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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 1-10989
VENCOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1055020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3300 PROVIDIAN CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, par value $.25 per share ON WHICH REGISTERED
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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 by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10-K. [X]
As of March 3, 1997, there were 68,938,295 shares of the Registrant's Common
Stock, $.25 par value, outstanding. The aggregate market value of the shares
of Registrant held by non-affiliates of the Registrant, based on the closing
price of such stock on the New York Stock Exchange on March 3, 1997, was
approximately $2,215,208,000. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Part III is incorporated by reference from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 15,
1997. A portion of Part II is incorporated by reference from the Registrant's
Annual Report to Stockholders for the year ended December 31, 1996.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 24
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 28
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 32
2
PART I
ITEM 1. BUSINESS
GENERAL
Vencor, Inc. ("Vencor" or the "Company") is one of the nation's largest
providers of healthcare services primarily focusing on the needs of the
elderly. At December 31, 1996, the Company's operations included 38 long-term
acute care hospitals containing 3,325 licensed beds, 313 skilled nursing
centers containing 39,619 licensed beds, 34 institutional pharmacies and,
through its affiliate, Atria Communities, Inc. ("Atria"), 21 assisted and
independent living communities with 2,942 units. Healthcare services provided
through this network of facilities included long-term intensive hospital care,
nursing care, contract respiratory therapy services, acute cardiopulmonary
care, subacute and post-operative care, inpatient and outpatient
rehabilitation therapy, specialized care for Alzheimer's disease, hospice
care, home health care, pharmacy services and assisted and independent living.
At December 31, 1996, the Company was providing contract healthcare services
to over 4,000 nursing and subacute care centers. The Company also continues to
develop VenTouch(TM), formerly known as ProTouch(R), a comprehensive paperless
clinical information system designed to increase the operating efficiencies of
the Company's facilities.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987. The Company changed its name to Vencor, Incorporated in 1989 and to
Vencor, Inc. in 1993. On September 28, 1995, The Hillhaven Corporation
("Hillhaven") merged into the Company (the "Hillhaven Merger").
This Report contains a number of forward-looking statements. These
statements are qualified by reference to the cautionary statements set forth
under "Business--Additional Company Information--Cautionary Statements."
VENCOR STRATEGY
The healthcare system of the United States remains in a period of
significant change. Factors affecting the healthcare system include cost
containment, the expansion of managed care, improved medical technology, an
increased focus on measurable medical outcomes, and a growing public awareness
of healthcare spending by governmental agencies at the federal and state
levels.
At the same time, the Company believes that the need for long-term care is
increasing. Improved medical care and advances in medical technology increase
the survival rates for victims of disease and trauma of all ages. Many of
these patients never fully recover and require long-term care. The incidence
of chronic problems increases with age, particularly in connection with
certain degenerative conditions. As the average age of the United States
population increases, the Company believes there will be an increase in the
need for long-term care at all levels of the continuum of care.
Payors are increasingly requiring providers to move patients from high-
acuity care environments to lower-acuity care settings as quickly as is
medically appropriate. The Company is positioned to respond to this trend.
With the addition of its home health services, the Company now provides a full
range of clinical expertise, as well as advanced technologies for cost-
efficiencies, to accommodate patients at any level of long-term care.
The Company is continuing to develop full-service integrated networks to
meet the range of needs of patients requiring long-term care. The Company is
continuing to integrate and expand the operations of its long-term acute care
hospitals and skilled nursing centers and is also investigating and developing
related healthcare services. The Company is exploring other ways in which it
can transfer its expertise in the efficient delivery of cardiopulmonary and
other long-term care to other healthcare businesses. Such efforts may include
affiliating with or acquiring other healthcare businesses.
3
The Company's strategy for implementing full-service integrated networks for
long-term care is set forth below.
Focus on Long-Term Care Continuum. The Company intends to continue expanding
its long-term care network. The Company conducts market research prior to
entering new markets, which research may address: (i) the need for placement
of long-term patients or residents, (ii) existing provider referral patterns,
(iii) the presence of competitors, (iv) payor mix, and (v) the political and
regulatory climate.
On March 21, 1997, the Company completed its acquisition of TheraTx,
Incorporated ("TheraTx") (the "TheraTx Merger"), a provider of subacute
rehabilitation and respiratory therapy management services to skilled nursing
facilities and an operator of 29 skilled nursing facilities that provide a
broad range of subacute, specialty and basic medical and other geriatric
services. For additional information regarding the TheraTx Merger, see
"Business--Recent Developments." Although the Company is continually
considering opportunities for future growth and is actively negotiating to
acquire additional facilities and related healthcare businesses, as of March
21, 1997, the Company had not entered into any agreements regarding future
acquisitions.
From time to time, the Company may also sell all or a portion of its
interest in a facility or business where such disposition would be in the best
interest of the Company. During 1996, Vencor sold a portion of its interest in
its assisted and independent living communities through the formation of Atria
and the initial public offering of Atria's common stock in August 1996 (the
"IPO"). In addition, the Company entered into a definitive agreement in
November 1996 to sell 34 of its nursing facilities to Lenox Healthcare, Inc.,
a privately held company based in Pittsfield, Massachusetts.
Expand Specialty Care Services. The Company intends to continue to expand
the specialty care programs and services at its nursing centers. These
services generally produce higher revenues than do routine nursing care
services and serve to differentiate the Company's facilities from others in a
given market. The Company is focusing on the expansion of its subacute,
medical and rehabilitation services, including physical, occupational and
speech therapies, wound care, oncology treatment, brain injury care, stroke
therapy and orthopedic therapy.
Expand Vencare Contract Services. In 1993, the Company initiated its Vencare
program of providing respiratory therapy and subacute care services in nursing
and hospital facilities owned by third parties. The Vencare program also
currently includes hospice care, management of cardiopulmonary hospital
departments, rehabilitation therapy services, and mobile radiology services.
Vencare enables the Company to provide its services to lower acuity, subacute
patients in cost-efficient settings. In November 1996, Medisave Pharmacies,
Inc. (acquired as part of the Hillhaven Merger) was consolidated into the
Company's Vencare health services operations and renamed Vencare Pharmacy
Services. Vencare Pharmacy Services provides hospital-based clinical pharmacy
services and institutional pharmacy services. Vencare services are provided
pursuant to contracts with nursing and subacute care centers and hospitals.
The Company intends to continue to expand its Vencare program.
Expand Home Health Services. During the summer of 1996, the Company
consolidated its home health services business to establish Vencor Home Health
Services. The Company intends to expand its home health and infusion services
as an affordable and practical approach to many healthcare needs. These
services include home health nursing and home infusion products and services.
The expansion of home health services extends Vencor's continuum of care to
the lowest cost setting.
Further Implement Patient Information System. In 1993, the Company formed
Ventech Systems, Inc. ("Ventech") to develop the VenTouch(TM) electronic
patient medical record system. During 1996, the Company consolidated Ventech's
operations into its information systems operations. VenTouch(TM) is a software
application which allows nurses, physicians and other clinicians to access and
manage clinical information utilized in the healthcare delivery process. Among
the features of VenTouch(TM) are on-line access and update of an electronic
patient chart, on-line trend analysis using electronic flowsheets and graphs,
and remote access for authorized users. The system is designed to decrease
administrative time, reduce paper and support the delivery of quality care.
The Company had installed VenTouch(TM) in all of its existing hospitals during
1995 and began installing
4
VenTouch(TM) in its nursing centers in 1996. In addition, during 1997, the
Company intends to offer its VenTouch(TM) information system as part of the
menu of services offered by Vencare to skilled nursing centers not owned by
the Company.
This section contains a number of forward-looking statements. These
statements are qualified by reference to the cautionary statements set forth
under "Business--Additional Company Information--Cautionary Statements."
RECENT DEVELOPMENTS
On March 21, 1997, the Company consummated the TheraTx Merger. The TheraTx
Merger was structured as a cash tender offer in which the Company paid $17.10
for each outstanding share of TheraTx common stock. Following the completion
of the tender offer, the Company merged its acquisition subsidiary with and
into TheraTx and TheraTx became a wholly-owned subsidiary of the Company. Upon
consummation of the TheraTx Merger, each share of TheraTx common stock not
purchased through the tender offer was converted into the right to receive
$17.10 in cash.
TheraTx provides subacute rehabilitation and respiratory therapy program
management services to skilled nursing facilities and operates 29 skilled
nursing facilities that provide a broad range of subacute, specialty and basic
medical and other geriatric services. TheraTx also provides occupational
healthcare and related services in outpatient clinics. In addition to its
primary practice areas, TheraTx also operates two outpatient surgery centers,
one acute-care specialty hospital and 16 occupational health facilities,
provides respiratory therapy and related services to hospitals and provides
medical supply distribution and related services to the long-term healthcare
industry.
TheraTx utilizes a proprietary clinical information system, TheraSys(R),
which measures clinical outcomes and clinical efficiency of care for its
rehabilitation services. TheraSys(R) allows for direct entry of patient
information into the system and facilitates the accumulation and analyses of
patient care data. Using the data derived from TheraSys(R), TheraTx's clinical
teams can better manage patient, family and payor expectations about the
likely length, cost and results of therapy.
HOSPITAL OPERATIONS
The Company's hospitals primarily provide long-term acute care to medically
complex, chronically ill patients. The Company's hospitals have the capability
to treat patients who suffer from multiple systemic failures or conditions
such as neurological disorders, head injuries, brain stem and spinal cord
trauma, cerebral vascular accidents, chemical brain injuries, central nervous
system disorders, developmental anomalies and cardiopulmonary disorders.
Chronic patients are often dependent on technology for continued life support,
such as mechanical ventilators, total parenteral nutrition, respiration or
cardiac monitors and dialysis machines. Generally, approximately 60% of the
Company's chronic patients are ventilator-dependent for some period of time
during their hospitalization. The Company's patients suffer from conditions
which require a high level of monitoring and specialized care, yet may not
necessitate the continued services of an intensive care unit. Due to their
severe medical conditions, the Company's hospital patients generally are not
clinically appropriate for admission to a skilled nursing facility or
rehabilitation hospital. The medical condition of most of the Company's
hospital patients is periodically or chronically unstable. By combining
general acute care services with the ability to care for chronic patients, the
Company believes that its long-term hospitals provide its patients with high
quality, cost-effective care. During 1996, the average length of stay for
chronic patients in the Company's long-term hospitals was approximately 50
days. Although the Company's patients range in age from pediatric to
geriatric, typically more than 70% of the Company's chronic patients are over
65 years of age.
5
HOSPITAL FACILITIES
The following table lists by state the number of hospitals and related
licensed beds owned and leased by the Company as of December 31, 1996:
NUMBER OF FACILITIES
LICENSED -----------------------
STATE BEDS OWNED LEASED TOTAL
----- -------- ------ ------- ------
Arizona.................................. 110 2 - 2
California............................... 506 6 - 6
Colorado................................. 68 1 - 1
Florida.................................. 338 4 1 5
Georgia.................................. 72 - 1 1
Illinois................................. 365 3 - 3
Indiana.................................. 121 2 - 2
Kentucky................................. 374 1 - 1
Massachusetts............................ 40 1 - 1
Michigan................................. 160 1 - 1
Missouri................................. 227 2 - 2
North Carolina........................... 124 1 - 1
Oklahoma................................. 59 1 - 1
Pennsylvania............................. 101 2 - 2
Tennessee................................ 49 1 - 1
Texas.................................... 345 5 1 6
Virginia................................. 206 1 - 1
Wisconsin................................ 60 1 - 1
----- ------ ------ ------
Totals................................. 3,325 35 3 38
===== ====== ====== ======
SERVICES PROVIDED BY COMPANY HOSPITALS
Chronic. The Company has devised a comprehensive program of care for its
chronic patients that draws upon the talents of interdisciplinary teams,
including licensed pulmonary specialists. The teams evaluate chronic patients
upon admission to determine a treatment plan. Where appropriate, the treatment
programs may involve the services of several disciplines, such as pulmonary
and physical therapy. Individual attention to patients who have the cognitive
and physical abilities to respond to therapy is emphasized. Patients who
successfully complete treatment programs are discharged to skilled nursing
facilities, rehabilitation hospitals or home care settings.
General Acute Care. The Company operates two general acute care hospitals.
Certain of the Company's long-term hospitals also provide general acute care
and outpatient services in support of their long-term care services. Certain
of the Company's hospitals maintain subacute units. General acute care and
outpatient services may include inpatient services, diagnostic services,
emergency services, CT scanning, one-day surgery, hospice services,
laboratory, X-ray, respiratory therapy, cardiology and physical therapy. The
Company may expand its general acute care and outpatient services as its long-
term hospitals mature.
Major factors contributing to the growth in demand for the Company's
intensive care hospital services include the following:
Increased Patient Population. Improved medical care and advancements in
medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital
care. The incidence of chronic respiratory problems increases with age,
particularly in connection with certain degenerative conditions. As the
average age of the United States population increases, the Company believes
there will be an increase in the need for long-term hospital care.
6
Medically Displaced Patients. The Company's hospital patients require a high
level of monitoring and specialized care, yet may not require the continued
services of an intensive care unit. Due to their extended recovery period, the
Company's hospital patients generally do not receive specialized
multidisciplinary treatment focused on the unique aspects of a long-term
recovery program in a general acute care hospital and yet cannot qualify for
admission to a skilled nursing facility or rehabilitation hospital.
Economically Displaced Patients. Historically, reimbursement policies and
practices designed to control healthcare costs have made it difficult to place
medically complex, chronically ill patients in an appropriate healthcare
setting. Under the Medicare program, general acute care hospitals are
reimbursed under the prospective payment system ("PPS"), a fixed payment
system which provides an economic incentive to general acute care hospitals to
minimize the length of patient stay. As a result, these hospitals generally
receive less than full cost for providing care to patients with extended
lengths of stay. Furthermore, PPS does not provide for reimbursement more
frequently than once every 60 days, placing an additional economic burden on a
general acute care hospital providing long-term care. The Company's long-term
hospitals, however, are exempt from PPS and thus receive reimbursement on a
more favorable basis for providing long-term hospital care to Medicare
patients. Commercial reimbursement sources, such as insurance companies and
health maintenance organizations ("HMOs"), some of which pay based on
established hospital charges, typically seek the most economical source of
care available. The Company believes that its emphasis on long-term hospital
care allows it to provide high quality care to chronic patients on a cost-
effective basis.
HOSPITAL PATIENT ADMISSION
Substantially all of the acute and medically complex patients admitted to
the Company's hospitals are transfers from other healthcare providers.
Patients are referred from general acute care hospitals, rehabilitation
hospitals, skilled nursing facilities and home care settings. Referral sources
include discharge planners, case managers of managed care plans, social
workers, physicians, third party administrators, HMOs and insurance companies.
The Company employs case managers who educate healthcare professionals from
other hospitals as to the unique nature of the services provided by the
Company's long-term hospitals. The case managers develop an annual admission
plan for each hospital with assistance from the hospital's administrator. To
identify specific service opportunities, the admission plan for each hospital
is based on a variety of factors, including population characteristics,
physician characteristics and incidence of disability statistics. The
admission plans involve ongoing education of local physicians, utilization
review and case management personnel, acute care hospitals, HMOs and preferred
provider organizations ("PPOs"). The Company maintains a pre-admission
assessment system at its regional referral centers to evaluate certain
clinical and other information in determining the appropriateness of each
patient referred to its hospitals.
PROFESSIONAL STAFF
Each of the Company's hospitals is staffed with a multidisciplinary team of
healthcare professionals. A professional nursing staff trained to care for the
long-term acute patient is on duty 24 hours each day in the Company's
hospitals. Other professional staff includes respiratory therapists, physical
therapists, occupational therapists and registered dietitians.
The physicians at the Company's hospitals generally are not employees of the
Company and may also be members of the medical staff of other hospitals. Each
of the Company's hospitals has a fully credentialled, multispecialty medical
staff to meet the needs of the patients. Each patient is visited at least once
a day by a physician. Typically, the Company does not enter into exclusive
contracts with physicians to provide services to its hospital patients. The
Company's hospitals and physicians enter into service contracts providing for
pulmonary, radiology, pathology, infection control and anesthesiology
services, most of which are cancelable on no more than 90 days' notice.
7
The Company believes that its future success will depend in large part upon
its continued ability to hire and retain qualified personnel. The Company
seeks the highest quality of professional staff within each market.
CENTRALIZED MANAGEMENT AND OPERATIONS
A hospital administrator supervises and is responsible for the day-to-day
operations at each of the Company's hospitals. Each hospital also employs a
controller who monitors the financial matters of each hospital, including the
measurement of actual operating results compared to goals established by the
Company. In addition, each hospital employs an assistant administrator to
oversee the clinical operations of the hospital and a quality assurance
manager to direct an integrated quality assurance program. The Company's
corporate headquarters provides services in the areas of system design and
development, training, human resource management, reimbursement expertise,
legal advice, technical accounting support, purchasing and facilities
management. Financial control is maintained through fiscal and accounting
policies that are established at the corporate level for use at each hospital.
The Company has standardized operating procedures and monitors its hospitals
to assure consistency of operations.
HOSPITAL MANAGEMENT INFORMATION SYSTEM
The financial information for each Company hospital is centralized at the
corporate headquarters through its management information system. The Company
installed its VenTouch(TM) information system, an electronic patient medical
record system, in all of the Company's hospitals in 1995. See "Business--
Management Information System."
QUALITY ASSESSMENT AND IMPROVEMENT
The Company maintains a strategic outcomes program which includes a
centralized pre-admission evaluation program and concurrent review of all of
its patient population against utilization and quality screenings, as well as
quality of life outcomes data collection and patient and family satisfaction
surveys. In addition, each hospital has an integrated quality assessment and
improvement program administered by a quality review manager which encompasses
utilization review, quality improvement, infection control and risk
management. The objective of these programs is to ensure that patients are
appropriately admitted to the Company's hospitals and that quality healthcare
is rendered to them in a cost-effective manner.
The Company has implemented a program whereby its hospitals will be reviewed
annually by internal quality auditors for compliance with standards of the
Joint Commission on Accreditation of Health Care Organizations ("JCAHO"). The
purposes of this internal review process are to (i) ensure ongoing compliance
with industry recognized standards for hospitals, (ii) assist management in
analyzing each hospital's operations and (iii) provide consulting and
educational opportunities for each hospital to identify opportunities to
improve patient care.
SELECTED HOSPITAL OPERATING DATA
The following table sets forth certain operating data for the Company's
hospitals:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
Hospitals in operation at end of period........... 38 36 33
Number of licensed beds at end of period.......... 3,325 3,263 2,511
Patient days...................................... 586,144 489,612 403,623
Average daily census.............................. 1,601 1,341 1,123
Occupancy percentage.............................. 53.7% 47.6% 48.8%
As used in the above table, the term "licensed beds" refers to the maximum
number of beds permitted in the hospital under its license regardless of
whether the beds are actually available for patient care. "Patient days"
refers to the total number of days of patient care provided by the Company's
hospitals for the periods indicated.
8
"Average daily census" is computed by dividing each hospital's patient days by
the number of calendar days the respective hospital is in operation.
"Occupancy percentage" is computed by dividing average daily census by the
number of licensed beds, adjusted for the length of time each facility was in
operation during each respective period.
SOURCES OF HOSPITAL REVENUES
The Company receives payment for hospital services from third-party payors,
including government reimbursement programs such as Medicare and Medicaid and
nongovernment sources such as commercial insurance companies, HMOs, PPOs and
contracted providers. Patients covered by nongovernment payors are generally
more profitable to the Company than those covered by Medicare and Medicaid
programs. The following table sets forth the approximate percentages of the
Company's hospital revenues derived from the specified payor sources
indicated:
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
Medicare...................................................... 59% 57% 56%
Medicaid...................................................... 12 12 11
Private and other............................................. 29 31 33
For the year ended December 31, 1996, hospital revenues totaled
approximately $551 million, or 21% of the Company's total revenues.
HOSPITAL COMPETITION
As of December 31, 1996, the hospitals owned, leased or managed by the
Company were located in 33 geographic markets in 18 states. In each geographic
market, there are general acute care hospitals which provide services
comparable to those offered by the Company's hospitals. In addition, the
Company believes that as of December 31, 1996, there were approximately 160
hospitals in the United States certified by Medicare as general long-term
hospitals, some of which provide similar cardiopulmonary services to those
provided by the Company's hospitals. Many of these long-term hospitals are
larger and more established than the Company's hospitals. Certain hospitals
that compete with the Company's hospitals are operated by not-for-profit,
nontaxpaying or governmental agencies, which can finance capital expenditures
on a tax-exempt basis, and which receive funds and charitable contributions
unavailable to the Company's hospitals. Cost containment efforts by federal
and state governments and other third-party payors designed to encourage more
efficient utilization of hospital services have generally resulted in lower
hospital industry occupancy rates in recent years. As a result of these
efforts, a number of acute care hospitals have converted to specialized care
facilities. Some hospitals are developing step-down units which attempt to
serve the needs of patients who require care at a level between that provided
by an intensive care unit and a general medical/surgical floor. This trend is
expected to continue due to the current oversupply of acute care hospital beds
and the increasing consolidation and affiliation of free-standing hospitals
into larger systems. As a result, the Company may experience increased
competition from existing hospitals and converted facilities.
Competition for patients covered by nongovernment reimbursement sources is
intense. The primary competitive factors in the long-term intensive care
business include quality of services, charges for services and responsiveness
to the needs of patients, families, payors and physicians. Other companies
have entered the long-term intensive care market with licensed hospitals that
compete with the Company's hospitals.
Some skilled nursing facilities, while not licensed as hospitals, have
developed units which provide a greater intensity of care than the care
typically provided by a skilled nursing facility. The condition of patients in
these skilled nursing facilities is less acute than the condition of patients
cared for in the Company's hospitals.
The competitive position of any hospital, including the Company's hospitals,
is also affected by the ability of its management to negotiate contracts with
purchasers of group healthcare services, including private
9
employers, PPOs and HMOs. Such organizations attempt to obtain discounts from
established hospital charges. The importance of obtaining contracts with PPOs,
HMOs and other organizations which finance healthcare, and its effect on a
hospital's competitive position, vary from market to market, depending on the
number and market strength of such organizations.
The Company also competes with other healthcare companies for hospital and
other healthcare acquisitions.
HOSPITAL REGULATION
The healthcare industry is subject to regulation by a number of government
and private agencies. Regulatory activities affect the Company's business
activities by controlling its growth, requiring licensure and certification
for its hospitals, regulating the use of its properties and controlling
reimbursement to the Company for services provided.
Certificates of Need and State Licensing. Certificates of Need ("CON")
regulations control the development and expansion of healthcare services and
facilities in certain states. CON laws generally provide that approval must be
obtained from the designated state health planning agency prior to the
expansion of existing facilities, construction of new facilities, addition of
beds, acquisition of major items of equipment or introduction of new services.
The stated objective of the CON process is to promote quality healthcare at
the lowest possible cost and avoid unnecessary duplication of services,
equipment and facilities. Recently, some states (including Florida,
Massachusetts and Tennessee) have amended their CON regulations to require CON
approval prior to the conversion of a hospital from general short-term
facility to a general long-term facility. Of the 18 states in which the
Company's hospitals were located as of December 31, 1996, Florida, Georgia,
Illinois, Kentucky, Massachusetts, Michigan, Missouri, North Carolina,
Pennsylvania, Tennessee, Virginia and Wisconsin have CON programs. With one
exception, the Company was not required to obtain a CON in connection with
previous acquisitions, due to the relatively low renovation costs and the
absence of the need for additional licensed beds or changes in services. CONs
may be required in connection with the Company's future hospital and contract
services expansion. There can be no assurance that the Company will be able to
obtain the CONs necessary for any or all future projects. If the Company is
unable to obtain the requisite CONs, its growth and business could be
adversely affected.
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the Company's hospitals in operation have obtained the necessary
licenses to conduct business.
Medicare and Medicaid. Medicare is a federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over and certain
disabled persons. Medicaid is a medical assistance program administered by
each state pursuant to which hospital benefits are available to certain
indigent patients. Within the Medicare and Medicaid statutory framework, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under Medicare and Medicaid. A
substantial portion of the Company's hospital revenues is derived from
patients covered by Medicare and Medicaid. See "Business--Hospital
Operations--Sources of Hospital Revenues."
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by the Department of Health
and Human Services ("HHS") relating to the type of hospital, its equipment,
personnel and standard of medical care, as well as comply with state and local
laws and regulations. The Company has developed a management system to ensure
compliance with the various standards and requirements. Each of the Company's
hospitals employs a person who is responsible for an on-going quality
assessment and improvement program. Hospitals undergo periodic on-site
Medicare certification surveys, which are generally limited if the hospital is
accredited by JCAHO. As of December 31, 1996, all of the Company's hospitals
were certified as Medicare providers, and 36 of its hospitals were also
certified by their respective state Medicaid programs. Applications are
pending for Medicaid certification with respect to the Company's other
10
hospitals. A loss of certification could adversely affect a hospital's ability
to receive payments from Medicare and Medicaid programs.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS as a means of controlling healthcare costs.
Under PPS, Medicare inpatient costs are reimbursed based upon a fixed payment
amount per discharge using diagnosis related groups ("DRGs"). The DRG payment
under PPS is based upon the national average cost of treating a Medicare
patient's condition. Although the average length of stay varies for each DRG,
the average stay for all Medicare patients subject to PPS is approximately six
days. An additional outlier payment is made for patients with unusually
extended lengths of stay or higher treatment costs. Outlier payments are only
designed to cover marginal costs. Additionally, PPS payments can only be made
once every 60 days. Thus, PPS creates an economic incentive for general short-
term hospitals to discharge chronic Medicare patients as soon as clinically
possible. Hospitals that are certified by Medicare as general long-term
hospitals are excluded from PPS. Management believes that the incentive for
short-term hospitals to discharge chronic medical patients as soon as
clinically possible creates a substantial referral source for the Company's
general long-term hospitals.
The Social Security Amendments of 1983 exempted psychiatric, rehabilitation,
cancer, children's and general long-term hospitals from PPS. A general long-
term hospital is defined as a hospital which has an average length of stay
greater than 25 days. Inpatient operating costs for general long-term
hospitals are reimbursed under the cost-based reimbursement system, subject to
a computed target rate (the "Target") per discharge for inpatient operating
costs established by the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). Until October 1991, Medicare operating costs per discharge in
excess of the Target were not reimbursed. Effective October 1, 1991, Medicare
operating costs in excess of the Target are reimbursed at the rate of 50% of
the excess up to 10% of the Target. Hospitals whose operating costs are lower
than the Target are reimbursed their actual costs plus an incentive. The
incentive is equal to 50% of the difference between their actual costs and the
Target and may not exceed 5% of the Target. New hospitals may apply for an
exemption from the TEFRA Target provisions. For hospitals certified prior to
October 1, 1992, the exemption was optional and, if granted, lasted for three
years. For certifications after October 1, 1992, the exemption is automatic
and is effective for two years. As of December 31, 1996, 32 of the Company's
hospitals were subject to TEFRA Target provisions. The Company's other
hospitals were not subject to TEFRA because they had qualified for the new
hospital exemptions described above. During 1997, three more of the Company's
hospitals will become subject to TEFRA Target provisions. The TEFRA limits
have not had a material adverse effect on the Company's results of operations,
and the Company does not expect that the TEFRA limits will have a material
effect on the Company's results of operations in 1997.
Medicare and Medicaid reimbursements are generally determined from annual
cost reports filed by the Company which are subject to audit by the respective
agency administering the programs. Management believes that adequate
provisions for loss have been recorded to reflect any adjustments which could
result from audits of these cost reports. Adjustments to the Company's cost
reports have not had an adverse effect on the Company's hospital operating
results.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for
services provided to a patient. Such review is subject to administrative and
judicial appeal. Each of the Company's hospitals employs a clinical
professional to administer the hospital's integrated quality assurance and
improvement program, including its utilization review program. PRO denials
have not had an adverse effect on the Company's hospital operating results.
Medicare and Medicaid antifraud and abuse amendments codified under Section
1128B(b) of the Social Security Act (the "Antifraud Amendments") prohibit
certain business practices and relationships that might affect the provision
and cost of healthcare services reimbursable under Medicare and Medicaid.
Sanctions for
11
violating the Antifraud Amendments include criminal and civil penalties and
exclusion from the Medicare and Medicaid programs. Pursuant to the Medicare
and Medicaid Patient and Program Protection Act of 1987, HHS and the Office of
the Inspector General ("OIG") specified certain "safe harbors" which describe
conduct and business relationships permissible under the Antifraud Amendments.
These "safe harbor" regulations may result in more aggressive enforcement of
the Antifraud Amendments by HHS and the OIG.
Section 1877 of the Social Security Act (commonly known as "Stark I") states
that a physician who has a financial relationship with a clinical laboratory
is generally prohibited from referring patients to that laboratory. The
Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to greatly expand the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (collectively referred to as the
"Stark Provisions"), a "financial relationship" is defined as an ownership
interest or a compensation arrangement. If such a financial relationship
exists, the entity is generally prohibited from claiming payment for such
services under the Medicare or Medicaid programs. Compensation arrangements
are generally exempted from the Stark Provisions if, among other things, the
compensation to be paid is set in advance, does not exceed fair market value
and is not determined in a manner that takes into account the volume or value
of any referrals or other business generated between the parties. The Company
expects that business practices of providers and financial relationships
between providers will be subject to increased scrutiny as healthcare reform
efforts continue on federal and state levels.
Healthcare Reform. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in some state
legislatures which could effect major changes in the healthcare system. In
October 1993, the Clinton Administration submitted comprehensive healthcare
reform legislation to Congress designed to provide, among other things, for
universal access to healthcare. Neither the Clinton Administration's plan nor
other healthcare reform legislation was enacted by Congress. More recently, a
significant effort has been initiated in Congress and the Clinton
Administration to balance the federal budget in seven years. This effort could
include significant reductions in Medicare and Medicaid spending, which may be
achieved through restrictions on growth of healthcare costs, implementation of
various aggregate cost limits, or a restructuring of Medicaid through block
grants to the states. The Company believes that implementation of block grants
to the states could add incentives to provide an increased amount of
healthcare services through managed care health plans.
A number of legislative proposals have included a moratorium on the
designation of additional long-term hospitals and changes in the Medicare
reimbursement system for long-term hospitals. However, the Company cannot
predict the content of any healthcare or budget reform legislation which may
be proposed in Congress or in state legislatures in the future, and whether
such legislation, if any, will be adopted. Accordingly, the Company is unable
to assess the effect of any such legislation on its business. There can be no
assurance that any such legislation will not have a material adverse impact on
the Company's future growth, revenues and income.
Gramm-Rudman. The Company's Medicare revenues may be adversely affected by
the Balanced Budget and Emergency Deficit Control Act of 1985, as amended
("Gramm-Rudman"). Under Gramm-Rudman, if the Office of Management and Budget
and the Congressional Budget Office determine that the federal deficit will
exceed certain specified levels for a federal fiscal year through 1998,
sufficient reductions in federal spending must be made to remove the excess
deficit. One-half of these reductions must be made in nondefense programs.
Although Medicaid funding is exempt from reductions under Gramm-Rudman, the
Medicare program is not. If reductions are made in the Medicare program, each
payment to providers that is paid on a reasonable cost basis may be reduced.
Payment reductions under Gramm-Rudman in federal fiscal years through 1998
could have an adverse effect on the Company's revenues and earnings. However,
because the actual amount of the reduction for any fiscal year may vary
according to the federal deficit, the financial impact of Gramm-Rudman on the
Company's results of operations cannot be predicted.
JCAHO Accreditation. Hospitals receive accreditation from JCAHO, a
nationwide commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of
12
medical staffs of hospitals. Generally, hospitals and certain other healthcare
facilities are required to have been in operation at least six months in order
to be eligible for accreditation by JCAHO. After conducting on-site surveys,
JCAHO awards accreditation for up to three years to hospitals found to be in
substantial compliance with JCAHO standards. Accredited hospitals are
periodically resurveyed, at the option of JCAHO, upon a major change in
facilities or organization and after merger or consolidation. As of December
31, 1996, 36 of the Company's hospitals were accredited by JCAHO. The Company
intends to apply for JCAHO accreditation for its other hospitals within the
next year. The Company intends to seek and obtain JCAHO accreditation for any
additional facilities it may purchase or lease and convert into long-term
hospitals. The Company does not believe that the failure to obtain JCAHO
accreditation at any hospital would have a material adverse effect on its
results of operations.
State Regulatory Environment. The Company currently operates five hospitals
and a chronic unit in Florida, a state which regulates hospital rates. These
operations contribute a significant portion of the Company's revenues and
operating income from its hospitals. Accordingly, the Company's hospital
revenues and operating income could be materially adversely affected by
Florida rate setting laws or other cost containment efforts. The Company also
operates six hospitals in Texas, six hospitals in California, and three
hospitals in Illinois which contribute a significant portion of the Company's
revenues and operating income from its hospitals. Although Texas, California
and Illinois do not currently regulate hospital rates, the adoption of such
legislation or other cost containment measures in these or other states could
have a material adverse effect on the Company's hospital revenues and
operating income. The Company is unable to predict whether and in what form
such legislation will be adopted. The Company's revenues and operating income
could be adversely affected by other state rate setting laws. Certain other
states in which the Company operates hospitals require disclosure of specified
financial information. In evaluating markets for expansion, the Company
considers the regulatory environment, including but not limited to, any
mandated rate setting.
VENCARE HEALTH SERVICES OPERATIONS
In 1993, the Company initiated its Vencare health services program. Through
Vencare, the Company has expanded the scope of its cardiopulmonary care by
providing subacute care, rehabilitation therapy and respiratory care services
and supplies to nursing and subacute care centers. The Company also manages
cardiopulmonary departments for other hospitals. The Company provides hospice
services to nursing center patients, hospital patients and persons in private
residences. In November 1996, the Company consolidated its pharmacy operations
under its Vencare health services. For the year ended December 31, 1996,
revenues from the Vencare program totaled approximately $387 million which
represented 15% of the Company's total revenues.
RESPIRATORY CARE SERVICES
The Company provides respiratory care services and supplies to nursing and
subacute center patients pursuant to contracts between the Company and the
nursing center or subacute center. The services are provided by respiratory
therapists based at the Company's hospitals. These respiratory therapists
perform a wide variety of procedures, including oxygen therapy, bronchial
hygiene, nebulizer and aerosol treatments, tracheostomy care, ventilator
management and patient respiratory education. Pulse oximeters and arterial
blood gas machines are used to evaluate the patient's condition, as well as
the effectiveness of the treatment. The Company also provides respiratory
equipment and supplies to nursing and subacute centers.
The Company receives payments from the nursing centers and subacute centers
for services rendered and these facilities, in turn, receive payments from the
appropriate provider. Respiratory therapy and supplies are generally covered
under the Medicare program and reimbursed as an ancillary service when the
service is provided by hospital-based respiratory therapists. Many commercial
insurers and managed care providers are seeking hospital discharge options for
lower acuity respiratory patients. Management believes that the
13
Company's pricing and successful clinical outcomes make its respiratory care
program attractive to commercial insurers and managed care providers.
At December 31, 1996, the Company had entered into contracts to provide
contract respiratory therapy services and supplies to approximately 1,600
nursing and subacute care centers, which includes approximately 250 nursing
centers owned or operated by the Company.
SUBACUTE SERVICES
At December 31, 1996, the Company had entered into contracts to provide
subacute care services to 13 nursing and subacute care centers. These
services, which are also an extension of the cardiopulmonary services provided
by the Company's hospitals, may include ventilator management, tracheostomy
care, continuation of airway restoration programs, enteral and parenteral
nutritional support, IV therapy for hydration and medication administration,
progressive wound care, chronic chest tube management, laboratory, radiology,
pharmacy and dialysis services, customized rehabilitation services and program
marketing. Subacute patients generally require assisted ventilation through
mechanical ventilation devices.
REHABILITATION THERAPY SERVICES
The Company provides physical, occupational and speech therapies to nursing
and subacute care center patients, as well as home health patients and public
school systems. At December 31, 1996, the Company had entered into contracts
to provide rehabilitation services to patients at 385 facilities.
HOSPICE SERVICES
The Company provides hospice services to nursing center patients, hospital
patients and persons in private residences. At December 31, 1996, the Company
had entered into approximately 160 contracts to provide hospice services to
patients in nursing and subacute care centers, hospitals and residences.
MOBILE DIAGNOSTIC SERVICES
The Company is a hospital based provider of on-call mobile X-ray services.
These services are primarily provided to skilled nursing facilities, but the
Company also provides services to correctional facilities, rehabilitation
hospitals and dialysis centers. These services are provided 24 hours a day,
365 days a year to 270 facilities.
COMPETITION IN THE CONTRACT SERVICES MARKET
Although the respiratory therapy services, rehabilitation services, subacute
services and hospice care markets are fragmented, significant competition
exists for the Company's contract services. The primary competitive factors
for the contract services business are quality of services, charges for
services and responsiveness to the needs of patients, families and the
facilities in which the services are provided. Certain hospitals are
establishing and managing their own step-down and subacute facilities. Other
hospital companies have entered the contract services market through
affiliation agreements and management contracts.
PHARMACIES
The Company provides institutional and other pharmacy services. As of
December 31, 1996, the Company operated 34 institutional pharmacies and 12
retail pharmacies in 18 states. In November 1996, the Company consolidated its
Medisave Pharmacies into its Vencare health services operations and now
provides its hospital-based clinical pharmacy services as part of its Vencare
services.
14
The institutional pharmacy business focuses on providing a full array of
pharmacy services to over 700 nursing centers and specialized care centers.
Institutional pharmacy sales encompass a wide variety of products including
prescription medication, prosthetics, respiratory services, infusion services
and enteral therapies. In addition, the Company provides a variety of
pharmaceutical consulting services designed to assist hospitals, nursing
centers, and home health agencies in program administration. As in prior
years, the Company continued its efforts to sell or close its retail
pharmacies. Management believes that the expected discontinuance of the retail
pharmacy operations in 1997 will not have a material adverse effect on
Vencare's operations.
The following table lists by state the number of pharmacies operated by the
Company as of December 31, 1996:
STATE INSTITUTIONAL RETAIL TOTAL
----- ------------- ------ -----
Arizona............................................ 1 - 1
California......................................... 14 - 14
Florida............................................ 2 - 2
Idaho.............................................. 1 - 1
Illinois........................................... - 2 2
Kansas............................................. - 2 2
Louisiana.......................................... - 2 2
Massachusetts...................................... 1 - 1
Mississippi........................................ - 1 1
Missouri........................................... 1 - 1
Nevada............................................. 2 - 2
North Carolina..................................... 4 - 4
Ohio............................................... 1 1 2
Tennessee.......................................... 2 - 2
Texas.............................................. - 4 4
Utah............................................... 1 - 1
Virginia........................................... 1 - 1
Wisconsin.......................................... 3 - 3
--- --- ---
Totals........................................... 34 12 46
=== === ===
GOVERNMENTAL REGULATION OF PHARMACIES
Pharmaceutical operations are subject to regulation by the various states in
which the Company conducts its business as well as by the federal government.
The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act
and the Prescription Drug Marketing Act, which are administered by the United
States Food and Drug Administration. Under the Comprehensive Drug Abuse
Prevention and Control Act of 1970, which is administered by the United States
Drug Enforcement Administration ("DEA"), dispensers of controlled substances
must register with the DEA, file reports of inventories and transactions and
provide adequate security measures. Failure to comply with such requirements
could result in civil or criminal penalties.
15
NURSING CENTER AND ASSISTED AND INDEPENDENT LIVING COMMUNITY OPERATIONS
NURSING CENTER--GENERAL INFORMATION
At December 31, 1996, the Company's nursing center operations provided long-
term care and subacute medical and rehabilitation services in 313 nursing
centers containing 39,619 licensed beds located in 32 states. At December 31,
1996, the Company owned 217 nursing centers and leased 80 nursing centers. The
Company also managed 16 nursing centers, including seven centers owned by
Tenet Healthcare Corporation ("Tenet"), which holds a greater than 10%
interest in the Company. In November 1996, the Company entered into a
definitive agreement to sell 34 of its nursing facilities in early 1997 to
Lenox Healthcare, Inc., a privately-held company based in Pittsfield,
Massachusetts.
The Company is a leading provider of rehabilitation services, including
physical, occupational and speech therapies. The majority of patients in
rehabilitation programs stay for eight weeks or less. Patients in
rehabilitation programs generally provide higher revenues than other nursing
center patients because they use a higher level of ancillary services. In
addition, management believes that the Company is one of the leading providers
of care for patients with Alzheimer's disease. At December 31, 1996, the
Company offered specialized programs covering approximately 3,000 beds in 86
nursing centers for patients suffering from Alzheimer's disease. Most of these
patients reside in separate units within the nursing centers and are cared for
by teams of professionals specializing in the unique problems experienced by
Alzheimer's patients.
NURSING CENTER MARKETING
The factors which affect consumers' selection of a nursing center vary by
community and include a nursing center's competitive position and its
relationships with local referral sources. Competition creates the standards
against which nursing centers in a given market are judged by various referral
sources, which include physicians, hospital discharge planners, community
organizations and families. Therefore, the Company's nursing center marketing
efforts are conducted at the local market level by the nursing center
administrators, admissions coordinators and others. Nursing center personnel
are assisted in carrying out their marketing strategies by regional marketing
staffs. The Company's marketing efforts are directed toward improving the
payor mix at the nursing centers by maximizing the census of private pay
patients and Medicare patients.
NURSING CENTER OPERATIONS
Each nursing center is managed by a state-licensed administrator who is
supported by other professional personnel, including a director of nursing,
staff development professional (responsible for employee training), activities
director, social services director, licensed dietitian, business office
manager and, in general, physical, occupational and speech therapists. The
directors of nursing are state-licensed nurses who supervise nursing staffs
which include registered nurses, licensed practical nurses and nursing
assistants. Staff size and composition vary depending on the size and
occupancy of each nursing center and on the level of care provided by the
nursing center. The nursing centers contract with physicians who serve as
medical directors and serve on quality assurance committees.
The nursing centers are supported by regional staff in the areas of nursing,
dietary and rehabilitation services, maintenance, sales and financial
services. In addition, corporate staff provide other services in the areas of
sales assistance, human resource management, state and federal reimbursement,
state licensing and certification, legal, finance and accounting support.
Financial control is maintained principally through fiscal and accounting
policies established at the corporate level for use at the nursing centers.
Quality of care is monitored and enhanced by quality assurance committees,
and family satisfaction surveys. The quality assurance committees oversee
patient healthcare needs and resident and staff safety. Additionally,
physicians serve on the quality assurance committees as medical directors and
advise on healthcare policies and practices. Nursing professionals visit each
nursing center periodically to review practices and recommend
16
improvements where necessary in the level of care provided and to assure
compliance with requirements under applicable Medicare and Medicaid
regulations. Surveys of residents' families are conducted from time to time in
which the families are asked to rate various aspects of service and the
physical condition of the nursing centers. These surveys are reviewed by
nursing center administrators to help ensure quality care.
The Company provides training programs for nursing center administrators,
managers, nurses and nursing assistants. These programs are designed to
maintain high levels of quality patient care.
Substantially all of the nursing centers are currently certified to provide
services under Medicare and Medicaid programs. A nursing center's
qualification to participate in such programs depends upon many factors, such
as accommodations, equipment, services, safety, personnel, physical
environment and adequate policies and procedures.
SELECTED NURSING CENTER OPERATING DATA
The following table sets forth certain operating data for the Company's
nursing centers:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Number of nursing centers in operation at
end of period............................. 313 311 310
Number of licensed beds at end of period... 39,619 39,480 39,423
Patient days............................... 12,566,763 12,569,600 12,654,016
Average daily census....................... 34,335 34,437 34,669
Occupancy percentage....................... 91.9% 92.2% 92.9%
SOURCES OF NURSING CENTER REVENUES
Nursing center revenues are derived principally from Medicare and Medicaid
programs and from private pay patients. Consistent with the nursing home
industry generally, changes in the mix of the Company's patient population
among these three categories significantly affect the profitability of the
Company's operations. Although Medicare and other high acuity patients
generally produce the most revenue per patient day, profitability is reduced
by the costs associated with the higher level of nursing care and other
services required by such patients. The Company believes that private pay
patients generally constitute the most profitable and Medicaid patients
generally constitute the least profitable category.
The following table sets forth certain percentages related to the payor mix
of the Company's owned and leased nursing centers:
MEDICARE MEDICAID PRIVATE AND OTHER
----------------- ----------------- ---------------------
PATIENT NET PATIENT NET PATIENT NET
YEAR DAYS REVENUES DAYS REVENUES DAYS REVENUES
----- ------- --------- ------- --------- -------- ---------
1996.................. 12% 30% 65% 44% 23% 26%
1995.................. 12 29 65 44 23 27
1994.................. 11 25 65 47 24 28
For the year ended December 31, 1996, nursing center revenues totaled
approximately $1.6 billion, or 62% of the Company's total revenues.
Both governmental and private third-party payors employ cost containment
measures designed to limit payments made to healthcare providers. Those
measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage
criteria which limit the services that will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government reimbursement
programs are
17
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially increase or decrease the rate of program payments to the Company
for its 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 owned, leased or managed by the Company, or
the provision of services and supplies by the Company, will meet the
requirements for participation in such programs. The Company could be
adversely affected by the continuing efforts of governmental and private
third-party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the federal budget deficit, there have been,
and the Company expects that there will continue to be, a number of proposals
to limit Medicare and Medicaid reimbursement for healthcare services.
Medicare. The Medicare Part A program provides reimbursement for extended
care services furnished to Medicare beneficiaries who are admitted to skilled
nursing centers after at least a three-day stay in an acute care hospital.
Covered services include supervised nursing care, room and board, social
services, physical and occupational therapies, pharmaceuticals, supplies and
other necessary services provided by skilled nursing centers.
Under the Medicare program, skilled nursing center reimbursement is based
upon reasonable direct and indirect costs of services provided to
beneficiaries. Routine costs are subject to a routine cost limit ("RCL"). The
RCL is a national average cost per patient day which is adjusted for
variations in local wages. Revenues under this program are subject to audit
and retroactive adjustment. Management believes that adequate provisions for
loss have been recorded to reflect any adjustments which could result from
such audits. Settlements of Medicare audits have not had a material adverse
effect on the Company's nursing center operating results.
Medicaid. Medicaid is a state-administered program financed by state funds
and matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. Accordingly, these
programs differ from state to state in many respects.
Federal law requires Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically
operated nursing center providing quality care and services in conformity with
all applicable laws and regulations. However, despite these federal
requirements, disagreements frequently arise between nursing centers and
states regarding the adequacy of Medicaid payments. In addition, the Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and certain
government funding limitations, all of which may materially increase or
decrease the level of program payments to nursing centers operated by the
Company. Management believes that the payments under these programs are not
sufficient on an overall basis to cover the costs of serving residents
participating in these programs. Furthermore, the Omnibus Budget
Reconciliation Act of 1987, as amended ("OBRA") mandates an increased emphasis
on ensuring quality patient care, which has resulted in additional
expenditures by nursing centers.
There can be no assurance that the payments under Medicaid programs will
remain at levels comparable to current levels or, in the future, will be
sufficient to cover the costs incurred in serving residents participating in
such programs. The Company provides to eligible individuals Medicaid-covered
services consisting of nursing care, room and board and social services. In
addition, states may at their option cover other services such as physical,
occupational and speech therapies and pharmaceuticals.
Private Payment. The Company's nursing centers seek to maximize the number
of private pay patients, including those covered under private insurance and
managed care health plans. Private payment patients typically have financial
resources (including insurance coverage) to pay for their monthly services and
do not rely on government programs for support.
18
NURSING CENTER COMPETITION
The Company's nursing centers compete on a local and regional basis with
other nursing centers. The Company's competitive position varies within each
community served. The Company believes that the quality care provided,
reputation, location and physical appearance of its nursing centers and, in
the case of private patients, the charges for services, are significant
competitive factors. Although there is limited, if any, price competition with
respect to Medicare and Medicaid patients (since revenues received for
services provided to such patients are based on fixed rates or cost
reimbursement principles) there is significant competition for both private
payment and Medicare patients.
The long-term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, assisted living facilities and communities,
home health agencies and similar institutions. The industry includes
government-owned, church-owned, secular not-for-profit and for-profit
institutions.
NURSING CENTER FACILITIES
The following table lists by state the number of nursing centers and related
licensed beds operated by the Company as of December 31, 1996:
NUMBER OF FACILITIES
LICENSED --------------------------
BEDS OWNED LEASED MANAGED TOTAL
-------- ----- ------ ------- -----
Alabama/1/................................ 447 3 - - 3
Arizona................................... 970 5 2 - 7
California................................ 4,473 22 15 3 40
Colorado.................................. 935 4 3 - 7
Connecticut............................... 716 6 - - 6
Florida/1/................................ 1,995 11 3 2 16
Georgia/1/................................ 370 3 - - 3
Hawaii.................................... 90 1 - - 1
Idaho..................................... 903 7 2 - 9
Indiana/1/................................ 4,263 16 14 - 30
Kentucky/1/................................ 2,014 13 3 - 16
Louisiana................................. 258 - - 2 2
Maine/1/.................................. 882 11 - - 11
Massachusetts/1/.......................... 4,246 33 3 2 38
Minnesota................................. 159 1 - - 1
Mississippi............................... 125 - 1 - 1
Montana1.................................. 456 2 1 - 3
Nebraska.................................. 167 - 1 - 1
Nevada/1/................................. 314 3 - - 3
New Hampshire............................. 622 3 - 1 4
North Carolina/1/......................... 3,261 20 9 - 29
Ohio/1/................................... 2,061 10 4 1 15
Oklahoma/1/............................... 100 - - 1 1
Oregon/1/................................. 468 2 2 - 4
Tennessee/1/.............................. 2,669 5 11 - 16
Texas..................................... 180 - - 1 1
Utah...................................... 740 5 - 1 6
Vermont/1/................................ 428 1 - 2 3
Virginia/1/............................... 764 4 1 - 5
Washington................................ 1,507 10 3 - 13
Wisconsin/1/.............................. 2,585 12 2 - 14
Wyoming/1/................................ 451 4 - - 4
------ --- --- --- ---
Totals.................................. 39,619 217 80 16 313
====== === === === ===
- --------
(1) These states have Certificate of Need regulations. See "Governmental
Regulation of Nursing Centers and Assisted and Independent Living
Communities."
19
ASSISTED AND INDEPENDENT LIVING COMMUNITIES
In the third quarter of 1996, the Company completed the IPO through the
issuance of 5,750,000 shares of Atria common stock. On December 31, 1996, the
Company owned 10,000,000 shares, or 63.2% of Atria's outstanding common stock.
As of December 31, 1996, Atria's assisted and independent living operations
consisted of 21 communities. These communities included 2,942 units and were
located in 12 states. Atria owns 18 of these communities, leases one community
and manages two communities. Atria also had 16 assisted living communities
under development with a total of approximately 1,050 units as of December 31,
1996. Assisted and independent living revenues approximated $52 million in
1996, or 2% of the Company's total revenues.
Assisted and independent living communities serve more independent and self-
sufficient residents than do the nursing centers. Assisted and independent
living units are typically studio to an occasional three-bedroom unit.
Approximately 40% of a typical community is devoted to common areas and
amenities. Residents typically receive basic services such as health
screenings, meal service, housekeeping, local transportation, 24-hour
emergency call system and social and recreational programs. Atria also offers
additional services to residents who may require assistance with at least one
activity of daily living, such as eating and personal hygiene.
Residents are responsible for monthly fees which typically are paid by the
resident or the resident's family members. Assisted and independent living
operations do not presently qualify for reimbursement under Medicare, Medicaid
or Veterans Administration healthcare programs because they do not offer the
levels of care required under such programs. Monthly fees paid by residents
are based upon the resident's apartment size, the number of services the
resident elects to purchase and the level of personal care required by the
resident.
The following table lists by state the number of assisted and independent
living communities operated by Atria as of December 31, 1996:
NUMBER OF FACILITIES
NUMBER ---------------------------
STATE OF UNITS OWNED1 LEASED MANAGED TOTAL
----- -------- ------ ------ ------- -----
Arizona.................................. 526 4 - - 4
California............................... 212 1 - - 1
Colorado................................. 99 1 - - 1
Florida.................................. 626 4 - - 4
Idaho.................................... 115 1 - - 1
Indiana.................................. 135 1 - 1 2
Kansas................................... 155 1 - - 1
Massachusetts............................ 555 - 1 1 2
Missouri................................. 172 1 - - 1
New Hampshire............................ 28 1 - - 1
Utah..................................... 120 1 - - 1
Washington............................... 199 2 - - 2
----- --- --- --- ---
Totals................................. 2,942 18 1 2 21
===== === === === ===
- --------
(1) Includes assisted and independent living communities owned by partnerships
in which Atria has a limited and/or general partnership interest.
In connection with Atria's IPO, Atria entered into a $200 million bank
credit facility (the "Atria Credit Facility"). The obligations under the Atria
Credit Facility are secured by all of Atria's property, the capital stock of
Atria's present and future principal subsidiaries and all intercompany
indebtedness owed to Atria by its subsidiaries. The Atria Credit Facility is
conditioned upon, among other things, ownership by Vencor of at least
20
30% of Atria's common stock. In addition, Vencor has agreed to guarantee up to
$100 million in the first year following Atria's IPO, declining to $75
million, $50 million and $25 million in each respective year thereafter. Atria
has agreed to pay Vencor a fee equal to 1.5% of the average outstanding sum of
the principal balance of all debts guaranteed by Vencor.
GOVERNMENTAL REGULATION OF NURSING CENTERS AND ASSISTED AND INDEPENDENT LIVING
COMMUNITIES
The federal government and all states in which the Company operates regulate
various aspects of the Company's nursing center business. In particular, the
development and operation of nursing centers and assisted and independent
living communities and the provision of healthcare services are subject to
federal, state and local laws relating to the adequacy of medical care,
equipment, personnel, operating policies, fire prevention, rate-setting and
compliance with building codes and environmental laws. Nursing centers are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with various standards, their continued licensing under
state law, certification under the Medicare and Medicaid programs and
continued participation in the Veterans Administration program. Assisted and
independent living communities and their owners are subject to periodic
inspection by governmental authorities to assure compliance with various
standards including standards relating to the financial condition of the
owners of such communities. The failure to obtain or renew any required
regulatory approvals or licenses could adversely affect the Company's
operations.
Effective October 1, 1990, OBRA increased the enforcement powers of state
and federal certification agencies. Additional sanctions were authorized to
correct noncompliance with regulatory requirements, including fines, temporary
suspension of admission of new patients to nursing centers and, in extreme
circumstances, decertification from participation in the Medicare or Medicaid
programs.
Nursing centers managed and operated by the Company are licensed either on
an annual or bi-annual basis and certified annually for participation in
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided, the
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers. From time to time
the Company's nursing centers receive statements of deficiencies from
regulatory agencies. In response, the Company implements plans of correction
with respect to these nursing centers to address the alleged deficiencies. The
Company believes that its nursing centers are in material compliance with all
applicable regulations or laws.
In certain circumstances, federal law mandates that conviction of certain
abusive or fraudulent behavior with respect to one nursing center may subject
other facilities under common control or ownership to disqualification for
participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all nursing centers under common control or ownership
within a state are subject to delicensure if any one or more of such
facilities are delicensed.
Revised federal regulations under OBRA, which became effective in 1995,
affect the survey process for nursing centers and the authority of state
survey agencies and the Health Care Financing Administration to impose
sanctions on facilities based upon noncompliance with requirements. Available
sanctions include imposition of civil monetary penalties, temporary suspension
of payment for new admissions, appointment of a temporary manager, suspension
of payment for eligible patients and suspension or decertification from
participation in the Medicare and/or Medicaid programs. The Company is unable
to project how these regulatory changes and their implementation will affect
the Company.
In addition to license requirements, many states in which the Company
operates have statutes that require a CON to be obtained prior to the
construction of a new nursing center, the addition of new beds or services or
the incurring of certain capital expenditures. Certain states also require
regulatory approval prior to certain changes in ownership of a nursing center.
Certain states in which the Company operates have eliminated their CON
programs and other states are considering alternatives to their CON programs.
To the extent that CONs or other
21
similar approvals are required for expansion of Company operations, either
through facility acquisitions or expansion or provision of new services or
other changes, such expansion could be adversely affected by the failure or
inability to obtain the necessary approvals, changes in the standards
applicable to such approvals or possible delays and expenses associated with
obtaining such approvals.
The Company's operations are also subject to federal and state laws which
govern financial and other arrangements between healthcare providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between healthcare providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the anti-
kickback provisions of the federal Medicare and Medicaid Patients and Program
Protection Act of 1987. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. In addition, some states
restrict certain business relationships between physicians and pharmacies, and
many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of
licensure or eligibility to participate in reimbursement programs as well as
civil and criminal penalties. These laws vary from state to state.
HOME HEALTH SERVICES
During the summer of 1996, the Company consolidated its home health services
business to establish Vencor Home Health Services. These services include home
health nursing products and services and home infusion therapy. These services
are generally provided to patients on an individual basis. At December 31,
1996, the Company provided services from 28 locations in eight states. For
1996, home health services generated approximately $12 million in revenues,
representing less than 1% of the Company's total revenues.
Significant competition exists for the Company's home health services. The
Company's home health agencies compete on a local and regional basis with
other providers of home health services. The Company believes that the primary
competitive factors for home health services include quality of service,
charges for services provided and attention to the individual needs of
patients.
22
MANAGEMENT INFORMATION SYSTEM
The financial information for each Company facility is centralized at the
corporate headquarters through its management information system. The Company
uses a comprehensive financial reporting system which enables it to monitor,
on a daily basis, certain key financial data at each facility such as payor
mix, admissions and discharges, cash collections, net revenues and staffing.
In addition, the financial reporting system provides monthly budget analysis,
financial comparisons to prior periods and comparisons among the Company's
facilities.
The Company has developed the VenTouch(TM) electronic patient medical record
system. VenTouch(TM) is a software application which allows nurses, physicians
and other clinicians to manage clinical information utilized in the patient
care delivery process.
Among the features of VenTouch(TM) are on-line access and update of an
electronic patient chart, an on-line trend analysis using electronic
flowsheets and graphs, and remote access for authorized users. Features
specific to the nursing centers include a complete on-line Resident Assessment
Instrument Process that incorporates state specific guidelines, computer
generated Resident Assessment Protocols, on-line HCFA Resident Assessment
Instrument manual and electronic data transfer capabilities. The system is
designed to decrease administrative time, reduce paper and support the
delivery of quality patient care.
The Company completed the installation of VenTouch(TM) in its hospitals
during 1995 and began installation of VenTouch(TM) in its nursing centers in
1996. In addition, during 1997, the Company intends to offer VenTouch(TM) as
part of the menu of services offered by Vencare to skilled nursing facilities
not owned by the Company.
ADDITIONAL COMPANY INFORMATION
EMPLOYEES
As of December 31, 1996, the Company had approximately 48,300 full-time and
16,200 part-time and per diem employees. The Company was a party to 24
collective bargaining agreements covering approximately 3,000 employees as of
December 31, 1996.
LIABILITY INSURANCE
The Company's hospitals, contract services, nursing centers and
pharmaceutical operations are insured by the Company's wholly-owned captive
insurance company, Cornerstone Insurance Company. Cornerstone Insurance
Company reinsures losses in excess of $500,000 per claim and $8,000,000 in
annual aggregation. Coverages for losses in excess of various limits are
maintained through unrelated commercial insurance carriers to provide
$130,000,000 limits per claim and in the aggregate.
The Company believes that its insurance is adequate in amount and coverage.
There can be no assurance that in the future such insurance will be available
at a reasonable price or that the Company will be able to maintain adequate
levels of malpractice insurance coverage.
CAUTIONARY STATEMENTS
Information provided in this Report by the Company contains, and from time
to time the Company may disseminate materials and make statements which may
contain, "forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of the "safe harbor" provisions of the
Act. The Company cautions investors that any forward-looking statements made
by the Company are not guarantees of future performance and that actual
results may differ materially from those in the forward-looking statements as
a result of various factors, including, but not limited to, the following:
23
(i) In recent years, an increasing number of legislative proposals have
been introduced or proposed by Congress and in some state legislatures
which would effect major changes in the healthcare system. However, the
Company cannot predict the form of healthcare reform legislation which may
be proposed or adopted by Congress or by state legislatures. Accordingly,
the Company is unable to assess the effect of any such legislation on its
business. There can be no assurance that any such legislation will not have
a material adverse impact on the future growth, revenues and net income of
the Company.
(ii) The Company derives substantial portions of its revenues from third-
party payors, including government reimbursement programs such as Medicare
and Medicaid, and nongovernment sources, such as commercial insurance
companies, HMOs, PPOs and contract services. Both government and
nongovernment payors have undertaken cost-containment measures designed to
limit payments to healthcare providers. There can be no assurance that
payments under governmental and nongovernmental payor programs will be
sufficient to cover the costs allocable to patients eligible for
reimbursement. The Company cannot predict whether or what proposals or
cost-containment measures will be adopted or, if adopted and implemented,
what effect, if any, such proposals might have on the operations of the
Company.
(iii) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing
facilities, construction of new facilities, purchase or lease of existing
facilities, addition of new services, certain capital expenditures, cost-
containment and reimbursement for services rendered. The failure to obtain
or renew required regulatory approvals or licenses, the delicensing of
facilities owned, leased or operated by the Company or the disqualification
of the Company from participation in certain federal and state
reimbursement programs could have a material adverse effect upon the
operations of the Company.
(iv) There can be no assurance that the Company will be able to continue
its substantial growth or be able to fully implement its strategy to
develop long-term care networks. The success of the Company's growth
strategy will be determined by various factors, including the Company's
ability to identify suitable acquisition candidates, competition for such
acquisitions, the future financial performance of acquired entities, and
the ability of the Company to integrate effectively the operations of
acquired entities.
ITEM 2. PROPERTIES
For information concerning the hospitals, pharmacies, nursing centers and
assisted and independent living communities operated by the Company, see
"Business--Hospital Operations--Hospital Facilities," "Business--Vencare
Health Services Operations--Pharmacies," and "Business--Nursing Center and
Assisted and Independent Living Community Operations." The Company believes
that its facilities are adequate for the Company's future needs in such
locations.
ITEM 3. LEGAL PROCEEDINGS
Hillhaven and its directors were named as defendants in a number of putative
class action complaints filed on behalf of Hillhaven's stockholders in Nevada
state court (the "Nevada State Court Actions") and California state court (the
"California State Court Actions") in connection with the sale of Hillhaven.
These complaints raised allegations that Hillhaven and its directors had
breached their fiduciary duties to Hillhaven's stockholders in connection with
the consideration of the acquisition proposal by Horizon Health Corporation
("Horizon") and certain corporate actions also cited in Horizon's
counterclaim. These actions sought declaratory and injunctive relief and, in
California, compensatory damages in unspecified amounts. The merger with
Vencor rendered moot the issues raised in the Nevada and California State
Court Actions, with the exception of the plaintiffs' request for an award of
attorneys' fees and costs. During 1996, the Court denied the plaintiff's
request for attorneys' fees and costs. The plaintiffs have appealed. The
Company believes that the likelihood of the plaintiffs ultimately prevailing
on their motion for attorneys' fees and costs is remote.
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business.
The Company believes that all such claims and actions currently
24
pending against it either are adequately covered by insurance or would not
have a material adverse effect on the Company if decided in a manner
unfavorable to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the present executive officers of the Company, their
ages (as of January 1, 1997), their positions with the Company and the year in
which they first became an executive officer of the Company:
FIRST ELECTED
EXECUTIVE
NAME AGE POSITION OFFICER
- ---- --- -------- -------------
Michael R. Barr......... 47 Chief Operating Officer and Executive Vice President 1985(1)
Jill L. Force........... 44 Senior Vice President, General Counsel and Corporate Secretary 1995(2)
James H. Gillenwater,
Jr..................... 39 Senior Vice President, Planning and Development 1995(3)
Thomas T. Ladt.......... 46 Executive Vice President, Operations 1993(4)
Richard A. Lechleiter... 38 Vice President, Finance and Corporate Controller 1995(5)
W. Bruce Lunsford....... 49 Chairman of the Board, President and Chief Executive Officer 1985(6)
W. Earl Reed, III....... 45 Chief Financial Officer and Executive Vice President 1987(7)
- --------
(1) Mr. Barr, a founder of the Company, physical therapist and certified
respiratory therapist, has served as Chief Operating Officer and Executive
Vice President of the Company since February 1996. From November 1995 to
February 1996, he was Executive Vice President of the Company and Chief
Executive Officer of the Company's Hospital Division. Mr. Barr served as
Vice President of Operations for the Company from 1985 to November 1995.
(2) Ms. Force, a certified public accountant and attorney, has served as
Senior Vice President, General Counsel and Corporate Secretary of the
Company since December 1996. From November 1995 through December 1996, she
served as Vice President, General Counsel and Corporate Secretary of the
Company. From 1989 to 1995, she was General Counsel and Corporate
Secretary of the Company.
(3) Mr. Gillenwater has served as Senior Vice President, Planning and
Development of the Company since December 1996. From November 1995 through
December 1996, he served as Vice President, Planning and Development of
the Company. From 1989 to November 1995, he was Director of Planning and
Development of the Company.
(4) Mr. Ladt has served as Executive Vice President, Operations of the Company
since February 1996. From November 1995 to February 1996, he served as
President of the Company's Hospital Division. From 1993 to November 1995,
Mr. Ladt was Vice President of the Company's Hospital Division. From 1989
to December 1993, Mr. Ladt was a Regional Director of Operations for the
Company.
(5) Mr. Lechleiter, a certified public accountant, has served as Vice
President, Finance and Corporate Controller of the Company since November
1995. From June 1995 to November 1995, he was Director of Finance of the
Company. Mr. Lechleiter was Vice President and Controller of Columbia/HCA
Healthcare Corp. from September 1993 to May 1995, of Galen Health Care,
Inc. from March 1993 to August 1993, and of Humana Inc. from September
1990 to February 1993.
(6) Mr. Lunsford, a founder of the Company, certified public accountant and
attorney, has served as Chairman of the Board, President and Chief
Executive Officer of the Company since it commenced operations in 1985.
(7) Mr. Reed, a certified public accountant, has served as Chief Financial
Officer and Executive Vice President of the Company since November 1995.
From 1987 to November 1995, Mr. Reed served as Vice President, Finance and
Development of the Company.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of this Report appears on the inside back
cover of the 1996 Annual Report to Stockholders and is incorporated by
reference in this Report.
26
ITEM 6. SELECTED FINANCIAL DATA
VENCOR, INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICS)
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
OPERATIONS:
Revenues................ $2,577,783 $2,323,956 $2,032,827 $1,727,436 $1,575,225
---------- ---------- ---------- ---------- ----------
Salaries, wages and 1,490,938 1,360,018 1,167,181 985,163 921,508
benefits...............
Supplies................ 218,083 188,754 162,053 126,473 117,940
Rent.................... 77,795 79,476 79,371 74,323 85,942
Other operating 449,335 416,969 366,621 330,014 299,813
expenses...............
Depreciation and 99,533 89,478 79,519 69,126 56,408
amortization...........
Interest expense........ 45,922 60,918 62,828 73,559 62,532
Investment income....... (12,203) (13,444) (13,126) (16,056) (12,820)
Non-recurring 125,200 109,423 (4,540) 5,769 113,265
transactions...........
---------- ---------- ---------- ---------- ----------
2,494,603 2,291,592 1,899,907 1,648,371 1,644,588
---------- ---------- ---------- ---------- ----------
Income (loss) from 83,180 32,364 132,920 79,065 (69,363)
operations before
income taxes...........
Provision for income 35,175 24,001 46,781 10,089 12,051
taxes..................
---------- ---------- ---------- ---------- ----------
Income (loss) from 48,005 8,363 86,139 68,976 (81,414)
operations.............
Reinstatement of - - - - 24,743
discontinued
operations.............
Extraordinary gain
(loss) on
extinguishment of debt,
net of income taxes.... - (23,252) (241) (2,217) 380
Cumulative effect on
prior years of a change
in accounting for
income taxes........... - - - (1,103) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 48,005 $ (14,889) $ 85,898 $ 65,656 $ (56,291)
========== ========== ========== ========== ==========
Earnings (loss) per
common and common
equivalent share:
Primary:
Income (loss) from $ 0.68 $ 0.21 $ 1.37 $ 1.22 $ (1.57)
operations............
Reinstatement of - - - - 0.47
discontinued
operations............
Extraordinary gain - (0.37) - (0.04) 0.01
(loss) on
extinguishment of
debt..................
Cumulative effect on
prior years of a
change
in accounting for
income taxes.......... - - - (0.02) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 0.68 $ (0.16) $ 1.37 $ 1.16 $ (1.09)
========== ========== ========== ========== ==========
Fully diluted:
Income (loss) from $ 0.68 $ 0.29 $ 1.28 $ 1.22 $ (1.57)
operations............
Reinstatement of - - - - 0.47
discontinued
operations............
Extraordinary gain - (0.32) - (0.04) 0.01
(loss) on
extinguishment of
debt..................
Cumulative effect on
prior years of a
change
in accounting for
income taxes.......... - - - (0.02) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 0.68 $ (0.03) $ 1.28 $ 1.16 $ (1.09)
========== ========== ========== ========== ==========
Shares used in
computing earnings
(loss) per common
and common equivalent
share:
Primary................ 70,702 62,318 57,037 54,555 52,820
Fully diluted.......... 70,702 71,967 69,014 60,640 52,820
FINANCIAL POSITION:
Working capital......... $ 320,123 $ 239,666 $ 129,079 $ 114,339 $ 114,695
Assets.................. 1,968,856 1,912,454 1,656,205 1,563,350 1,515,812
Long-term debt.......... 710,507 778,100 746,212 784,801 988,998
Stockholders' equity.... 797,091 772,064 596,454 485,550 283,791
OPERATING DATA:
Number of hospitals..... 38 36 33 26 18
Number of hospital 3,325 3,263 2,511 2,198 1,717
licensed beds..........
Number of hospital 586,144 489,612 403,623 293,367 223,483
patient days...........
Number of nursing 313 311 310 325 369
centers................
Number of nursing center 39,619 39,480 39,423 40,759 45,419
licensed beds..........
Number of nursing center 12,566,763 12,569,600 12,654,016 12,770,435 13,709,222
patient days...........
Number of Vencare 2,205 2,008 948 128 -
contracts..............
Number of pharmacy 46 55 60 88 131
outlets................
Number of Atria 21 22 21 21 22
communities............
Number of Atria units... 2,942 3,022 2,950 2,993 3,153
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Selected Financial Data in Item 6 and the consolidated financial
statements included in this Form 10-K set forth certain data with respect to
the financial position, results of operations and cash flows of Vencor which
should be read in conjunction with the following discussion and analysis.
BACKGROUND INFORMATION
The Hillhaven Merger was consummated on September 28, 1995. At the time of
the Hillhaven Merger, Hillhaven operated 311 nursing centers, 56 retail and
institutional pharmacies and 23 assisted and independent living communities
with 3,122 units. Annualized revenues approximated $1.7 billion. See Note 2 of
the Notes to Consolidated Financial Statements for a description of the
Hillhaven Merger.
Prior to its merger with Vencor, Hillhaven completed a merger with
Nationwide Care, Inc. ("Nationwide") (the "Nationwide Merger") on June 30,
1995. At the time of the Nationwide Merger, Nationwide operated 23 nursing
centers containing 3,257 licensed beds and four assisted and independent
living communities with 442 units. Annualized revenues approximated $125
million. See Note 3 of the Notes to Consolidated Financial Statements for a
description of the Nationwide Merger.
As discussed in the Notes to Consolidated Financial Statements, the
Hillhaven Merger and Nationwide Merger have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying consolidated financial
statements and financial and operating data included herein give retroactive
effect to these transactions and include the combined operations of Vencor,
Hillhaven and Nationwide for all periods presented.
In the third quarter of 1996, Vencor completed the IPO of Atria. At December
31, 1996, Vencor owned 10,000,000 shares, or 63.2%, of Atria's outstanding
common stock. For accounting purposes, the accounts of Atria continue to be
consolidated with those of Vencor and the Company has recorded minority
interests in the earnings and equity of Atria since consummation of the IPO.
See Note 4 of the Notes to Consolidated Financial Statements for a description
of the IPO.
RESULTS OF OPERATIONS
A summary of revenues follows (dollars in thousands--prior period revenues
have been reclassified to conform with the 1996 presentation):
1996 1995
-------------------- -------------------- 1994
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
---------- -------- ---------- -------- ----------
Hospitals................ $ 551,268 20.8 $ 456,486 26.4 $ 361,111
---------- ---------- ----------
Nursing centers.......... 1,627,479 5.2 1,546,832 11.2 1,390,731
Non-recurring
transactions............ - (24,500) -
---------- ---------- ----------
1,627,479 6.9 1,522,332 9.5 1,390,731
---------- ---------- ----------
Vencare.................. 386,730 26.1 306,601 26.9 241,601
Atria.................... 51,846 8.1 47,976 20.7 39,758
---------- ---------- ----------
2,617,323 12.2 2,333,395 14.8 2,033,201
Elimination.............. (39,540) (9,439) (374)
---------- ---------- ----------
$2,577,783 10.9 $2,323,956 14.3 $2,032,827
========== ========== ==========
Hospital revenues increased in both 1996 and 1995 from the acquisition of
facilities and growth in same-store patient days. Hospital patient days rose
20% to 586,144 in 1996 and 21% to 489,612 in 1995. Price increases in both
years were not significant.
28
Excluding the effect of non-recurring transactions, nursing center revenue
increases resulted primarily from growth in the volume of Medicare patients,
who typically require higher levels of medical care. Medicare patient days
grew 3% to 1,562,600 in 1996 and 11% to 1,511,300 in 1995. Nursing center
revenue growth was adversely impacted by a decline in private pay patient days
to 2,812,700 in 1996 from 2,911,500 in 1995 and 3,052,000 in 1994. In an
effort to attract increased volumes of Medicare and private pay patients, the
Company has adopted a plan to expend approximately $200 million over the next
two years to improve existing facilities and expand the range of services
provided to accomodate higher acuity patients.
Vencare, the Company's ancillary services division organized in 1993,
provides primarily respiratory and rehabilitation therapy and pharmacy
management services to nursing centers and other healthcare providers. Growth
in ancillary services revenues in both 1996 and 1995 was primarily
attributable to the expansion of the Vencare contract services business. The
number of Vencare contracts (most of which relate to respiratory therapy) grew
from 948 at the end of 1994 to 2,008 and 2,205 at December 31, 1995 and 1996,
respectively.
Revenues from Vencor's assisted and independent living business, Atria,
increased in both years as a result of price increases, growth in occupancy,
expansion of ancillary services and, in 1995, the purchase of controlling
interest in two communities previously accounted for under the equity method
and the effect of two newly constructed communities.
In the fourth quarter of 1996, Vencor recorded pretax charges aggregating
$125.2 million ($79.9 million net of tax) primarily to complete the
integration of Hillhaven. In November 1996, Vencor executed a definitive
agreement to sell 34 underperforming or non-strategic nursing centers in early
1997. A charge of $65.3 million was recorded in connection with the
disposition. In addition, Vencor's previously independent institutional
pharmacy business, acquired as part of the Hillhaven Merger, was integrated
into Vencare, resulting in a charge of $39.6 million related primarily to
costs associated with employee severance and benefit costs (approximately 500
employees), facility close-down expenses and the writeoff of certain deferred
costs for services to be discontinued. A provision for loss totaling $20.3
million related to the planned replacement of one hospital and three nursing
centers was also recorded in the fourth quarter.
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million ($89.9 million net of tax) primarily in connection with the
consummation of the Hillhaven Merger. The charges included (i) $23.2 million
of investment advisory and professional fees, (ii) $53.8 million of employee
benefit plan and severance costs (approximately 500 employees), (iii) $26.9
million of losses associated with the planned disposition of certain nursing
center properties and (iv) $24.5 million of charges to reflect Vencor's change
in estimates of accrued revenues recorded in connection with certain prior-
year nursing center third-party reimbursement issues. During 1996, activities
related to the elimination of duplicative corporate and operational functions
was substantially completed, and management expects that the dispositions of
certain nursing center properties will be concluded in 1997. Operating results
for 1995 also include pretax charges of $5.5 million ($3.7 million net of tax)
recorded in the second quarter related primarily to the Nationwide Merger.
Non-recurring transactions related primarily to sales of assets and nursing
center restructuring activities increased pretax income by $4.5 million ($2.7
million net of tax) in 1994.
Income from operations for 1996 totaled $48.0 million, compared to $8.3
million and $86.1 million for 1995 and 1994, respectively. Excluding the
effect of non-recurring transactions, 1996 income from operations increased
25% to $127.9 million ($1.81 per share--fully diluted) and 22% to $101.9
million ($1.45 per share--fully diluted) in 1995. The growth in both periods
resulted primarily from increased hospital volumes and growth in higher margin
ancillary services in both Vencare and the nursing center business and, in
1996, realization of substantial synergies resulting from the Hillhaven
Merger. Management believes that additional revenues resulting from patient
cross-referrals within the healthcare network created by the Hillhaven Merger
aggregated approximately $80 million in 1996. In addition, cost reductions
from elimination of duplicative functions, increased cost efficiencies and
refinancing of long-term debt increased 1996 pretax income by approximately
$20 million.
For more information concerning the provision for income taxes as well as
information regarding differences between effective income tax rates and
statutory rates, see Note 7 of the Notes to Consolidated Financial Statements.
29
LIQUIDITY
Cash provided by operations totaled $183.5 million for 1996 compared to
$113.6 million for 1995 and $133.0 million for 1994. Cash payments in 1996 and
1995 related to non-recurring transactions reduced cash flows from operations
by approximately $22 million and $32 million, respectively.
During each of the past three years, cash flows from operations have been
adversely impacted by growth in the outstanding days of revenues in accounts
receivable. Growth in accounts receivable has been primarily related to the
integration of acquired hospital facilities, delays in payments from certain
state Medicaid programs and managed care plans and, in 1996, the restructuring
of Vencor's pharmacy operations. Management believes that these factors may
have an adverse effect on cash flows from operations in 1997.
Concurrent with the consummation of the Hillhaven Merger, Vencor established
a $1 billion bank credit facility (the "Vencor $1 Billion Credit Facility") to
finance the redemption of Hillhaven preferred stock, repay certain Hillhaven
higher rate debt and borrowings under prior revolving credit agreements, and
provide sufficient credit for future expansion. At December 31, 1996,
available borrowings under the Vencor $1 Billion Credit Facility approximated
$224 million. Following completion of the IPO, Atria consummated the Atria
Credit Facility ($200 million) to finance its expansion and development
program. At December 31, 1996, amounts available under the Atria Credit
Facility aggregated $107 million.
In connection with the TheraTx Merger, Vencor consummated a new bank credit
facility on March 18, 1997 aggregating $1.6 billion (the "Vencor $1.6 Billion
Credit Facility"), replacing the Vencor $1 Billion Credit Facility.
Working capital totaled $320.1 million at December 31, 1996 compared to
$239.7 million at December 31, 1995. Cash and cash equivalents at December 31,
1996 includes $65.2 million related to Atria, a substantial portion of which
will be used to finance Atria's development and expansion program. Management
believes that cash flows from operations and amounts available under the
Vencor $1.6 Billion Credit Facility are sufficient to meet future expected
liquidity needs.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $135.0 million for 1996
compared to $136.9 million for 1995 and $111.5 million for 1994. Planned
capital expenditures in 1997 (excluding acquisitions) are expected to
approximate $200 million to $250 million and include significant expenditures
related to nursing center improvements and the expansion of Atria's assisted
and independent living business. Management believes that its capital
expenditure program is adequate to expand, improve and equip existing
facilities.
Vencor also expended $26.2 million, $59.3 million and $36.4 million for
acquisitions of new facilities (and related healthcare businesses) and
previously leased nursing centers during 1996, 1995 and 1994, respectively, of
which $5.2 million, $44.2 million and $32.4 million related to additional
hospital facilities. Management intends to acquire additional hospitals,
nursing centers and ancillary service businesses in the future.
Capital expenditures during the last three years were financed primarily
through internally generated funds and, in 1996, from the collection of notes
receivable aggregating $78.2 million. In addition, capital expenditures in
1995 were financed through the public offering of 2.2 million shares of common
stock, the proceeds from which totaled $66.5 million. Vencor intends to
finance a substantial portion of its capital expenditures with internally
generated funds, additional long-term debt and, with respect to Atria,
proceeds from the IPO. Sources of capital include available borrowings under
the Vencor $1.6 Billion Credit Facility, the Atria Credit Facility, public or
private debt and equity.
During 1996, Vencor repurchased 1,950,000 shares of common stock at an
aggregate cost of $55.3 million.
As discussed in Note 9 of the Notes to Consolidated Financial Statements,
Vencor called for redemption all of its outstanding convertible debt
securities in the fourth quarter of 1995, resulting in the issuance of
30
approximately 7,259,000 shares of common stock. Approximately $34.4 million of
the convertible securities were redeemed in exchange for cash equal to 104.2%
of face value plus accrued interest. These transactions had no material effect
on earnings per common and common equivalent share.
As discussed in Note 9 of the Notes to Consolidated Financial Statements,
Vencor entered into certain interest rate swap agreements in the fourth
quarter of 1995 to eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. The agreements expire in April 1997
($100 million), October 1997 ($200 million) and April 1998 ($100 million) and
provide for fixed rates at 5.7% plus 1/2% to 1 1/4%.
HEALTH CARE LEGISLATION
Congress is currently considering various proposals which could reduce
expenditures under certain government health and welfare programs, including
Medicare and Medicaid. Management cannot predict whether such proposals will
be adopted, or if adopted, what effect, if any, such proposals would have on
its business.
Medicare revenues as a percentage of total revenues were 31%, 30% and 27%
for 1996, 1995 and 1994, respectively, while Medicaid percentages of revenues
approximated 31%, 33% and 36% for the respective periods.
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against Vencor. Resolution of litigation and other loss contingencies
is not expected to have a material adverse effect on Vencor's liquidity,
financial position or results of operations.
The Vencor $1 Billion Credit Facility and the Atria Credit Facility contain
customary covenants which require maintenance of certain financial ratios and
limit amounts of additional debt and repurchases of common stock. Vencor was
in compliance with all such covenants at December 31, 1996.
During 1996, Vencor adopted Financial Accounting Standards Board Statements
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" and No. 123, "Accounting for Stock-Based
Compensation." See Notes 5 and 12 of the Notes to Consolidated Financial
Statements.
On March 21, 1997, the Company consummated the TheraTx Merger, which will be
accounted for using the purchase method. The TheraTx Merger was structured as
a cash tender offer in which the Company paid $17.10 for each outstanding
share of TheraTx common stock. Following the completion of the tender offer,
the Company merged its acquisition subsidiary with and into TheraTx and
TheraTx became a wholly-owned subsidiary of the Company. Upon consummation of
the TheraTx Merger, each share of TheraTx common stock not purchased through
the tender offer was converted into the right to receive $17.10 in cash. See
Note 18 of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is included in appendix pages F-1
through F-21 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items other than the information set forth
above under Part I, "Executive Officers of the Registrant," is omitted because
the Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this
Report which includes the required information. The required information
contained in the Company's proxy statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements and Financial Statement
Schedules:
PAGE NO.
--------
Report of Independent Auditors...................................... F-2
Consolidated Statement of Operations for the years ended December
31, 1996, 1995, and 1994........................................... F-3
Consolidated Balance Sheet, December 31, 1996 and 1995.............. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................... F-5
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................................ F-6
Notes to Consolidated Financial Statements.......................... F-7
Quarterly Consolidated Financial Information (Unaudited)............ F-20
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994................................. F-21
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
32
(a)(2) Index to Exhibits:
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Certificate of Incorporation of the Company, as amended. Exhibit 3 to
the Company's Form 10-Q for the quarterly period ended September 30,
1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
3.2 Second Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10-K for the year ended January 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to the Company's Form
10-K for the year ended December 31, 1995 (Comm. File No. 1-10989) is
hereby incorporated by reference.
4.2 Article IV of the Certificate of Incorporation of the Company is
included in Exhibit 3.1.
4.3 $1 Billion Credit Agreement dated September 11, 1995 (conformed to
include Amendment No. 1) among the Company, various banks and other
financial institutions, Morgan Guaranty Trust Company of New York (as
Documentation Agent), Nationsbank, N.A. (as Administrative Agent) and
J.P. Morgan Delaware (as Collateral Agent). Exhibit 4(b) to the
Company's Form 10-Q for the quarterly period ended September 30, 1995
(Comm. File No. 1-10989) is hereby incorporated by reference.
4.4 Amendment No. 2 to the $1 Billion Credit Agreement dated as of
September 11, 1995 among the Company, the other Borrowers referred to
therein and the Banks, Co-Agents, LC Issuing Banks and Agents referred
to therein. Exhibit 4(c) to the Company's Form 10-Q for the quarterly
period ended September 30, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
4.5 Amendment No. 3 to the $1 Billion Credit Agreement dated as of
November 27, 1995 among the Company, the other Borrowers referred to
therein and the Banks, Co-Agents, LC Issuing Banks and Agents referred
to therein. Exhibit 4.5 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File. No. 1-10989) is hereby incorporated by
reference.
4.6 Amendment No. 4 to the $1 Billion Credit Agreement dated as of June
19, 1996 among the Company, the other Borrowers referred to therein
and the Banks, Co-Agents, LC Issuing Banks and Agents referred to
therein.
4.7 Amendment No. 5 to the $1 Billion Credit Agreement dated as of August
26, 1996 among the Company, the other Borrowers referred to therein
and the Banks, Co-Agents, LC Issuing Banks and Agents referred to
therein.
4.8 Form of Indenture between Hillhaven and State Street Bank and Trust
Company, as Trustee with respect to the 10 1/8% Senior Subordinated
Notes due 2001. Exhibit 4.7 to the Company's Form 10-K for the year
ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
4.9 Form of 10 1/8% Senior Subordinated Note due 2001. Exhibit 4.8 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
4.10 First Supplemental Indenture dated September 27, 1995, among the
Company, Hillhaven and State Street Bank and Trust Company, as
Trustee, relating to 10 1/8% Senior Subordinated Notes due 2001.
Exhibit 4(a) to the Company's Form 10-Q for the quarterly period ended
September 30, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
33
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
4.11 $200 Million Credit Agreement dated as of August 15, 1996, among (a)
Atria Communities, Inc., as Borrower; (b) the lending institutions
listed on Annex I to the Credit Agreement, as Lenders; (c) PNC Bank,
National Associations, as Administrative Agent; (d) PNC Bank,
Kentucky, Inc., as Managing Agent; (e) National City Bank of Kentucky,
as Documentation Agent, and (f) PNC Bank, National Association,
National City Bank of Kentucky, and The Toronto-Dominion Bank, New
York Agency, as Syndication Agents.
10.1* Directors and Officers Insurance and Company Reimbursement Policies.
Exhibit 10.1 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.2* Vencor, Incorporated Retirement Savings Plan as amended and restated
as of January 1, 1989. Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-36703) is hereby incorporated by
reference.
10.3* Amendment No. 1 to the Vencor, Incorporated Retirement Savings Plan
dated December 7, 1990. Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Reg. No. 33-38188) is hereby incorporated by
reference.
10.4* Amendment No. 2 to the Vencor, Incorporated Retirement Savings Plan
dated May 15, 1991. Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-43097) is hereby incorporated by
reference.
10.5* Amendment No. 3 to the Vencor, Incorporated Retirement Savings Plan
dated November 26, 1991. Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.6* Amendment No. 4 to the Vencor, Incorporated Retirement Savings Plan
dated January 15, 1992. Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.7* Amendment No. 5 to the Vencor, Incorporated Retirement Savings Plan
dated January 15, 1992. Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.8* Amendment No. 6 to the Vencor, Incorporated Retirement Savings Plan
dated December 22, 1992. Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.9* Amendment No. 7 to the Vencor, Incorporated Retirement Savings Plan,
dated May 20, 1994. Exhibit 10.9 to the Company's Form 10-K for the
year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.10* Amendment No. 8 to the Vencor, Incorporated Retirement Savings Plan,
dated August 13, 1995. Exhibit 10.10 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.11* Amendment No. 9 to the Vencor, Incorporated Retirement Savings Plan,
dated March 27, 1996.
10.12* Vencor, Incorporated Retirement Savings Plan Trust Agreement dated
July 10, 1990 by and between the Company and First Kentucky Trust
Company, Trustee. Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-36703) is hereby incorporated by
reference.
10.13* 1987 Non-Employee Directors Stock Option Plan. Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-30212) is
hereby incorporated by reference.
34
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.14* 1987 Incentive Compensation Program. Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-30212) is hereby
incorporated by reference.
10.15* Amendment to the Vencor, Inc. 1987 Incentive Compensation Program
dated May 15, 1991. Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Reg. No. 33-40949) is hereby incorporated by
reference.
10.16* Amendments to the Vencor, Inc. 1987 Incentive Compensation Program
dated May 18, 1994. Exhibit 10.13 to the Company's Form 10-K for the
year ended December 31, 1994 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.17* Amendment to the Vencor, Inc. 1987 Incentive Compensation Program
dated February 15, 1995. Exhibit 10.14 to the Company's Form 10-K for
the year ended December 31, 1994 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.18* Amendment to the Vencor, Inc. 1987 Incentive Compensation Program
dated September 27, 1995. Exhibit 10.17 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.19* Amendment to the Vencor, Inc. 1987 Incentive Compensation Program
dated May 15, 1996.
10.20* Form of Vencor, Inc. Incentive Compensation Program Performance Share
Award, as amended. Exhibit 10.18 to the Company's Form 10-K for the
year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.21* Vencor, Incorporated Non-Employee Directors Deferred Compensation
Plan. Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.22* Amendment to Vencor, Incorporated Non-Employee Directors Deferred
Compensation Plan dated September 26, 1995. Exhibit 10.20 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.23* Vencor, Inc. 1997 Incentive Compensation Plan dated December 31, 1996.
10.24* Vencor, Inc. Non-Qualified Deferred Compensation Plan dated January 1,
1996.
10.25* Vencor, Inc. 1997 Stock Option Plan for Non-Employee Directors dated
December 31, 1996.
10.26* Vencor, Inc. Employee Benefit Trust Agreement dated December 27, 1990
by and between the Company and First Kentucky Trust Company. Exhibit
10.20 to the Company's Registration Statement on Form S-1 (Reg. No.
33-39017) is hereby incorporated by reference.
10.27* The Amended Hillhaven Corporation Board of Directors Retirement Plan.
Exhibit 10.25 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.28* Deferred Savings Plan of The Hillhaven Corporation. Exhibit 10.26 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.29* The Hillhaven Corporation Annual Incentive Plan, amended as of
December 6, 1994. Exhibit 10.27 to the Company's Form 10-K for the
year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.30* The Amended and Restated Hillhaven Corporation Deferred Compensation
Plan. Exhibit 10.28 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
35
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.31* The Hillhaven Corporation Supplemental Executive Retirement Plan.
Exhibit 10.29 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.32* Form of Indemnification Agreement between Vencor, Inc. and certain of
its officers and employees. Exhibit 10.31 to the Company's Form 10-K
for the year ended December 31, 1995 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.33* Form of Vencor, Inc. Change-in-Control Severance Agreement. Exhibit
10.32 to the Company's Form 10-K for the year ended December 31, 1995
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.34 Services Agreement between Hillhaven and Tenet, dated as of January
31, 1990. Exhibit 10.33 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.35 Government Programs Agreement between Hillhaven and Tenet, dated
January 31, 1990. Exhibit 10.34 to the Company's Form 10-K for the
year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.36 Insurance Agreement between Hillhaven and Tenet, dated as of January
31, 1990. Exhibit 10.35 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.37* Employee and Employee Benefits Agreement between Hillhaven and Tenet,
dated as of January 31, 1990. Exhibit 10.36 to the Company's Form 10-K
for the year ended December 31, 1995 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.38 Form of Assignment and Assumption of Lease Agreement between Hillhaven
and certain subsidiaries, on the one hand, and Tenet and certain
subsidiaries on the other hand, together with the related Guaranty by
Hillhaven, dated on or prior to January 31, 1990. Exhibit 10.37 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.39 Form of Management Agreement between First Healthcare Corporation and
certain Tenet subsidiaries, dated on or prior to January 31, 1990.
Exhibit 10.38 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.40 Reorganization and Distribution Agreement between Hillhaven and Tenet,
dated as of January 8, 1990, as amended on January 30, 1990. Exhibit
10.39 to the Company's Form 10-K for the year ended December 31, 1995
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.41 Guarantee Reimbursement Agreement between Hillhaven and Tenet, dated
as of January 31, 1990. Exhibit 10.40 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.42 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of October 30, 1990. Exhibit 10.41 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.43 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 30, 1991. Exhibit 10.42 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.44 Second Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of October 2, 1991. Exhibit 10.43 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
36
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.45 Third Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of April 1, 1992. Exhibit 10.44 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.46 Fourth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of November 12, 1992. Exhibit 10.45 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.47 Fifth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of February 19, 1993. Exhibit 10.46 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.48 Sixth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 28, 1993. Exhibit 10.47 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.49 Seventh Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 28, 1993. Exhibit 10.48 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.50 Eighth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of September 2, 1993. Exhibit 10.49 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.51 Facility Agreement among First Healthcare Corporation and Certain
Limited Partnerships, dated as of April 23, 1992 relating to the sale
of 32 nursing centers. Exhibit 10.50 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.52 First Amendment to Facility Agreement among First Healthcare
Corporation and Certain Limited Partnerships, dated as of July 31,
1992 relating to the sale of 32 nursing centers. Exhibit 10.51 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.53 Forbearance Agreement among First Healthcare Corporation, Medisave
Pharmacies, Inc. and Certain Limited Partnerships, dated as of August
25, 1995. Exhibit 10.52 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.54 Letter of Intent dated June 22, 1993 between Hillhaven and Tenet.
Exhibit 10.53 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.55 Trust Agreement between The Hillhaven Corporation and Wachovia Bank of
North Carolina, N.A., as Trustee, dated as of January 16, 1995.
Exhibit 10.55 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.56 Amended and Restated Agreement and Plan of Share Exchange and
Agreements to Assign Partnership Interests dated as of February 27,
1995 by and among The Hillhaven Corporation, Nationwide Care, Inc.,
Phillippe Enterprises, Inc., Meadowvale Skilled Care Center, Inc. and
Specified Partners of Camelot Care Centers, Evergreen Woods, Ltd. and
Shangri-La Partnership. Exhibit 10.56 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.57 Amended and Restated Agreement and Plan of Merger. Appendix A to
Amendment No. 2 to Registration Statement on Form S-4 of Vencor, Inc.
(Reg. No. 33-59345) is hereby incorporated by reference.
37
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.58 Other Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished to the
Commission upon request.
10.59 Parent Guaranty dated as of August 15, 1996 among (a) Atria
Communities, Inc., as Borrower, (b) Vencor, Inc., as Parent Guarantor,
(c) First Healthcare Corporation, Northwest Healthcare, Inc., Medisave
Pharmacies, Inc., Hillhaven of Central Florida, Inc., and Nationwide
Care, Inc., as Supporting Guarantors, and (d) PNC Bank, National
Association, as Administrative Agent.
11 Statement Regarding Computation of Earnings Per Share.
13.1 Annual Report to Shareholders--Market Prices and Dividend Information
(for the fiscal year ended December 31, 1996). No portion of this
Annual Report shall be deemed to be filed with the Commission except
to the extent that information is specifically incorporated herein by
reference.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (included only in filings under the Electronic
Data Gathering, Analysis, and Retrieval System).
- --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K During Last Quarter of Fiscal Year.
Not applicable.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section of
this Report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is included in appendix page F-21 of
this Report.
38
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Date: March 26, 1997 VENCOR, INC.
By /s/ W. Bruce Lunsford
-----------------------------------
W. BRUCE LUNSFORD CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ William C. Ballard Jr. Director March 26, 1997
- -------------------------------------
WILLIAM C. BALLARD JR.
/s/ Michael R. Barr Executive Vice March 26, 1997
- ------------------------------------- President, Chief
MICHAEL R. BARR Operating Officer
and Director
/s/ Walter F. Beran Director March 26, 1997
- -------------------------------------
WALTER F. BERAN
/s/ Donna R. Ecton Director March 26, 1997
- -------------------------------------
DONNA R. ECTON
/s/ Greg D. Hudson Director March 26, 1997
- -------------------------------------
GREG D. HUDSON
/s/ Richard A. Lechleiter Vice President, March 26, 1997
- ------------------------------------- Finance and
RICHARD A. LECHLEITER Corporate
Controller
(Principal
Accounting Officer)
/s/ William H. Lomicka Director March 26, 1997
- -------------------------------------
WILLIAM H. LOMICKA
39
SIGNATURES TITLE DATE
/s/ W. Bruce Lunsford Chairman of the March 26, 1997
- ------------------------------------- Board, President,
W. BRUCE LUNSFORD Chief Executive
Officer (Principal
Executive Officer)
and Director
/s/ W. Earl Reed, III Executive Vice March 26, 1997
- ------------------------------------- President, Chief
W. EARL REED, III Financial Officer
(Principal
Financial Officer)
and Director
/s/ R. Gene Smith Vice Chairman of the March 26, 1997
- ------------------------------------- Board and Director
R. GENE SMITH
/s/ Jack O. Vance Director March 26, 1997
- -------------------------------------
JACK O. VANCE
40
VENCOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1996, 1995 and 1994.................................................... F-3
Consolidated Balance Sheet, December 31, 1996 and 1995.................. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996,
1995 and 1994.......................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Consolidated Financial Information (Unaudited)................ F-20
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1996,
1995 and 1994.......................................................... F-21
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders Vencor, Inc.
We have audited the accompanying consolidated balance sheet of Vencor, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the index to Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vencor, Inc. at December 31, 1996 and 1995, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
LOGO
Louisville, Kentucky
February 17, 1997
F-2
VENCOR, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
---------- ---------- ----------
Revenues................................... $2,577,783 $2,323,956 $2,032,827
---------- ---------- ----------
Salaries, wages and benefits............... 1,490,938 1,360,018 1,167,181
Supplies................................... 218,083 188,754 162,053
Rent....................................... 77,795 79,476 79,371
Other operating expenses................... 449,335 416,969 366,621
Depreciation and amortization.............. 99,533 89,478 79,519
Interest expense........................... 45,922 60,918 62,828
Investment income.......................... (12,203) (13,444) (13,126)
Non-recurring transactions................. 125,200 109,423 (4,540)
---------- ---------- ----------
2,494,603 2,291,592 1,899,907
---------- ---------- ----------
Income from operations before income taxes. 83,180 32,364 132,920
Provision for income taxes................. 35,175 24,001 46,781
---------- ---------- ----------
Income from operations..................... 48,005 8,363 86,139
Extraordinary loss on extinguishment of
debt, net of income
tax benefit of $14,839 in 1995 and $125 in
1994...................................... - (23,252) (241)
---------- ---------- ----------
Net income (loss)...................... 48,005 (14,889) 85,898
Preferred stock dividend requirements and
other items............................... - (5,280) (7,753)
Gain on redemption of preferred stock...... - 10,176 -
---------- ---------- ----------
Income (loss) available to common
stockholders.............................. $ 48,005 $ (9,993) $ 78,145
========== ========== ==========
Earnings (loss) per common and common
equivalent share:
Primary:
Income from operations................... $ 0.68 $ 0.21 $ 1.37
Extraordinary loss on extinguishment of
debt...................................... - (0.37) -
---------- ---------- ----------
Net income (loss)...................... $ 0.68 $ (0.16) $ 1.37
========== ========== ==========
Fully diluted:
Income from operations................... $ 0.68 $ 0.29 $ 1.28
Extraordinary loss on extinguishment of
debt...................................... - (0.32) -
---------- ---------- ----------
Net income (loss)...................... $ 0.68 $ (0.03) $ 1.28
========== ========== ==========
Shares used in computing earnings (loss)
per common
and common equivalent share:
Primary.................................. 70,702 62,318 57,037
Fully diluted............................ 70,702 71,967 69,014
See accompanying notes.
F-3
VENCOR, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 AND 1995 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995
ASSETS ---------- ----------
Current assets:
Cash and cash equivalents............................. $ 112,466 $ 35,182
Accounts and notes receivable less allowance for loss
of $23,915--1996 and $16,785--1995................... 420,758 360,147
Inventories........................................... 24,939 24,862
Income taxes.......................................... 67,808 77,997
Other................................................. 35,162 26,491
---------- ----------
661,133 524,679
Property and equipment, at cost:
Land.................................................. 113,749 111,232
Buildings............................................. 975,399 992,992
Equipment............................................. 435,787 403,338
Construction in progress (estimated cost to complete
and equip after December 31, 1996--$50,000).......... 84,835 44,731
---------- ----------
1,609,770 1,552,293
Accumulated depreciation.............................. (416,608) (362,199)
---------- ----------
1,193,162 1,190,094
Notes receivable less allowance for loss of $15,305--
1995.................................................. - 78,090
Intangible assets less accumulated amortization of
$25,218--1996
and $22,149--1995..................................... 31,608 42,580
Other.................................................. 82,953 77,011
---------- ----------
$1,968,856 $1,912,454
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 103,518 $ 99,887
Salaries, wages and other compensation................ 111,366 99,937
Other accrued liabilities............................. 71,434 75,617
Long-term debt due within one year.................... 54,692 9,572
---------- ----------
341,010 285,013
Long-term debt......................................... 710,507 778,100
Deferred credits and other liabilities................. 84,053 75,573
Minority interests in equity of consolidated entities.. 36,195 1,704
Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 1,000
shares; none issued and outstanding.................. - -
Common stock, $0.25 par value; authorized 180,000
shares;
issued 72,615 shares--1996 and 72,158 shares--1995... 18,154 18,040
Capital in excess of par value........................ 713,527 684,377
Retained earnings..................................... 150,870 102,865
---------- ----------
882,551 805,282
Common treasury stock; 3,730 shares--1996 and 2,025
shares--1995......................................... (85,460) (33,218)
---------- ----------
797,091 772,064
---------- ----------
$1,968,856 $1,912,454
========== ==========
See accompanying notes.
F-4
VENCOR, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SHARES
--------------------------
PAR VALUE
COMMON ----------------- CAPITAL IN COMMON
PREFERRED COMMON TREASURY PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK STOCK STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
--------- ------ -------- --------- ------- ---------- -------- -------- --------
Balances, December 31,
1993................... 157 53,208 (2,993) $ 23 $13,302 $451,027 $ 58,911 $(37,713) $485,550
Net income............. 85,898 85,898
Cash dividends on
preferred stock
($82.50 per share) and
provision for
redemption value...... (3,066) (3,066)
In-kind dividend on
preferred stock....... 4 2 4,506 (4,508) -
Issuance of common
stock in connection
with employee benefit
plans................. 360 121 89 5,458 1,518 7,065
Issuance of common
stock in connection
with acquisitions..... 698 9,089 8,565 17,654
Exercise of common
stock purchase
warrants.............. 5,610 1,403 61,897 63,300
Tender of preferred
stock in connection
with exercise of
common stock purchase
warrants.............. (63) (10) (63,290) (63,300)
Other.................. 3,974 (621) 3,353
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1994................... 98 59,178 (2,174) 15 14,794 472,661 136,614 (27,630) 596,454
Net loss............... (14,889) (14,889)
Cash dividends on
preferred stock
($67.98 per share) and
provision for
redemption value...... (2,380) (2,380)
In-kind dividend on
preferred stock....... 3 2,900 (2,900) -
Issuance of common
stock in connection
with employee benefit
plans................. 664 (150) 166 24,111 (11,098) 13,179
Issuance of common
stock in connection
with acquisitions..... 439 (3,227) 5,498 2,271
Increase in value of
common stock purchase
warrants of acquired
entities.............. 9,810 (9,810) -
Public offering of
common stock.......... 2,200 550 65,944 66,494
Conversion of long-term
debt.................. 7,260 1,815 149,645 151,460
Issuance of common
stock to grantor
trust................. 3,927 (3,927) 982 87,297 (88,279) -
Hillhaven Merger:
Issuance of common
stock and related
income tax benefits... 2,732 683 51,561 52,244
Termination of grantor
trust................. (3,786) 3,786 (946) (87,146) 88,279 187
Redemption of preferred
stock................. (101) (15) (91,253) (91,268)
Other.................. (17) 1 (4) 2,074 (3,770) 12 (1,688)
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1995................... - 72,158 (2,025) - 18,040 684,377 102,865 (33,218) 772,064
Net income............. 48,005 48,005
Increase in equity
resulting from initial
public offering of
Atria Communities,
Inc. common stock..... 19,828 19,828
Issuance of common
stock in connection
with employee benefit
plans................. 457 246 114 9,223 3,083 12,420
Repurchase of common
stock................. (1,950) (55,305) (55,305)
Other.................. (1) 99 (20) 79
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1996................... - 72,615 (3,730) $ - $18,154 $713,527 $150,870 $(85,460) $797,091
==== ====== ====== ==== ======= ======== ======== ======== ========
See accompanying notes.
F-5
VENCOR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................ $ 48,005 $ (14,889) $ 85,898
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Depreciation and amortization............... 99,533 89,478 79,519
Deferred income taxes....................... (34,814) (23,570) 5,526
Extraordinary loss on extinguishment of
debt....................................... - 38,091 366
Non-recurring transactions.................. 121,789 102,166 2,500
Other....................................... 5,685 14,809 (1,575)
Change in operating assets and liabilities:
Accounts and notes receivable.............. (64,304) (107,761) (63,247)
Inventories and other assets............... 1,284 (3,478) 12,385
Accounts payable........................... 2,165 22,157 4,718
Other accrued liabilities.................. 4,196 (3,366) 6,946
--------- --------- ---------
Net cash provided by operating
activities.............................. 183,539 113,637 133,036
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........... (135,027) (136,893) (111,486)
Acquisition of healthcare businesses and
previously leased facilities................ (26,236) (59,343) (36,391)
Sale of assets............................... 9,147 899 6,530
Collection of notes receivable............... 78,151 4,715 8,965
Net change in investments.................... (445) (12,779) 14,046
Other........................................ (6,576) (8,241) 3,032
--------- --------- ---------
Net cash used in investing activities.... (80,986) (211,642) (115,304)
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving
lines of credit............................. (1,500) 161,600 21,000
Issuance of long-term debt................... 10,495 438,052 18,599
Repayment of long-term debt.................. (31,586) (474,896) (75,124)
Public offering of common stock.............. 52,247 66,494 -
Other issuances of common stock.............. 2,242 6,520 1,289
Repurchase of common stock................... (55,305) - -
Redemption of preferred stock................ - (91,268) -
Payment of dividends......................... - (2,779) (3,070)
Other........................................ (1,862) (9,554) (2,338)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. (25,269) 94,169 (39,644)
--------- --------- ---------
Change in cash and cash equivalents........... 77,284 (3,836) (21,912)
Cash and cash equivalents at beginning of
period....................................... 35,182 39,018 60,930
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 112,466 $ 35,182 $ 39,018
========= ========= =========
Supplemental information:
Interest payments............................ $ 46,527 $ 69,916 $ 59,733
Income tax payments.......................... 55,303 42,218 37,332
See accompanying notes.
F-6
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
REPORTING ENTITY
Vencor, Inc. ("Vencor" or "the Company") operates an integrated network of
healthcare services in forty-one states primarily focused on the needs of the
elderly. At December 31, 1996, Vencor operated 38 hospitals (3,325 licensed
beds), 313 nursing centers (39,619 licensed beds), a contract services
business ("Vencare") which provides respiratory therapy, rehabilitation
therapy, subacute medical services and pharmacy management services to nursing
centers and other healthcare providers and 21 assisted and independent living
communities with 2,942 units.
On September 28, 1995, Vencor consummated a merger with The Hillhaven
Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the
"Hillhaven Merger"). See Note 2.
Prior to its merger with Vencor, Hillhaven consummated a merger with
Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock-
for-stock transaction (the "Nationwide Merger"). See Note 3.
In the third quarter of 1996, Vencor completed an initial public offering
related to its assisted and independent living business through the issuance
of 5,750,000 common shares of Atria Communities, Inc. ("Atria") (the "IPO").
See Note 4.
BASIS OF PRESENTATION
The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.
The Hillhaven Merger and the Nationwide Merger have been accounted for by
the pooling-of-interests method. Accordingly, the consolidated financial
statements included herein give retroactive effect to these transactions and
include the combined operations of Vencor, Hillhaven and Nationwide for all
periods presented.
In connection with the IPO, Vencor retained a controlling interest in Atria.
Accordingly, the accounts of Atria continue to be consolidated with those of
Vencor, and the Company has recorded minority interests in the earnings and
equity of Atria since consummation of the IPO.
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.
F-7
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
REVENUES (CONTINUED)
A summary of revenues by payor type follows (dollars in thousands):
1996 1995 1994
---------- ---------- ----------
Medicare.................................... $ 822,589 $ 691,297 $ 554,443
Medicaid.................................... 821,828 776,278 731,491
Commercial and other........................ 972,906 865,820 747,267
---------- ---------- ----------
2,617,323 2,333,395 2,033,201
Elimination................................. (39,540) (9,439) (374)
---------- ---------- ----------
$2,577,783 $2,323,956 $2,032,827
========== ========== ==========
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
INVENTORIES
Inventories consist primarily of medical supplies and are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Depreciation expense, computed by the straight-line method, was $91.6
million in 1996, $79.7 million in 1995, and $71.6 million in 1994.
Depreciation rates for buildings range generally from 20 to 45 years.
Estimated useful lives of equipment vary from 5 to 15 years.
During 1996, Vencor adopted Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." See Note 5.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method over periods ranging from 10 to 25 years. Noncompete
agreements and debt issuance costs are amortized based upon the lives of the
respective contracts or loans.
PROFESSIONAL LIABILITY RISKS
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
F-8
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Share and per share amounts have been retroactively restated to reflect a 3-
for-2 stock split distributed in October 1994.
The computation of earnings per common and common equivalent share give
retroactive effect to the Hillhaven Merger and the Nationwide Merger and is
based upon the weighted average number of common shares outstanding and the
dilutive effect of common stock equivalents consisting primarily of stock
options. In addition, the 1995 and 1994 computations also include the dilutive
effect of convertible debt securities.
During 1995, all convertible debt securities were redeemed in exchange for
cash or converted into Vencor common stock. Accordingly, the computation of
fully diluted earnings per common share assumes that the equivalent number of
common shares underlying such debt securities were outstanding during the
entire year even though the result thereof is antidilutive.
In connection with the Hillhaven Merger, Vencor realized a gain of
approximately $10.2 million upon the cash redemption of Hillhaven preferred
stock. Although the gain had no effect on net income, fully diluted earnings
per common and common equivalent share were increased by $0.14.
NOTE 2--HILLHAVEN MERGER
On September 27, 1995, the stockholders of both Vencor and Hillhaven
approved the Hillhaven Merger, effective September 28, 1995. In connection
with the Hillhaven Merger, Vencor issued approximately 31,651,000 shares of
common stock in exchange for all of the outstanding common stock of Hillhaven
(an exchange ratio of 0.935 of a share of Vencor common stock for each share
of Hillhaven common stock).
The Hillhaven Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Hillhaven Merger and include the combined operations of Vencor and
Hillhaven for all periods presented. The following is a summary of the results
of operations of the separate entities for periods prior to the Hillhaven
Merger (dollars in thousands):
NON-RECURRING
VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED
-------- ---------- ------------- ----------- ------------
Nine months ended
September 30,
1995 (unaudited):
Revenues.............. $411,233 $1,322,873 $(24,500) $(3,775) $1,705,831
Income (loss) from
operations............. 31,566 41,367 (93,561) - (20,628)
Net income (loss)..... 30,711 20,235 (93,561) - (42,615)
1994:
Revenues.............. $400,018 $1,633,183 $ - $ (374) $2,032,827
Income from
operations............. 31,416 51,976 2,747 - 86,139
Net income............ 31,416 51,735 2,747 - 85,898
F-9
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--NATIONWIDE MERGER
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. In connection therewith, 4,675,000 shares of common stock
(effected for the Hillhaven Merger exchange ratio) were issued in exchange for
all of the outstanding shares of Nationwide.
The Nationwide Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Nationwide Merger and include the combined operations of Hillhaven and
Nationwide for all periods presented. The following is a summary of the
results of operations of the separate entities for periods prior to the
Nationwide Merger (dollars in thousands):
NON-RECURRING
HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED
---------- ---------- ------------- ------------
Six months ended June 30,
1995 (unaudited):
Revenues................... $ 803,793 $ 66,800 $ - $ 870,593
Income from operations..... 23,837 2,147 (3,686) 22,298
Net income................. 23,459 (266) (3,686) 19,507
1994:
Revenues................... $1,509,729 $123,454 $ - $1,633,183
Income from operations..... 47,178 4,798 2,747 54,723
Net income................. 46,937 4,798 2,747 54,482
NOTE 4--INITIAL PUBLIC OFFERING OF ATRIA
In the third quarter of 1996, Vencor completed the IPO, the net proceeds
from which aggregated approximately $52.2 million. At December 31, 1996,
Vencor owned 10,000,000 shares, or 63.2%, of Atria's outstanding common stock.
Significant agreements related to the IPO are discussed below.
Credit Facility
Concurrently with the consummation of the IPO, Atria entered into a bank
credit facility (the "Atria Credit Facility"), which matures in four years and
may be extended at the option of the banks for an additional year. The Atria
Credit Facility aggregates up to $200 million, including a letter of credit
option not to exceed $70 million. Loans under the Atria Credit Facility bear
interest, at Atria's option, at either (i) a base rate based on PNC Bank's
prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus an
additional percentage based on certain leverage ratios. The obligations under
the Atria Credit Facility are secured by substantially all of Atria's
property, the capital stock of Atria's present and future principal
subsidiaries and all intercompany indebtedness owned to Atria by its
subsidiaries. The Atria Credit Facility is conditioned upon, among other
things, Vencor's ownership of at least 30% of Atria's common stock.
Agreements with Atria
Atria and Vencor or its subsidiaries have entered into certain arrangements
which are intended to facilitate an orderly transition of Atria from a
division of Vencor to a separate publicly held entity which will be minimally
disruptive to both Atria and Vencor. In addition to various agreements related
to administrative support, shared services and real estate leases, significant
agreements with Atria include:
Guarantees--Vencor will guarantee for four years certain borrowings by
Atria under the Atria Credit Facility in amounts up to $100 million in the
first year following the IPO, declining to $75 million, $50 million and $25
million in each respective year thereafter.
F-10
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INITIAL PUBLIC OFFERING OF ATRIA (CONTINUED)
Income Taxes--A tax sharing agreement provides for risk-sharing
arrangements in connection with various income tax related issues.
Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of
1933 of Atria common stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from
the completion of the IPO and are subject to certain conditions and
limitations, including the right of underwriters of an offering to limit
the number of shares owned by Vencor included in such registration.
Liabilities and Indemnifications--Atria has agreed to assume all
contractual liabilities relating to the assets transferred by Vencor to
Atria.
NOTE 5--NON-RECURRING TRANSACTIONS
1996
In the fourth quarter of 1996, Vencor recorded pretax charges aggregating
$125.2 million primarily to complete the integration of Hillhaven. In November
1996, Vencor executed a definitive agreement to sell 34 underperforming or
non-strategic nursing centers in early 1997. A charge of $65.3 million was
recorded in connection with the disposition. In addition, Vencor's previously
independent institutional pharmacy business, acquired as part of the Hillhaven
Merger, was integrated into Vencare, resulting in a charge of $39.6 million
related primarily to costs associated with employee severance and benefit
costs (approximately 500 employees), facility close-down expenses and the
writeoff of certain deferred costs for services to be discontinued. A
provision for loss totaling $20.3 million related to the planned replacement
of one hospital and three nursing centers was also recorded in the fourth
quarter.
1995
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million primarily in connection with the consummation of the Hillhaven
Merger. The charges included (i) $23.2 million of investment advisory and
professional fees, (ii) $53.8 million of employee benefit plan and severance
costs (approximately 500 employees), (iii) $26.9 million of losses associated
with the planned disposition of certain nursing center properties and (iv)
$24.5 million of charges to reflect Vencor's change in estimates of accrued
revenues recorded in connection with certain prior-year nursing center third-
party reimbursement issues (recorded as a reduction of revenues). During 1996,
activities related to the elimination of duplicative corporate and operational
functions was substantially completed, and management expects that the
disposition of certain nursing center properties will be concluded in 1997.
Pretax charges aggregating $5.5 million were recorded in the second quarter
primarily in connection with the Nationwide Merger.
1994
In the first quarter of 1994, Vencor recorded a pretax charge of $2.5
million in connection with the prior disposition of certain nursing centers.
Operating results in the fourth quarter of 1994 include a pretax gain of $7
million on the sale of assets.
F-11
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--BUSINESS COMBINATIONS OTHER THAN HILLHAVEN AND NATIONWIDE
Vencor has acquired a number of healthcare facilities (including certain
previously leased facilities) and other related businesses, substantially all
of which have been accounted for by the purchase method. Accordingly, the
aggregate purchase price of these transactions has been allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based upon
their respective fair values. The consolidated financial statements include
the operations of acquired entities since the respective acquisition dates.
The pro forma effect of these acquisitions on Vencor's results of operations
prior to consummation was not significant.
The following is a summary of acquisitions consummated during the last three
years under the purchase method of accounting (dollars in thousands):
1996 1995 1994
-------- -------- --------
Fair value of assets acquired.................... $ 26,621 $ 78,893 $ 54,045
Fair value of liabilities assumed................ (385) (16,475) -
-------- -------- --------
Net assets acquired............................ 26,236 62,418 54,045
Cash received from acquired entities............. - (804) -
Issuance of common stock......................... - (2,271) (17,654)
-------- -------- --------
Net cash paid for acquisitions................. $ 26,236 $ 59,343 $ 36,391
======== ======== ========
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $4.8 million in 1996, $9.7 million in
1995 and $8.3 million in 1994.
NOTE 7--INCOME TAXES
Provision for income taxes consists of the following (dollars in thousands):
1996 1995 1994
-------- -------- --------
Current:
Federal......................................... $ 59,470 $ 40,008 $ 34,697
State........................................... 10,519 7,563 6,558
-------- -------- --------
69,989 47,571 41,255
Deferred......................................... (34,814) (23,570) 5,526
-------- -------- --------
$ 35,175 $ 24,001 $ 46,781
======== ======== ========
Reconciliation of federal statutory rate to effective income tax rate
follows:
1996 1995 1994
-------- -------- --------
Federal statutory rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit......................................... 3.6 4.3 4.0
Merger and restructuring costs................... 3.5 34.6 -
Targeted jobs tax credits........................ - - (4.5)
Other items, net................................. 0.2 0.3 0.7
-------- -------- --------
Effective income tax rate...................... 42.3% 74.2% 35.2%
======== ======== ========
F-12
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (dollars in thousands):
1996 1995
-------------------- -------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
Depreciation........................... $ - $47,256 $ - $40,912
Insurance.............................. 12,058 - 10,269 -
Doubtful accounts...................... 37,989 - 26,723 -
Property............................... 34,767 - 10,148 -
Compensation........................... 17,030 - 19,133 -
Other.................................. 33,120 19,990 16,127 8,584
-------- ------- ------- -------
$134,964 $67,246 $82,400 $49,496
======== ======= ======= =======
Management believes that the deferred tax assets in the table above will
ultimately be realized. Management's conclusion is based primarily on the
existence of sufficient taxable income within the allowable carryback periods
to realize the tax benefits of deductible temporary differences recorded at
December 31, 1996.
Deferred income taxes totaling $62.4 million and $54.7 million at December
31, 1996 and 1995, respectively, are included in other current assets.
Noncurrent deferred income taxes, included in other long-term assets, totaled
$5.3 million at December 31, 1996. Noncurrent deferred income taxes at
December 31, 1995 totaling $21.8 million are included principally in deferred
credits and other liabilities.
NOTE 8--PROFESSIONAL LIABILITY RISKS
Vencor has insured a substantial portion of its professional liability risks
through a wholly owned insurance subsidiary since June 1, 1994. Provisions for
such risks underwritten by the subsidiary were $10.4 million for 1996, and
$11.1 million for 1995, and $6.9 million for 1994.
Amounts funded for the payment of claims and expenses incident thereto,
included principally in cash and cash equivalents and other assets, aggregated
$20.7 million and $17.5 million at December 31, 1996 and 1995, respectively.
Allowances for professional liability risks, included principally in deferred
credits and other liabilities, were $21.6 million and $15.9 million at
December 31, 1996 and 1995, respectively.
NOTE 9--LONG-TERM DEBT
CAPITALIZATION
A summary of long-term debt at December 31 follows (dollars in thousands):
1996 1995
-------- --------
Senior collateralized debt, 4.4% to 12% (rates generally
floating) payable in periodic installments through 2019... $119,634 $140,813
Non-interest bearing residential mortgage bonds, payable in
periodic installments through 2040........................ 33,917 33,344
Bank revolving credit agreements due 2001 (floating rates
averaging 6.3%)........................................... 333,100 205,600
Bank term loans (floating rates averaging 6.3%) payable in
periodic installments
through 2001.............................................. 271,000 400,000
10 1/8% Senior Subordinated Notes due 2001................. 3,291 3,289
Other...................................................... 4,257 4,626
-------- --------
Total debt, average life of seven years (rates averaging
5.9%)..................................................... 765,199 787,672
Amounts due within one year................................ (54,692) (9,572)
-------- --------
Long-term debt........................................... $710,507 $778,100
======== ========
F-13
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--LONG-TERM DEBT (CONTINUED)
CREDIT FACILITY
Concurrent with the consummation of the Hillhaven Merger, Vencor entered
into a five and one-half year $1 billion bank credit facility (the "Vencor $1
Billion Credit Facility") comprising a $400 million term loan and a $600
million revolving credit facility. The Vencor $1 Billion Credit Facility was
established to finance the redemption of Hillhaven preferred stock, repay
certain higher rate debt and borrowings under prior revolving credit
agreements discussed below, and provide sufficient credit for future
expansion. Interest is payable at rates up to either (i) the prime rate plus
1/4% or the daily federal funds rate plus 3/4%, (ii) LIBOR plus 1 1/4% or
(iii) the bank certificate of deposit rate plus 1 3/8%. Outstanding borrowings
under the $400 million term loan are payable in various installments beginning
in 1997. The Vencor $1 Billion Credit Facility is collateralized by the
capital stock of certain subsidiaries and contains covenants which require
maintenance of certain financial ratios and limit amounts of additional debt
and repurchases of common stock.
REFINANCING ACTIVITIES
During 1995, Vencor recorded $23.3 million of after-tax losses from
refinancing of long-term debt, substantially all of which was incurred in
connection with the Hillhaven Merger. Amounts refinanced in 1995 included $171
million of 10 1/8% Senior Subordinated Notes due 2001 (the "10 1/8% Notes"),
$112 million of outstanding borrowings under prior revolving credit
agreements, and $173 million of other senior debt.
In the fourth quarter of 1995, Vencor called for redemption its $115 million
of 6% Convertible Subordinated Notes due 2002 (the "6% Notes") and $75 million
of 7 3/4% Convertible Subordinated Debentures due 2002 (the "7 3/4%
Debentures") which were convertible into Vencor common stock at the rate of
$26.00 and $17.96 per share, respectively. Approximately $80.6 million
principal amount of the 6% Notes were converted into approximately 3,098,000
shares of common stock and the remainder were redeemed in exchange for cash
equal to 104.2% of face value plus accrued interest. All outstanding 7 3/4%
Debentures were converted into approximately 4,161,000 shares of common stock.
These transactions had no material effect on earnings per common and common
equivalent share.
OTHER INFORMATION
On October 30, 1995, Vencor entered into certain interest rate swap
agreements to eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. The agreements expire in April 1997
($100 million), October 1997 ($200 million) and April 1998 ($100 million) and
provide for fixed rates at 5.7% plus 1/2% to 1 1/4%.
Maturities of long-term debt in years 1998 through 2001 are $66 million, $82
million, $111 million and $313 million, respectively.
The estimated fair value of Vencor's long-term debt was $752 million and
$777 million at December 31, 1996 and 1995, respectively, compared to carrying
amounts aggregating $765 million and $788 million. The estimate of fair value
includes the effect of the interest rate swap agreement and is based upon the
quoted market prices for the same or similar issues of long-term debt, or on
rates available to Vencor for debt of the same remaining maturities.
F-14
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LEASES
Vencor leases real estate and equipment under cancelable and non-cancelable
arrangements. Future minimum payments and related sublease income under non-
cancelable operating leases are as follows (dollars in thousands):
MINIMUM SUBLEASE
PAYMENTS INCOME
-------- --------
1997.......................................................... $48,341 $ 8,519
1998.......................................................... 42,265 7,335
1999.......................................................... 36,681 6,317
2000.......................................................... 32,655 6,116
2001.......................................................... 23,011 4,962
Thereafter.................................................... 61,414 17,608
Sublease income aggregated $8.8 million, $13.7 million and $13.2 million for
1996, 1995 and 1994, respectively.
NOTE 11--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect Vencor's liquidity, financial position or results of operations.
Principal contingencies are described below:
Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. Vencor is contesting certain issues
raised in audits of prior year cost reports.
Professional liability risks--Vencor has provided for loss for professional
liability risks based upon actuarially determined estimates. Actual
settlements may differ from the provisions for loss.
Interest rate swap agreements--Vencor is a party to certain agreements which
reduce the impact of changes in interest rates on $400 million of its floating
rate long-term debt. In the event of nonperformance by other parties to these
agreements, Vencor may incur a loss to the extent that market rates exceed
contract rates.
Guarantees of indebtedness--Letters of credit and guarantees of indebtedness
aggregated $29 million at December 31, 1996.
Income taxes--Vencor is contesting adjustments proposed by the Internal
Revenue Service for years 1990, 1991 and 1992.
Litigation--Various suits and claims arising in the ordinary course of
business are pending against Vencor.
F-15
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CAPITAL STOCK
PLAN DESCRIPTIONS
In September 1995, Vencor common stockholders voted to increase the number
of authorized shares of common stock from 60 million to 180 million and
increase the number of common shares issuable under certain employee benefit
plans from approximately 3.2 million to 6.9 million. At December 31, 1996,
approximately 5.6 million shares of common stock were reserved for issuance
under Vencor's stock compensation plans.
Vencor has plans under which options to purchase common stock may be granted
to officers, employees and certain directors. Options have been granted at not
less than market price on the date of grant. Exercise provisions vary, but
most options are exercisable in whole or in part beginning one to four years
after grant and ending ten years after grant. Activity in the plans is
summarized below:
SHARES WEIGHTED
UNDER OPTION PRICE AVERAGE
OPTION PER SHARE EXERCISE PRICE
--------- ---------------- --------------
Balances, December 31, 1993.......... 1,660,826 $ 0.53 to $24.25
Granted............................ 536,239 11.53 to 22.75
Exercised.......................... (102,230) 0.53 to 22.09
Canceled or expired................ (48,185) 5.35 to 22.09
---------
Balances, December 31, 1994.......... 2,046,650 0.53 to 24.25
Granted............................ 1,537,820 11.50 to 32.50
Exercised.......................... (593,918) 0.53 to 29.14
Canceled or expired................ (51,151) 5.35 to 28.50
---------
Balances, December 31, 1995.......... 2,939,401 0.53 to 32.50
Granted............................ 1,467,451 25.50 to 38.38 $26.02
Exercised.......................... (368,758) 0.53 to 28.50 6.10
Canceled or expired................ (351,271) 14.17 to 32.63 26.65
---------
Balances, December 31, 1996.......... 3,686,823 $ 0.53 to $38.38 $23.54
=========
A summary of stock options outstanding at December 31, 1996 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
- --------------- ------------ ------------- -------- ------------ --------
$0.53 to $5.95.......... 219,032 1 to 4 years $ 2.87 219,032 $ 2.87
$14.17 to $24.25........ 821,635 5 to 7 years 19.08 629,517 18.99
$25.50 to $38.38........ 2,646,156 8 to 10 years 26.63 294,139 27.49
--------- ---------
3,686,823 $23.54 1,142,688 $18.09
========= =========
The weighted average remaining contractual life of options outstanding at
December 31, 1996 approximated eight years. Shares of common stock available
for future grants were 1,387,396 at December 31, 1996 and 2,470,066 at
December 31, 1995.
In 1995, Vencor issued long-term incentive agreements to certain officers
and key employees whereby the Company may annually issue shares of common
stock to such individuals in satisfaction of predetermined performance goals.
Share awards aggregated 80,913 for 1996 and 92,500 for 1995.
F-16
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CAPITAL STOCK (CONTINUED)
PLAN DESCRIPTIONS (CONTINUED)
In 1993, Vencor adopted a Shareholder Rights Plan under which common
stockholders have the right to purchase Series A Preferred Stock in the event
of accumulation of or tender offer for 15% or more of Vencor's common stock.
The rights will expire in 2003 unless redeemed earlier by Vencor.
STATEMENT NO. 123 DATA
Vencor has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
Vencor's employee stock options is equal to the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if Vencor has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value of such options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.33% for 1996 and 1995; no dividend
yield; expected term of seven years and volatility factors of the expected
market price of the Company's common stock of .24 for 1996 and .25 for 1995.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Vencor's employee stock options have characteristics significantly
different from those of traded options, and because the changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the respective vesting period. The
weighted average fair values of options granted during 1996 and 1995 under the
Black-Scholes model were $10.95 and $11.74, respectively. Pro forma
information follows (in thousands except per share amounts):
1996 1995
------- --------
Pro forma income (loss) available to common stockholders.... $42,530 $(10,842)
Pro forma earnings (loss) per common and common equivalent
share:
Primary.................................................... 0.61 (0.17)
Fully diluted.............................................. 0.61 (0.05)
Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1999.
F-17
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS
Vencor maintains defined contribution retirement plans covering employees
who meet certain minimum eligibility requirements. Benefits are determined as
a percentage of a participant's contributions and are generally vested based
upon length of service. Retirement plan expense was $8.8 million for 1996,
$9.7 million for 1995 and $7.0 million for 1994. Amounts equal to retirement
plan expense are funded annually.
NOTE 14--ACCRUED LIABILITIES
A summary of other accrued liabilities at December 31 follows (dollars in
thousands):
1996 1995
------- -------
Interest....................................................... $ 3,502 $ 3,582
Taxes other than income........................................ 20,238 22,000
Patient accounts............................................... 17,919 13,319
Merger related costs........................................... 16,640 19,071
Other.......................................................... 13,135 17,645
------- -------
$71,434 $75,617
======= =======
NOTE 15--SPIN-OFF AND RELATED TRANSACTIONS
Hillhaven became an independent public company in January 1990 as a result
of a spin-off transaction with Tenet Healthcare Corporation (formerly National
Medical Enterprises, Inc.) ("Tenet"). The following is a summary of
significant transactions with Tenet:
Debt guarantees--Tenet and Vencor are parties to a guarantee agreement under
which Vencor pays a fee to Tenet in consideration for Tenet's guarantee of
certain Vencor obligations. Such fees totaled $3.0 million in 1996, $3.8
million in 1995, and $5.0 million in 1994.
Insurance--Prior to June 1, 1994, substantially all of the professional and
general liability risks of Hillhaven were insured by a subsidiary of Tenet.
Provisions for loss were $3.1 million in 1994.
Leases--Vencor leases certain nursing centers from a joint venture in which
Tenet has a minority interest. Lease payments to the joint venture aggregated
$10.3 million, $9.9 million and $9.3 million for 1996, 1995 and 1994,
respectively.
Equity ownership--At December 31, 1996, Tenet owned 8,301,067 shares of
Vencor common stock. Prior to the Hillhaven Merger, Tenet also owned all of
Hillhaven's outstanding Series C and Series D Preferred Stock.
Management agreements--Fees paid by Tenet for management, consulting and
advisory services in connection with the operation of seven nursing centers
owned or leased by Tenet aggregated $2.7 million in both 1996 and 1995 and
$2.5 million in 1994.
NOTE 16--FAIR VALUE DATA
A summary of fair value data at December 31 follows (dollars in thousands):
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
Cash and cash equivalents.................. $112,466 $112,466 $ 35,182 $ 35,182
Notes receivable........................... - - 88,729 89,992
Long-term debt, including amounts due
within one year........................... 765,199 751,843 787,672 777,090
F-18
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--STOCK REPURCHASE PROGRAM
In June 1996, the Board of Directors authorized the repurchase of up to
2,000,000 shares of Vencor common stock. As of December 31, 1996, Vencor had
repurchased 1,950,000 shares at an aggregate cost of approximately $55.3
million.
NOTE 18--EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT AUDITORS
On March 21, 1997, Vencor completed the acquisition of TheraTx, Incorporated
("TheraTx"), a provider of rehabilitation and respiratory therapy management
services and nursing center operator (the "TheraTx Merger"). Under the terms
of the merger agreement, Vencor paid $17.10 cash for each outstanding share of
TheraTx common stock, which aggregated approximately 20.6 million shares at
December 31, 1996. The TheraTx Merger will be recorded using the purchase
method of accounting.
In connection with the TheraTx Merger, Vencor entered into a new five-year
bank credit facility aggregating $1.6 billion on March 18, 1997, replacing the
Vencor $1 Billion Credit Facility.
F-19
VENCOR, INC. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Revenues....................... $626,337 $634,554 $650,551 $666,341
Net income (loss)(a)........... 27,610 30,865 33,558 (44,028)
Per common share:
Primary earnings (loss)....... 0.39 0.43 0.48 (0.64)
Fully diluted earnings (loss). 0.39 0.43 0.48 (0.64)
Market prices (b):
High......................... 39 7/8 35 34 1/2 33 1/4
Low.......................... 31 1/2 28 1/8 25 1/2 27 1/2
1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Revenues....................... $552,178 $578,314 $575,339 $618,125
Net income (loss):
Income (loss) from operations
(c)........................... 21,172 21,087 (62,887) 28,991
Extraordinary loss on
extinguishment of debt........ (66) (2,725) (19,196) (1,265)
Net income (loss)............ 21,106 18,362 (82,083) 27,726
Per common share:
Primary earnings (loss):
Income (loss) from operations
(c)........................... 0.33 0.32 (0.91) 0.43
Extraordinary loss on
extinguishment of debt........ - (0.05) (0.32) (0.02)
Net income (loss)........... 0.33 0.27 (1.23) 0.41
Fully diluted earnings (loss):
Income (loss) from operations
(c)........................... 0.31 0.30 (0.91) 0.41
Extraordinary loss on
extinguishment of debt........ - (0.04) (0.32) (0.02)
Net income (loss)........... 0.31 0.26 (1.23) 0.39
Market prices (b):
High......................... 37 38 36 1/8 33 3/4
Low.......................... 27 1/8 28 1/2 28 1/4 26
- --------
(a) Fourth quarter results includes $79.9 million ($1.16 per share) of costs
in connection with the sale of 34 nursing centers, the restructuring of
the pharmacy operations and the planned replacement of certain facilities.
See Note 5 of the Notes to Consolidated Financial Statements.
(b) Vencor common stock is traded on the New York Stock Exchange (ticker
symbol--VC).
(c) Second quarter results include $3.7 million ($0.05 per share) of costs
related to the Nationwide Merger. Third quarter loss includes $89.9
million ($1.50 per share) of costs related to the Hillhaven Merger. See
Note 5 of the Notes to Consolidated Financial Statements.
F-20
VENCOR, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
OF PERIOD EXPENSES ACCOUNTS OR PAYMENTS OF PERIOD
---------- ---------- ---------- ----------- ---------
Allowances for loss on
accounts and
notes receivable:
Year ended December
31, 1994............... $21,316 $ 9,055 $ (344)(a) $ (1,762) $28,265
Year ended December
31, 1995............... 28,265 7,851 - (4,026) 32,090
Year ended December
31, 1996............... 32,090 15,001 - (23,176) 23,915
Allowances for loss on
assets held
for disposition:
Year ended December
31, 1994............... $56,646 $ - $(56,646)(a)(b) $ - $ -
Year ended December
31, 1995............... - 26,900(c) - - 26,900
Year ended December
31, 1996............... 26,900 64,000(d) - (22,812) 68,088
- --------
(a) Adjustment to reflect change in fiscal year of acquired entities.
(b) Includes $54.6 million related to reinstatement of assets previously held
for disposition.
(c) Reflects provision for loss associated with the planned disposition of
certain nursing center properties recorded in connection with the
Hillhaven Merger.
(d) Reflects provision for loss associated with the sale of 34 nursing centers
and the planned replacement of one hospital and three nursing centers.
F-21