,732
Private and other............ 633,137 623,665 626,903 617,483 2,501,188 590,619
--------- --------- --------- --------- ---------- ---------
2,881,439 2,901,048 2,933,927 2,940,025 11,656,439 2,907,680
========= ========= ========= ========= ========== =========
Hospital Data:
End of period data:
Number of hospitals.......... 57 56 56 56 56
Number of licensed beds...... 4,937 4,935 4,907 4,931 4,931
Revenue mix %:
Medicare..................... 59 56 55 65 58 58
Medicaid..................... 10 10 11 11 11 10
Private and other............ 31 34 34 24 31 32
Patient days:
Medicare..................... 175,953 171,011 159,739 163,273 669,976 188,063
Medicaid..................... 29,939 29,675 30,674 29,561 119,849 31,964
Private and other............ 49,924 49,165 47,756 45,631 192,476 51,747
--------- --------- --------- --------- ---------- ---------
255,816 249,851 238,169 238,465 982,301 271,774
========= ========= ========= ========= ========== =========
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only significant exposure to market risk is changes in the
levels of various interest rates. In this regard, changes in LIBOR interest
rates affect the interest paid on its borrowings. In addition, the interest
rates on the DIP Financing are affected by changes in the Federal Funds rate and
the prime rate of Morgan Guaranty Trust Company of New York. To mitigate the
impact of fluctuations in these interest rates, the Company generally maintains
a significant portion of its borrowings as fixed rate in nature either by
borrowing on a fixed rate long-term basis or entering into interest rate swap
transactions.
As previously discussed, the Company filed the Chapter 11 Cases on September
13, 1999. Accordingly, all amounts disclosed in the table below are subject to
compromise in connection with the Chapter 11 Cases. While the fair values of
the Company's debt obligations declined significantly as a result of the Chapter
11 Cases, such amounts do not reflect any adjustments that might result from the
resolutions of the Chapter 11 Cases or other matters discussed herein.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. In addition, the Company
may assume or reject executory contracts under the Bankruptcy Code.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table
constitutes a forward-looking statement. For long-term debt, the table presents
principal cash flows and related weighted average interest rates by expected
maturity date. For interest rate swap agreements, the table presents notional
amounts and weighted average interest rates by contractual maturity dates.
Notional amounts are used to calculate the contractual cash flows to be
exchanged under the contract.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
(Dollars in thousands)
Expected Maturities Fair
------------------------------------------------------------------------ Value
2000 2001 2002 2003 2004 Thereafter Total 3/31/00
-------- ------- -------- ------- -------- ---------- -------- --------
Liabilities:
Long-term debt, including
amounts due within one year:
Fixed rate..................... $ 17,262 $18,164 $ 19,910 $21,663 $ 689 $303,882 $381,570 $145,028
Average interest rate.......... 11.50% 11.50% 11.50% 11.50% 9.50% 9.50%
Variable rate.................. $ 28,753 $76,974 $129,425 $57,500 $216,491 $ - $509,143 $356,400
(a) Average interest rate
Interest rate derivative
financial instruments related
to debt:
Interest rate swaps:
Pay fixed/receive variable..... $100,000 $100,000 $ 76
Average pay rate............... 6.3%
(b) Average receive rate
--------------
(a) Interest is payable, depending on the debt instrument, certain leverage
ratios and other factors, at a rate of LIBOR plus 3/4% to 3 1/2% or the
prime rate plus 2% to 3 1/2%.
(b) The variable rate portion of the interest rate swap is 3-month LIBOR.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINDRED HEALTHCARE, INC.
Date: August 29, 2001 /s/ EDWARD L. KUNTZ
---------------------- -------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
Date: August 29, 2001 /s/ RICHARD A. SCHWEINHART
---------------------- -------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
37