UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 001-14057
KINDRED HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 61-1323993 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
680 South Fourth Street | ||
Louisville, KY | 40202-2412 | |
(Address of principal executive offices) | (Zip Code) |
(502) 596-7300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes x No ¨
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class of Common Stock |
Outstanding at April 30, 2004 | |
Common stock, $0.25 par value | 18,189,328 shares |
1 of 39
FORM 10-Q
INDEX
Page | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: |
|||
Condensed Consolidated Statement of Operations for the three months |
3 | |||
Condensed Consolidated Balance Sheet March 31, 2004 and December 31, 2003 |
4 | |||
Condensed Consolidated Statement of Cash Flows for the three months |
5 | |||
6 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
19 | ||
Item 3. | 34 | |||
Item 4. | 34 | |||
PART II. | OTHER INFORMATION | |||
Item 1. | 36 | |||
Item 6. | 38 |
2
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Revenues |
$ | 871,262 | $ | 802,158 | ||||
Salaries, wages and benefits |
492,071 | 460,752 | ||||||
Supplies |
116,733 | 104,182 | ||||||
Rent |
64,459 | 63,078 | ||||||
Other operating expenses |
145,406 | 146,839 | ||||||
Depreciation |
22,046 | 19,195 | ||||||
Interest expense |
3,656 | 2,888 | ||||||
Investment income |
(1,218 | ) | (1,635 | ) | ||||
843,153 | 795,299 | |||||||
Income from continuing operations before income taxes |
28,109 | 6,859 | ||||||
Provision for income taxes |
11,834 | 4,348 | ||||||
Income from continuing operations |
16,275 | 2,511 | ||||||
Loss from discontinued operations, net of income taxes |
(2,435 | ) | (15,635 | ) | ||||
Net income (loss) |
$ | 13,840 | $ | (13,124 | ) | |||
Earnings (loss) per common share: |
||||||||
Basic: |
||||||||
Income from continuing operations |
$ | 0.46 | $ | 0.07 | ||||
Loss from discontinued operations |
(0.07 | ) | (0.45 | ) | ||||
Net income (loss) |
$ | 0.39 | $ | (0.38 | ) | |||
Diluted: |
||||||||
Income from continuing operations |
$ | 0.38 | $ | 0.07 | ||||
Loss from discontinued operations |
(0.06 | ) | (0.45 | ) | ||||
Net income (loss) |
$ | 0.32 | $ | (0.38 | ) | |||
Shares used in computing earnings (loss) per common share: |
||||||||
Basic |
35,414 | 34,755 | ||||||
Diluted |
42,721 | 34,767 |
See accompanying notes.
3
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
March 31, 2004 |
December 31, 2003 |
|||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 17,827 | $ | 66,524 | ||||
Cash restricted |
7,864 | 7,339 | ||||||
Insurance subsidiary investments |
175,710 | 146,325 | ||||||
Accounts receivable less allowance for loss of $94,160 March 31 and |
475,238 | 429,304 | ||||||
Inventories |
31,135 | 29,984 | ||||||
Deferred tax assets |
89,836 | 89,836 | ||||||
Assets held for sale |
27,360 | 27,400 | ||||||
Other |
54,455 | 46,375 | ||||||
879,425 | 843,087 | |||||||
Property and equipment |
688,959 | 671,850 | ||||||
Accumulated depreciation |
(212,963 | ) | (193,310 | ) | ||||
475,996 | 478,540 | |||||||
Goodwill |
31,417 | 31,417 | ||||||
Insurance subsidiary investments |
66,157 | 74,618 | ||||||
Deferred tax assets |
91,991 | 92,093 | ||||||
Other |
63,066 | 65,659 | ||||||
$ | 1,608,052 | $ | 1,585,414 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 119,057 | $ | 119,087 | ||||
Salaries, wages and other compensation |
207,004 | 214,113 | ||||||
Due to third party payors |
27,669 | 31,406 | ||||||
Professional liability risks |
71,140 | 83,725 | ||||||
Other accrued liabilities |
83,938 | 88,333 | ||||||
Income taxes |
46,356 | 36,684 | ||||||
Long-term debt due within one year |
4,729 | 4,532 | ||||||
559,893 | 577,880 | |||||||
Long-term debt |
154,708 | 139,397 | ||||||
Professional liability risks |
220,714 | 212,013 | ||||||
Deferred credits and other liabilities |
58,974 | 58,559 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.25 par value; authorized 175,000 shares; issued 36,369 shares March 31 and 36,340 shares December 31 |
9,092 | 9,085 | ||||||
Capital in excess of par value |
585,853 | 585,394 | ||||||
Deferred compensation |
(6,296 | ) | (8,040 | ) | ||||
Accumulated other comprehensive income |
496 | 348 | ||||||
Retained earnings |
24,618 | 10,778 | ||||||
613,763 | 597,565 | |||||||
$ | 1,608,052 | $ | 1,585,414 | |||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 13,840 | $ | (13,124 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Depreciation |
22,046 | 20,083 | ||||||
Amortization of deferred compensation costs |
1,743 | 1,253 | ||||||
Provision for doubtful accounts |
8,116 | 6,288 | ||||||
Other |
(102 | ) | 506 | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(54,304 | ) | (53,316 | ) | ||||
Inventories and other assets |
(9,468 | ) | (6,387 | ) | ||||
Accounts payable |
(3,184 | ) | (2,998 | ) | ||||
Income taxes |
9,912 | (5,457 | ) | |||||
Due to third party payors |
(3,737 | ) | 3,551 | |||||
Other accrued liabilities |
(9,062 | ) | 27,935 | |||||
Net cash used in operating activities |
(24,200 | ) | (21,666 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(17,881 | ) | (10,565 | ) | ||||
Purchase of insurance subsidiary investments |
(9,776 | ) | (30,395 | ) | ||||
Sale of insurance subsidiary investments |
5,672 | 2,333 | ||||||
Net change in insurance subsidiary cash and cash equivalents |
(16,820 | ) | (71,911 | ) | ||||
Net change in other investments |
1,777 | (4,685 | ) | |||||
Other |
508 | (333 | ) | |||||
Net cash used in investing activities |
(36,520 | ) | (115,556 | ) | ||||
Cash flows from financing activities: |
||||||||
Net change in revolving credit borrowings |
16,900 | | ||||||
Repayment of long-term debt |
(1,032 | ) | (112 | ) | ||||
Payment of deferred financing costs |
| (1,596 | ) | |||||
Issuance of common stock |
467 | | ||||||
Other |
(4,312 | ) | (4,967 | ) | ||||
Net cash provided by (used in) financing activities |
12,023 | (6,675 | ) | |||||
Change in cash and cash equivalents |
(48,697 | ) | (143,897 | ) | ||||
Cash and cash equivalents at beginning of period |
66,524 | 244,070 | ||||||
Cash and cash equivalents at end of period |
$ | 17,827 | $ | 100,173 | ||||
Supplemental information: |
||||||||
Interest payments |
$ | 3,272 | $ | 2,835 | ||||
Income tax payments |
398 | 18 |
See accompanying notes.
5
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
Business
Kindred Healthcare, Inc. (Kindred or the Company) is a healthcare services company that operates hospitals, nursing centers, institutional pharmacies and a contract rehabilitation services business. At March 31, 2004, the Companys hospital division operated 68 hospitals in 23 states. The Companys health services division operated 254 nursing centers in 30 states. The Companys pharmacy division operated an institutional pharmacy business with 30 pharmacies in 19 states. The Company also operated a contract rehabilitation services business which began operating as a separate division on January 1, 2004.
During 2003, the Company effected certain strategic transactions to improve its future operating results. These transactions included the divestiture of all of its Florida and Texas nursing center operations, the acquisition for resale of eight additional nursing centers and two hospitals formerly leased from Ventas, Inc. (Ventas) and certain other dispositions and contract terminations. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets not sold at March 31, 2004 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet. See Note 2 for a summary of discontinued operations.
On April 20, 2001, the Company and its subsidiaries emerged from proceedings under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) pursuant to the terms of the Companys Fourth Amended Joint Plan of Reorganization (the Plan of Reorganization), as modified at the confirmation hearing by the United States Bankruptcy Court for the District of Delaware. In connection with its emergence, the Company changed its name to Kindred Healthcare, Inc.
Stock Split
On April 26, 2004, the Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend. The new shares will be distributed on May 27, 2004 to stockholders of record at the close of business on May 10, 2004. Share and per share data for all periods presented in the accompanying unaudited condensed consolidated financial statements have been adjusted retroactively to reflect the stock split.
Impact of Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities an interpretation of ARB No. 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). In December 2003, the FASB issued FIN 46-R (FIN 46-R), Consolidation of Variable Interest Entities an interpretation of ARB No. 51 (revised December 2003), which replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN 46, including modifications to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of the guidance previously issued in the form of FASB Staff Positions. The Company has adopted all of the provisions of FIN 46-R in the first quarter of 2004. The adoption of FIN 46-R did not have an impact on the presentation of the Companys financial position, results of operations or liquidity.
6
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION (Continued)
Stock Option Accounting
The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS 123), Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing stock options.
Pro forma information regarding net income and earnings per share determined as if the Company had accounted for its stock options under the fair value method of SFAS 123 follows (in thousands, except per share amounts):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Net income (loss) |
$ | 13,840 | $ | (13,124 | ) | |||
Adjustments: |
||||||||
Stock-based compensation expense included in reported net income (loss) |
1,743 | 1,253 | ||||||
Stock-based compensation expense determined under fair value based method |
(3,786 | ) | (2,511 | ) | ||||
Pro forma net income (loss) |
$ | 11,797 | $ | (14,382 | ) | |||
Earnings (loss) per common share: |
||||||||
As reported: |
||||||||
Basic |
$ | 0.39 | $ | (0.38 | ) | |||
Diluted |
$ | 0.32 | $ | (0.38 | ) | |||
Pro forma: |
||||||||
Basic |
$ | 0.33 | $ | (0.41 | ) | |||
Diluted |
$ | 0.27 | $ | (0.41 | ) |
Comprehensive income
The following table sets forth the computation of comprehensive income (loss) for the three months ended March 31, 2004 and 2003 (in thousands):
Three months ended March 31, |
|||||||
2004 |
2003 |
||||||
Net income (loss) |
$ | 13,840 | $ | (13,124 | ) | ||
Net unrealized investment gains (losses), net of taxes |
148 | (147 | ) | ||||
Comprehensive income (loss) |
$ | 13,988 | $ | (13,271 | ) | ||
7
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION (Continued)
Other information
The accompanying unaudited condensed consolidated financial statements do not include all of the disclosures normally required by generally accepted accounting principles or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2003 filed with the Securities and Exchange Commission (the SEC) on Form 10-K.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Companys customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair presentation of interim results and, except for the item discussed in Note 3, all such adjustments are of a normal and recurring nature.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
NOTE 2 DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the divestitures discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the losses related to these divestitures have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. Assets and liabilities not sold at March 31, 2004 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet.
A summary of discontinued operations follows (in thousands):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Revenues |
$ | 15,229 | $ | 63,251 | ||||
Salaries, wages and benefits |
12,021 | 40,559 | ||||||
Supplies |
802 | 5,914 | ||||||
Rent |
284 | 5,314 | ||||||
Other operating expenses |
6,307 | 36,001 | ||||||
Depreciation |
| 888 | ||||||
Investment income |
(226 | ) | (3 | ) | ||||
19,188 | 88,673 | |||||||
Loss from operations before income taxes |
(3,959 | ) | (25,422 | ) | ||||
Income tax benefit |
(1,524 | ) | (9,787 | ) | ||||
Loss from operations |
$ | (2,435 | ) | $ | (15,635 | ) | ||
8
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 DISCONTINUED OPERATIONS (Continued)
The following table sets forth certain discontinued operating data by business segment (in thousands):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Revenues: |
||||||||
Hospital division: |
||||||||
Hospitals |
$ | 2,231 | $ | 8,993 | ||||
Ancillary services |
(91 | ) | 1,760 | |||||
2,140 | 10,753 | |||||||
Health services division |
13,121 | 49,726 | ||||||
Pharmacy division |
(32 | ) | 2,772 | |||||
$ | 15,229 | $ | 63,251 | |||||
Operating income (loss): |
||||||||
Hospital division: |
||||||||
Hospitals |
$ | (2,146 | ) | $ | (234 | ) | ||
Ancillary services |
(186 | ) | 180 | |||||
(2,332 | ) | (54 | ) | |||||
Health services division |
(1,642 | ) | (19,369 | ) | ||||
Pharmacy division |
73 | 200 | ||||||
$ | (3,901 | ) | $ | (19,223 | ) | |||
Rent: |
||||||||
Hospital division: |
||||||||
Hospitals |
$ | 57 | $ | 920 | ||||
Ancillary services |
(5 | ) | 201 | |||||
52 | 1,121 | |||||||
Health services division |
188 | 4,098 | ||||||
Pharmacy division |
44 | 95 | ||||||
$ | 284 | $ | 5,314 | |||||
Depreciation: |
||||||||
Hospital division: |
||||||||
Hospitals |
$ | | $ | 201 | ||||
Ancillary services |
| 119 | ||||||
| 320 | |||||||
Health services division |
| 554 | ||||||
Pharmacy division |
| 14 | ||||||
$ | | $ | 888 | |||||
9
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 DISCONTINUED OPERATIONS (Continued)
A summary of the net assets held for sale follows (in thousands):
March 31, 2004 |
December 31, 2003 |
|||||||
Current assets: |
||||||||
Property and equipment, net |
$ | 26,912 | $ | 26,912 | ||||
Other |
448 | 488 | ||||||
27,360 | 27,400 | |||||||
Current liabilities (included in other accrued liabilities) |
(1,167 | ) | (1,439 | ) | ||||
$ | 26,193 | $ | 25,961 | |||||
NOTE 3 REVENUES
Revenues are recorded based upon estimated amounts due from patients and third party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid and other third party payors.
A summary of revenues by payor type follows (in thousands):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Medicare |
$ | 391,284 | $ | 333,646 | ||||
Medicaid |
267,798 | 259,066 | ||||||
Private and other |
267,005 | 224,610 | ||||||
926,087 | 817,322 | |||||||
Eliminations: |
||||||||
Pharmacy |
(18,136 | ) | (15,164 | ) | ||||
Rehabilitation |
(36,689 | ) | | |||||
(54,825 | ) | (15,164 | ) | |||||
$ | 871,262 | $ | 802,158 | |||||
In the first quarter of 2004, the Company recorded income of approximately $2 million related to settlements of prior year hospital Medicare cost reports.
NOTE 4 EARNINGS PER SHARE
Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of warrants, stock options and non-vested restricted stock.
Share and per share data for all periods presented have been adjusted retroactively to reflect a 2-for-1 stock split (in the form of a 100% stock dividend) declared by the Board of Directors on April 26, 2004.
10
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 EARNINGS PER SHARE (Continued)
A computation of earnings (loss) per common share follows (in thousands, except per share amounts):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Earnings (loss): |
||||||||
Income from continuing operations |
$ | 16,275 | $ | 2,511 | ||||
Loss from discontinued operations, net of income taxes |
(2,435 | ) | (15,635 | ) | ||||
Net income (loss) |
$ | 13,840 | $ | (13,124 | ) | |||
Shares used in the computation: |
||||||||
Weighted average shares outstanding basic computation |
35,414 | 34,755 | ||||||
Dilutive effect of warrants, stock options and non-vested restricted stock |
7,307 | 12 | ||||||
Adjusted weighted average shares outstanding diluted computation |
42,721 | 34,767 | ||||||
Earnings (loss) per common share: |
||||||||
Basic: |
||||||||
Income from continuing operations |
$ | 0.46 | $ | 0.07 | ||||
Loss from discontinued operations |
(0.07 | ) | (0.45 | ) | ||||
Net income (loss) |
$ | 0.39 | $ | (0.38 | ) | |||
Diluted: |
||||||||
Income from continuing operations |
$ | 0.38 | $ | 0.07 | ||||
Loss from discontinued operations |
(0.06 | ) | (0.45 | ) | ||||
Net income (loss) |
$ | 0.32 | $ | (0.38 | ) | |||
NOTE 5 BUSINESS SEGMENT DATA
The Company operates four business segments: the hospital division, the health services division, the rehabilitation division and the pharmacy division. The hospital division primarily operates long-term acute care hospitals. The health services division operates nursing centers. The rehabilitation division provides rehabilitation services primarily to long-term care providers. The pharmacy division provides institutional pharmacy services to nursing centers and other healthcare providers. The Company defines operating income as earnings before interest, income taxes, depreciation and rent. Operating income reported for each of the Companys business segments excludes the allocation of corporate overhead.
On January 1, 2004, the Company reorganized its rehabilitation services business by transferring its internal rehabilitation personnel from its nursing centers and consolidating them with its external rehabilitation business (the Rehabilitation Services Reorganization). The historical operating results of the Companys nursing center and rehabilitation services segments have not been restated to conform with the new business alignment.
The Company identifies its segments in accordance with the aggregation provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This information is consistent with information used by the Company in managing its businesses and aggregates businesses with similar economic characteristics. The information provided in Note 5 should be read in conjunction with the discussion and analysis contained in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
11
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 BUSINESS SEGMENT DATA (Continued)
The following table sets forth certain data by business segment (in thousands):
Three months ended March 31, |
||||||||
2004 |
2003 |
|||||||
Revenues: |
||||||||
Hospital division |
$ | 348,648 | $ | 331,862 | ||||
Health services division |
444,994 | 410,832 | ||||||
Rehabilitation division |
52,699 | 8,502 | ||||||
Pharmacy division |
79,746 | 66,126 | ||||||
926,087 | 817,322 | |||||||
Eliminations: |
||||||||
Pharmacy |
(18,136 | ) | (15,164 | ) | ||||
Rehabilitation |
(36,689 | ) | | |||||
(54,825 | ) | (15,164 | ) | |||||
$ | 871,262 | $ | 802,158 | |||||
Income from continuing operations: |
||||||||
Operating income (loss): |
||||||||
Hospital division |
$ | 80,066 | $ | 70,538 | ||||
Health services division |
49,469 | 43,424 | ||||||
Rehabilitation division |
8,519 | (959 | ) | |||||
Pharmacy division |
7,609 | 6,702 | ||||||
Corporate: |
||||||||
Overhead |
(26,834 | ) | (26,713 | ) | ||||
Insurance subsidiary |
(1,777 | ) | (2,607 | ) | ||||
(28,611 | ) | (29,320 | ) | |||||
Operating income |
117,052 | 90,385 | ||||||
Rent |
(64,459 | ) | (63,078 | ) | ||||
Depreciation |
(22,046 | ) | (19,195 | ) | ||||
Interest, net |
(2,438 | ) | (1,253 | ) | ||||
Income from continuing operations before income taxes |
28,109 | 6,859 | ||||||
Provision for income taxes |
11,834 | 4,348 | ||||||
$ | 16,275 | $ | 2,511 | |||||
Rent: |
||||||||
Hospital division |
$ | 22,844 | $ | 23,284 | ||||
Health services division |
40,283 | 39,031 | ||||||
Rehabilitation division |
611 | 69 | ||||||
Pharmacy division |
662 | 630 | ||||||
Corporate |
59 | 64 | ||||||
$ | 64,459 | $ | 63,078 | |||||
12
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 BUSINESS SEGMENT DATA (Continued)
Three months ended March 31, | ||||||
2004 |
2003 | |||||
Depreciation: |
||||||
Hospital division |
$ | 8,464 | $ | 7,054 | ||
Health services division |
6,893 | 6,373 | ||||
Rehabilitation division |
33 | 16 | ||||
Pharmacy division |
530 | 517 | ||||
Corporate |
6,126 | 5,235 | ||||
$ | 22,046 | $ | 19,195 | |||
Capital expenditures (including discontinued operations): |
||||||
Hospital division |
$ | 5,406 | $ | 2,822 | ||
Health services division |
8,450 | 3,222 | ||||
Rehabilitation division |
47 | 51 | ||||
Pharmacy division |
773 | 616 | ||||
Corporate: |
||||||
Information systems |
2,651 | 3,207 | ||||
Other |
554 | 647 | ||||
$ | 17,881 | $ | 10,565 | |||
March 31, 2004 |
December 31, 2003 | |||||
Assets at end of period: |
||||||
Hospital division |
$ | 544,086 | $ | 526,029 | ||
Health services division |
403,339 | 379,435 | ||||
Rehabilitation division |
9,340 | 8,009 | ||||
Pharmacy division |
47,133 | 43,198 | ||||
Corporate |
604,154 | 628,743 | ||||
$ | 1,608,052 | $ | 1,585,414 | |||
Goodwill: |
||||||
Hospital division |
$ | 31,417 | $ | 31,417 | ||
13
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 INSURANCE RISKS
The Company insures a substantial portion of its professional liability and workers compensation risks through a wholly owned limited purpose insurance subsidiary. Provisions for loss for these risks are based upon independent actuarially determined estimates.
The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These liabilities are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. To the extent that subsequent expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.
The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):
Three months ended March 31, | ||||||
2004 |
2003 | |||||
Professional liability: |
||||||
Continuing operations |
$ | 22,921 | $ | 30,812 | ||
Discontinued operations |
1,368 | 23,153 | ||||
Workers compensation: |
||||||
Continuing operations |
$ | 12,569 | $ | 11,751 | ||
Discontinued operations |
533 | 1,470 |
A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):
March 31, 2004 |
December 31, 2003 | |||||||||||||||||
Professional liability |
Workers compensation |
Total |
Professional liability |
Workers compensation |
Total | |||||||||||||
Assets: |
||||||||||||||||||
Current: |
||||||||||||||||||
Insurance subsidiary investments |
$ | 109,322 | $ | 66,388 | $ | 175,710 | $ | 93,989 | $ | 52,336 | $ | 146,325 | ||||||
Reinsurance recoverables |
991 | | 991 | 896 | | 896 | ||||||||||||
110,313 | 66,388 | 176,701 | 94,885 | 52,336 | 147,221 | |||||||||||||
Non-current: |
||||||||||||||||||
Insurance subsidiary investments |
66,157 | | 66,157 | 74,618 | | 74,618 | ||||||||||||
Reinsurance recoverables |
5,245 | | 5,245 | 5,858 | | 5,858 | ||||||||||||
Deposits |
6,250 | 2,228 | 8,478 | 7,250 | 2,222 | 9,472 | ||||||||||||
Other |
8 | 16 | 24 | 9 | 35 | 44 | ||||||||||||
77,660 | 2,244 | 79,904 | 87,735 | 2,257 | 89,992 | |||||||||||||
$ | 187,973 | $ | 68,632 | $ | 256,605 | $ | 182,620 | $ | 54,593 | $ | 237,213 | |||||||
Liabilities: |
||||||||||||||||||
Allowance for insurance risks: |
||||||||||||||||||
Current |
$ | 71,140 | $ | 16,408 | $ | 87,548 | $ | 83,725 | $ | 14,248 | $ | 97,973 | ||||||
Non-current |
220,714 | 49,909 | 270,623 | 212,013 | 49,463 | 261,476 | ||||||||||||
$ | 291,854 | $ | 66,317 | $ | 358,171 | $ | 295,738 | $ | 63,711 | $ | 359,449 | |||||||
14
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 INSURANCE RISKS (Continued)
Provisions for loss for professional liability risks retained by the Companys limited purpose insurance subsidiary have been discounted based upon managements estimate of long-term investment yields and independent actuarial estimates of claim payment patterns. The interest rate used to discount funded professional liability risks in each period presented was 5%. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $308 million at March 31, 2004 and $311 million at December 31, 2003.
Provisions for loss for workers compensation risks retained by the Companys limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.
NOTE 7 CONTINGENCIES
Management continually evaluates contingencies based upon the best available information. 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.
Principal contingencies are described below:
RevenuesCertain third party payments are subject to examination by agencies administering the various programs. The Company is contesting certain issues raised in audits of prior year cost reports.
Professional liability risksThe Company has provided for loss for professional liability risks based upon actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 6.
Guarantees of indebtednessLetters of credit and guarantees of indebtedness approximated $7 million at March 31, 2004.
Income taxesThe Internal Revenue Service is conducting its examination of the Companys 2000 and 2001 federal income tax returns.
LitigationThe Company is a party to certain material litigation and regulatory actions as well as various suits and claims arising in the ordinary course of business. See Note 8.
Ventas indemnificationOn May 1, 1998, Ventas completed the spin-off of its healthcare operations to its shareholders through the distribution of the Companys former common stock (the Spin-off). In connection with the Spin-off, liabilities arising from various legal proceedings and other actions were assumed by the Company and the Company agreed to indemnify Ventas against any losses, including any costs or expenses, it may incur arising out of or in connection with such legal proceedings and other actions. The indemnification provided by the Company also covers losses, including costs and expenses, which may arise from any future claims asserted against Ventas based on the former healthcare operations of Ventas. In connection with the Companys indemnification obligation, the Company assumed the defense of various legal proceedings and other actions. The Company also has agreed to hold Ventas harmless from all claims
15
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7 CONTINGENCIES (Continued)
against Ventas arising from third party leases and guarantee arrangements entered into before the Spin-off. Under the Plan of Reorganization, the Company agreed to continue to fulfill the Companys indemnification obligations arising from the Spin-off.
Other indemnificationsIn the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction such as a disposal of an operating facility. These indemnifications may cover claims against employment-related matters, governmental regulations, environmental issues, and tax matters, as well as patient, third party payor, supplier and contractual relationships. Obligations under these indemnities generally would be initiated by a breach of the terms of the contract or by a third party claim or event.
NOTE 8 LITIGATION
Summary descriptions of various significant legal and regulatory activities follow.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor, Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was filed on July 2, 1998 in the Jefferson County, Kentucky, Circuit Court. The suit was brought on behalf of the Company and Ventas against certain former executive officers and directors of the Company and Ventas. The complaint alleges that the defendants damaged the Company and Ventas by engaging in violations of the securities laws, engaging in insider trading, fraud and securities fraud and damaging the reputation of the Company and Ventas. The plaintiff asserts that such actions were taken deliberately, in bad faith and constitute breaches of the defendants duties of loyalty and due care. The complaint alleges that certain of the Companys and Ventass former executive officers during a specified time frame violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), by, among other things, issuing to the investing public a series of false and misleading statements concerning Ventass then current operations and the inherent value of its common stock. The complaint further alleges that as a result of these purported false and misleading statements concerning Ventass revenues and successful acquisitions, the price of its common stock was artificially inflated. In particular, the complaint alleges that the defendants issued false and misleading financial statements during the first, second and third calendar quarters of 1997 which misrepresented and understated the impact that changes in Medicare reimbursement policies would have on Ventass core services and profitability. The complaint further alleges that the defendants issued a series of materially false statements concerning the purportedly successful integration of Ventass acquisitions and prospective earnings per share for 1997 and 1998, which the defendants knew lacked any reasonable basis and were not being achieved. The suit seeks unspecified damages, interest, punitive damages, reasonable attorneys fees, expert witness fees and other costs, and any extraordinary equitable and/or injunctive relief permitted by law or equity to assure that the Company and Ventas have an effective remedy. In October 2002, the defendants filed a motion to dismiss for failure to prosecute the case. The court granted the motion to dismiss but the plaintiff subsequently moved the court to vacate the dismissal. The defendants filed an opposition to the plaintiffs motion to vacate the dismissal, but in August 2003 the court reinstated the lawsuit. In September 2003, the Company filed a renewed motion to dismiss, as to all defendants, based on the plaintiffs failure to make a demand for remedy upon the appropriate board of directors. The Company also has argued that it is an improper party to this lawsuit. In March 2004, the judge who had been presiding over this lawsuit recused himself because of a possible conflict of interest. The case was then assigned to another judge, who has not yet ruled on the renewed motion to dismiss. The Company believes that the allegations in the complaint are without merit and intends to defend this action vigorously.
A putative class action lawsuit entitled Massachusetts State Carpenters Pension Fund v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-600-J, was filed against the Company and certain of the Companys current and former officers and directors on October 16, 2002, in the United States District Court for
16
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 LITIGATION (Continued)
the Western District of Kentucky, Louisville Division. The complaint alleges that from August 14, 2001 to October 10, 2002 the defendants violated Sections 10(b) and 20(a) of the Exchange Act by, among other things, issuing to the investing public a series of allegedly false and misleading statements that inaccurately indicated that the Company was successfully emerging from bankruptcy and implementing a growth plan. In particular, the complaint alleges that these statements were materially false and misleading because they failed to disclose that the 2001 Florida tort reform legislation had resulted in a marked increase in claims against the Company in Florida, and also because the statements reflected a materially understated reserve for professional liability costs. The complaint further alleges that as a result of the purportedly false and misleading statements, the price of the Companys common stock was artificially inflated, the investing public was deceptively induced to purchase the stock at those inflated prices, and the defendants profited by selling shares at those prices. The suit seeks an unspecified amount of monetary damages plus interest, reasonable attorneys fees and other costs, and any other equitable, injunctive or other relief that the court deems just and proper. After October 16, 2002, several other purported class action complaints, which assert essentially similar allegations as those contained in the Massachusetts State Carpenters Pension Fund complaint discussed above, also were filed against the same defendants in the United States District Court for the Western District of Kentucky, Louisville Division, including but not limited to the cases entitled Mark Ramsdell v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-625-R; Paula Hillenbrand v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-654-R; Marilyn Buck v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-732-S; and Eastside Holdings Ltd. v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-617-H. All of these actions were consolidated by the District Court. In May 2003, the defendants filed a motion to dismiss the consolidated lawsuits, and on January 9, 2004, the District Court granted that motion with prejudice. The plaintiffs did not appeal the District Courts dismissal, which became final on February 12, 2004 when the appeal period expired.
Three shareholder derivative suits entitled Elizabeth Sommerfeld v. Kindred Healthcare, Inc., et al., Civil Action No. 02 CI 08476; Ilse Denchfield v. Kindred Healthcare, Inc., et al., Civil Action No. 02 CI 09475; and Fedorka v. Edward L. Kuntz, et al., Civil Action No. 03 CI 02015, were filed in November 2002, December 2002 and March 2003, respectively, in the Jefferson Circuit Court in Kentucky. In May 2003, the Fedorka plaintiffs voluntarily dismissed their state court derivative lawsuit and refiled that lawsuit in the United States District Court for the Western District of Kentucky, Louisville Division, Civil Action No. 3:03CV-272-S. On May 14, 2003, a separate but nearly identical derivative lawsuit, Tin Win v. Edward L. Kuntz, et al., Civil Action No. 3:03CV-292-J, also was filed in the United States District Court for the Western District of Kentucky, Louisville Division. On May 12, 2003, the Jefferson Circuit Court entered an order consolidating the Sommerfeld and Denchfield derivative actions and staying all proceedings in the consolidated derivative action pending the U.S. District Courts ruling on the defendants motion to dismiss the consolidated putative class action. On July 24, 2003, the District Court entered a similar order concerning the Fedorka and Win derivative actions. The federal and state derivative complaints, which recite purported facts substantially similar to those set forth in the Massachusetts State Carpenters Pension Fund putative class action and the other securities fraud class actions discussed above, attempt to assert a claim against the individual defendants for breach of fiduciary duties for insider selling and misappropriation of information. Specifically, the complaints allege that each of the individual defendants knew that the price of the Companys common stock would dramatically decrease when the Companys inadequate reserves for professional liability risks were disclosed and that the individual defendants sales of the Companys common stock with knowledge of this material non-public information constituted a breach of their fiduciary duties of loyalty and good faith. The suits seek to impose a constructive trust in favor of the Company for the amount of profits each of the individual defendants or their firms may have received from their November 2001 sales of the Companys common stock, as well as attorneys fees and other expenses. The Company believes that the allegations in the complaints are without merit and intends to defend these actions vigorously.
17
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 LITIGATION (Continued)
The Company was previously informed by the Kentucky Attorney Generals Office that the Company and certain of its present and former officers and employees are the subject of several investigations into care issues at the Companys Kentucky-based nursing facilities that could lead to civil and/or criminal charges against the Company and/or the individual officers and employees. Subsequently, the Company was informed that the Kentucky Attorney Generals Office had transferred these investigations to the Fayette County, Kentucky prosecutor as a special prosecutor with statewide jurisdiction. On February 10, 2004, the Company announced a civil settlement with the Kentucky Attorney Generals Office to resolve all issues associated with these investigations on terms which were not material to the Companys consolidated financial results.
In connection with the Spin-off, liabilities arising from various legal proceedings and other actions were assumed by the Company and the Company agreed to indemnify Ventas against any losses, including any costs or expenses, it may incur arising out of or in connection with such legal proceedings and other actions. The indemnification provided by the Company also covers losses, including costs and expenses, which may arise from any future claims asserted against Ventas based on the former healthcare operations of Ventas. In connection with the Companys indemnification obligation, the Company assumed the defense of various legal proceedings and other actions. Under the Plan of Reorganization, the Company agreed to continue to fulfill the Companys indemnification obligations arising from the Spin-off.
The Company is a party to various legal actions (some of which are not insured), and regulatory investigations and sanctions arising in the ordinary course of its business. The Company is unable to predict the ultimate outcome of pending litigation and regulatory investigations. In addition, there can be no assurance that the U.S. Department of Justice (the DOJ), the Centers for Medicare and Medicaid Services (CMS) or other federal and state enforcement and regulatory agencies will not initiate additional investigations related to the Companys businesses in the future, nor can there be any assurance that the resolution of any litigation or investigations, either individually or in the aggregate, would not have a material adverse effect on the Companys financial position, results of operations and liquidity. In addition, the litigation and investigations discussed above (as well as future litigation and investigations) are expected to consume the time and attention of management and may have a disruptive effect upon the Companys operations.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement
This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements regarding the Companys expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as anticipate, approximate, believe, plan, estimate, expect, project, could, should, will, intend, may and other similar expressions, are forward-looking statements.
Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Companys expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based on managements current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Companys actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Companys filings with the SEC. Factors that may affect the Companys plans or results include, without limitation:
| the Companys ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, |
| the Companys ability to meet its rental and debt service obligations, |
| adverse developments with respect to the Companys results of operations or liquidity, |
| the Companys ability to attract and retain key executives and other healthcare personnel, |
| increased operating costs due to shortages in qualified nurses and other healthcare personnel, |
| the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, |
| changes in the reimbursement rates or methods of payment from third party payors, including the Medicare and Medicaid programs, and changes arising from the Medicare prospective payment system for long-term acute care hospitals and the recently enacted Medicare Prescription Drug, Improvement, and Modernization Act of 2003, |
| national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services, |
| the Companys ability to control costs, including labor and employee benefit costs, |
| the Companys ability to comply with the terms of its Corporate Integrity Agreement, |
| the Companys ability to integrate operations of acquired facilities, |
| the increase in the costs of defending and insuring against alleged professional liability claims and the Companys ability to predict the estimated costs related to such claims, |
| the Companys ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims, and |
| the Companys ability to successfully dispose of unprofitable facilities. |
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cautionary Statement (Continued)
Many of these factors are beyond the Companys control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.
General
The business segment data in Note 5 of the accompanying Notes to Condensed Consolidated Financial Statements should be read in conjunction with the following discussion and analysis.
The Company is a healthcare services company that operates hospitals, nursing centers, institutional pharmacies and a contract rehabilitation services business. At March 31, 2004, the Companys hospital division operated 68 hospitals (5,323 licensed beds) in 23 states. The Companys health services division operated 254 nursing centers (32,812 licensed beds) in 30 states. The Companys pharmacy division operated an institutional pharmacy business with 30 pharmacies in 19 states. The Company also operated a contract rehabilitation services business which began operating as a separate division on January 1, 2004.
On January 1, 2004, the Company completed the Rehabilitation Services Reorganization. The historical operating results of the Companys nursing center and rehabilitation services segments have not been restated to conform with the new business alignment.
During 2003, the Company effected certain strategic transactions to improve its future operating results. These transactions included the divestiture of all of its Florida and Texas nursing center operations, the acquisition for resale of eight additional nursing centers and two hospitals formerly leased from Ventas and certain other dispositions and contract terminations. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets not sold at March 31, 2004 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet. See Note 2 of the accompanying Notes to Condensed Consolidated Financial Statements for a summary of discontinued operations.
On April 20, 2001, the Company and its subsidiaries emerged from proceedings under Chapter 11 of Title 11 of the Bankruptcy Code pursuant to the terms of the Plan of Reorganization.
Critical Accounting Policies
Managements discussion and analysis of financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience and on various other assumptions that management believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
The Company believes the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Revenue recognition
The Company has agreements with third party payors that provide for payments to each of its operating divisions. These payment arrangements may be based upon prospective rates, reimbursable costs, established charges, discounted charges or per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from Medicare, Medicaid, other third party payors and individual patients for services rendered. Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon final settlements.
In the first quarter of 2004, the Company recorded income of approximately $2 million related to settlements of prior year hospital Medicare cost reports. See Note 3 of the accompanying Notes to Condensed Consolidated Financial Statements.
Collectibility of 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. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.
In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type, the status of ongoing disputes with third party payors and general industry conditions. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.
The provision for doubtful accounts totaled $8 million and $5 million for the three months ended March 31, 2004 and 2003, respectively.
Allowances for insurance risks
The Company insures a substantial portion of its professional liability and workers compensation risks through a wholly owned limited purpose insurance subsidiary. Provisions for loss for these risks are based upon independent actuarially determined estimates.
The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These liabilities are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. To the extent that subsequent expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.
Provisions for loss for professional liability risks retained by the Companys limited purpose insurance subsidiary have been discounted based upon managements estimate of long-term investment yields and independent actuarial estimates of claim payment patterns. The interest rate used to discount funded professional liability risks in each period presented was 5%. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. The allowance for
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Allowances for insurance risks (Continued)
professional liability risks recorded in the accompanying unaudited condensed consolidated financial statements aggregated $292 million at March 31, 2004 and $296 million at December 31, 2003. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $308 million at March 31, 2004 and $311 million at December 31, 2003.
During the past two years, the Company has recorded substantial cost increases related to professional liability risks. A portion of these costs were not funded into the Companys limited purpose insurance subsidiary until the following fiscal year. Based upon actuarially determined estimates, the Company funded approximately $5 million into its limited purpose insurance subsidiary in March 2004 and intends to fund an additional $10 million into its limited purpose insurance subsidiary by December 31, 2004 to satisfy fiscal 2003 funding requirements. In March 2003, the Company funded approximately $63 million into its limited purpose insurance subsidiary to satisfy fiscal 2002 funding requirements.
Changes in the number of professional liability claims and the increasing cost to settle these claims significantly impact the allowance for professional liability risks. A relatively small variance between the Companys estimated and ultimate actual number of claims or average cost per claim could have a material impact, either favorable or unfavorable, on the adequacy of the allowance for professional liability risks. For example, a 1% variance in the allowance for professional liability risks at March 31, 2004 would impact the Companys operating income by approximately $3 million.
The provision for professional liability risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $23 million and $31 million for the three months ended March 31, 2004 and 2003, respectively. While the Company expects that professional liability costs for 2004 may be higher than the costs recorded in 2003, management believes that the annual growth rates for professional liability costs appear to be moderating.
Provisions for loss for workers compensation risks retained by the Companys limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually. The allowance for workers compensation risks aggregated $66 million at March 31, 2004 and $64 million at December 31, 2003. The provision for loss for workers compensation risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $12 million for both the three months ended March 31, 2004 and 2003.
See Note 6 of the accompanying Notes to Condensed Consolidated Financial Statements.
Accounting for income taxes
The provision for income taxes is based upon the Companys estimate of taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating and capital loss carryforwards. A valuation allowance is provided for these deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
There are significant uncertainties with respect to professional liability costs and future government payments to both the Companys hospitals and nursing centers which could affect materially the realization of
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Accounting for income taxes (Continued)
certain deferred tax assets. Accordingly, the Company has recognized deferred tax assets to the extent it is more likely than not they will be realized. A valuation allowance is provided for deferred tax assets to the extent the realizability of the deferred tax assets is uncertain. The Company recognized deferred tax assets totaling $182 million at March 31, 2004 and December 31, 2003.
In 2003, the pre-reorganization deferred tax assets realized, amounts which have been considered more likely than not to be realized by the Company, and the resolution of certain income tax contingencies fully eliminated the goodwill recorded in connection with the Plan of Reorganization. Since the Companys emergence from bankruptcy, goodwill has been reduced by $152 million related primarily to the recognition of pre-reorganization deferred tax assets. After the fresh-start accounting goodwill was eliminated in full in 2003, the excess of approximately $27 million was treated as an increase to capital in excess of par value.
The Company is subject to various income tax audits at the federal and state levels in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties. While the Company believes its tax positions are appropriate, there can be no assurance that the various authorities engaged in the examination of its income tax returns will not challenge the Companys positions.
Valuation of long-lived assets and goodwill
The Company regularly reviews the carrying value of certain long-lived assets and the related identifiable intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period is necessary. If circumstances suggest the recorded amounts cannot be recovered based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to fair value.
In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual facility is considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Companys ability to renew the lease or divest a particular property), the Company defines the group of facilities under the master lease as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease are aggregated for purposes of evaluating the carrying values of long-lived assets.
In connection with SFAS No. 142, Goodwill and Other Intangible Assets, the Company is required to perform an impairment test for goodwill at least annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. The Company performs its annual impairment test at the end of each year. No impairment charge was recorded at December 31, 2003 in connection with the annual impairment test.
Results of Operations Continuing Operations
Hospital Division
Revenues increased 5% to $348 million in the first quarter of 2004 from $332 million in the same period a year ago, primarily as a result of growth in admissions and new hospital development. On a same-store basis, revenues increased 3% compared to the same period a year ago.
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continuing Operations (Continued)
Hospital Division (Continued)
Admissions rose 6% in the first quarter of 2004 compared to the same period a year ago, while patient days declined 6% in the first quarter of 2004 compared to the same period last year. Average length of stay declined to 32 days in the first quarter of 2004 compared to 36 days in the same period a year ago. On a same-store basis, admissions rose 5% in the first quarter of 2004 compared to the same period a year ago, while patient days declined 7% in the first quarter of 2004 compared to the same period a year ago.
Hospital operating income rose 14% to $80 million in the first quarter of 2004 from $70 million in the same period a year ago. Operating margins were 23.0% in the first quarter of 2004 compared to 21.3% in the first quarter of 2003.
Growth in hospital operating income was primarily attributable to growth in admissions, improved labor cost efficiencies and a $2 million favorable Medicare cost report settlement in the first quarter of 2004. Wage and benefit costs (including contract labor) increased 2% to $173 million in the first quarter of 2004 from $169 million in the same period a year ago. Average wage rates rose 3% in the first quarter of 2004 compared to the same period last year, while contract labor costs of $7 million in the first quarter of 2004 were relatively unchanged from the same period a year ago.
Professional liability costs were $6 million in the first quarter of 2004 compared to $7 million in the same period a year ago.
Health Services Division
Revenues increased 8% to $445 million in the first quarter of 2004 compared to $411 million in the same period a year ago. Patient days on both a reported and same-store basis were relatively unchanged in the first quarter of 2004 compared to the first quarter of 2003. Medicare census increased 9% in the first quarter of 2004 compared to the same period a year ago, while Medicaid and private census both declined 1% in the first quarter of 2004 compared to the same period a year ago.
Aggregate revenues per patient day increased 8% in the first quarter of 2004 compared to the same period in 2003. Medicare rates grew 10% in the first quarter of 2004 compared to the same period last year primarily as a result of rate adjustments that became effective on October 1, 2003. Medicaid and private rates both grew 4% in the first quarter of 2004 compared to the same period a year ago.
Nursing center operating income increased 14% to $49 million in the first quarter of 2004 compared to $43 million in the first quarter of 2003. Operating margins increased to 11.1% in the first quarter of 2004 compared to 10.6% in the first quarter of 2003.
In connection with the Rehabilitation Services Reorganization, the Company transferred approximately 4,000 employees from its nursing centers to the new rehabilitation division. As a result, nursing center wage and benefit costs (including contract labor) declined 3% to $242 million in the first quarter of 2004 compared to $251 million for the same period a year ago. In addition, average hourly wage rates declined 1% in the first quarter of 2004 compared to the same period a year ago, while employee benefit costs declined 3% for the same time period. Intercompany charges for rehabilitation services provided by the rehabilitation division to the Companys nursing centers in the first quarter of 2004 totaled $37 million.
Professional liability costs totaled $17 million in the first quarter of 2004 compared to $24 million for the same period a year ago. In the first quarter of 2003, the Company recorded approximately $7 million of
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continuing Operations (Continued)
Health Services Division (Continued)
additional professional liability costs in its nursing center business related to changes in estimates of prior year costs.
Rehabilitation Division
Revenues increased to $53 million in the first quarter of 2004 (of which approximately $16 million related to the Companys non-affiliated customers) from $8 million for the same period a year ago, while operating income totaled $9 million in the first quarter of 2004 compared to operating losses of $1 million in the first quarter of 2003. The increase in revenues and operating income in the first quarter of 2004 was primarily attributable to the Rehabilitation Services Reorganization. Intercompany revenues for services provided to the Companys nursing centers totaled $37 million in the first quarter of 2004.
Pharmacy Division
Revenues increased 21% to $80 million in the first quarter of 2004 compared to $66 million for the first quarter a year ago. The increased revenues resulted primarily from price increases, increased utilization of higher priced drugs and the growth in the number of non-affiliated customers. At March 31, 2004, the Company provided pharmacy services to nursing facilities containing 63,300 licensed beds, including 28,200 licensed beds that it operates. At March 31, 2003, the Company provided pharmacy services to nursing facilities containing 58,200 licensed beds, including 29,800 licensed beds that it operates.
Pharmacy operating income totaled $8 million in the first quarter of 2004 compared to $7 million in the same period a year ago. Operating margins were 9.5% in the first quarter of 2004 compared to 10.1% for the same period a year ago. The cost of goods sold as a percentage of revenues rose to 64.7% in the first quarter of 2004 compared to 62.4% for the same period a year ago, primarily as a result of Medicaid reimbursement reductions in certain states and competitive customer pricing.
Corporate Overhead
Operating income for the Companys operating divisions excludes allocations of corporate overhead. These costs aggregated $27 million in the first quarters of both 2004 and 2003. As a percentage of consolidated revenues, corporate overhead totaled 3.1% in the first quarter of 2004 compared to 3.3% for the same period a year ago.
Corporate expenses included the operating losses of the Companys limited purpose insurance subsidiary of $2 million in the first quarters of both 2004 and 2003.
Capital Costs
Rent expense increased 2% to $64 million in the first quarter of 2004 compared to $63 million for the same period a year ago. A substantial portion of the increase resulted from contractual inflation increases, including those associated with the master lease agreements with Ventas.
Depreciation expense increased 15% to $22 million in the first quarter of 2004 compared to $19 million for the same period a year ago. The increase was primarily a result of the Companys ongoing capital expenditure program.
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations Continuing Operations (Continued)
Capital Costs (Continued)
Interest expense aggregated $4 million in the first quarter of 2004 compared to $3 million for the same period a year ago. For accounting purposes, the $44 million present value rent obligation to Ventas incurred in connection with the divestiture of the Companys Florida and Texas nursing centers bears interest at a rate of 11%.
Investment income related to the Companys excess cash balances and insurance subsidiary investments totaled $1 million in the first quarter of 2004 compared to $2 million for the same period a year ago.
Consolidated Results
The Company reported income from continuing operations before income taxes of $28 million for the first quarter of 2004 compared to $7 million for the first quarter of 2003. Income from continuing operations in the first quarter of 2004 aggregated $16 million compared to $3 million in the first quarter of 2003.
The effective income tax rate for the first quarter of 2004 was 42.1% as compared to 63.4% in the first quarter of 2003. The lower effective income tax rate in the first quarter of 2004 resulted primarily from a higher amount of estimated 2004 annual pretax income at the end of the first quarter of 2004 as compared to the estimated 2003 annual pretax income at the end of the first quarter of 2003.
Discontinued Operations
Net operating losses for discontinued operations decreased to $2 million in the first quarter of 2004 from $16 million in the first quarter of 2003. Professional liability costs in the first quarter of 2004 approximated $1 million compared to $23 million in the first quarter of 2003. See Notes 2 and 6 of the accompanying Notes to Condensed Consolidated Financial Statements.
Liquidity
Cash flows used in operations (including discontinued operations) aggregated $24 million for the three months ended March 31, 2004 compared to $22 million for the same period a year ago. Operating cash flows in both periods were negatively impacted by growth in accounts receivable. Collections of accounts receivable are expected to improve in the second quarter of 2004. During both periods, the Company maintained sufficient liquidity to fund its ongoing capital expenditure program.
Cash and cash equivalents totaled $18 million at March 31, 2004 compared to $67 million at December 31, 2003. Based upon existing cash levels, expected operating cash flows and capital spending, and the availability of borrowings under the Companys revolving credit facility, management believes that the Company has the necessary financial resources to satisfy expected short-term and long-term liquidity needs.
As previously discussed, the Company funded approximately $5 million into its limited purpose insurance subsidiary in March 2004 and intends to fund an additional $10 million into its limited purpose insurance subsidiary by December 31, 2004 to satisfy fiscal 2003 funding requirements. In March 2003, the Company funded approximately $63 million into its limited purpose insurance subsidiary to satisfy fiscal 2002 funding requirements.
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
Long-term debt at March 31, 2004 aggregated $155 million (including $17 million of borrowings under the Companys revolving credit facility) compared to $139 million at December 31, 2003. The Company expects that operating cash flows in the second and third quarters of 2004 will be sufficient to repay all outstanding revolving credit borrowings at March 31, 2004. Available borrowings under the Companys revolving credit facility aggregated $84 million at March 31, 2004. The Company was in compliance with the terms of its revolving credit facility and senior secured notes at March 31, 2004.
In November 2003, the Company entered into an agreement to purchase ten unprofitable facilities that were leased from Ventas for $85 million in cash. The Company intends to dispose of these properties as soon as practicable. Proceeds from these transactions are expected to approximate $27 million.
Capital Resources
Capital expenditures totaled $18 million for the three months ended March 31, 2004 compared to $11 million for the three months ended March 31, 2003. Capital expenditures (excluding acquisitions) could approximate $80 million in 2004. Management believes that its capital expenditure program is adequate to improve and equip existing facilities.
The Companys capital expenditure program is financed generally through the use of operating cash flows. At March 31, 2004, the estimated cost to complete and equip construction in progress approximated $16 million.
The terms of the Companys revolving credit facility and senior secured notes include certain covenants which limit the Companys annual capital expenditures. In addition, these agreements limit the ability of the Companys subsidiaries to transfer funds to the parent company and generally prohibit repurchases of common stock and the payment of cash dividends.
Other Information
Effects of Inflation and Changing Prices
The Company derives a substantial portion of its revenues from the Medicare and Medicaid programs. In recent years, significant cost containment measures enacted by Congress and certain state legislatures have limited the Companys ability to recover its cost increases through increased pricing of its healthcare services. Medicare revenues in the Companys long-term acute care hospitals and nursing centers are subject to fixed payments under the Medicare prospective payment systems. Medicaid reimbursement rates in many states in which the Company operates nursing centers also are based on fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services.
Most of the Companys hospitals have been operating under the Medicare prospective payment system since September 1, 2003. Operating results under this system are subject to changes in patient acuity and expense levels in the Companys hospitals. These factors, among others, are subject to significant change. Slight variations in patient acuity could significantly change Medicare revenues generated under the Medicare prospective payment system. In addition, the Companys hospitals may not be able to appropriately adjust their operating costs as patient acuity levels change. As previously discussed, Medicare reimbursements to the Companys hospitals are based on a fixed payment system. Operating margins in the hospital division could be negatively impacted if the Company is unable to control its operating costs. As a result of these uncertainties, the Company cannot predict the ultimate long-term impact of the Medicare prospective payment system on its
27
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of Inflation and Changing Prices (Continued)
hospital operating results and the Company can make no assurances that such regulations or operational changes resulting from these regulations will not have a material adverse impact on its financial position, results of operations or liquidity. In addition, the Company can make no assurances that the new system will not have a material adverse effect on revenues from non-government third party payors. Various factors, including a reduction in average length of stay, could negatively impact revenues from non-government third party payors.
Management believes that the Companys operating margins may continue to be under pressure, particularly in the Companys nursing center business, as the growth in operating expenses, particularly professional liability, labor and employee benefits costs, exceeds payment increases from third party payors. In addition, as a result of competitive pressures, the Companys ability to maintain operating margins through price increases to private patients is limited.
Litigation
The Company is a party to certain material litigation. See Note 8 of the accompanying Notes to Condensed Consolidated Financial Statements.
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement of Operations (a)
(Unaudited)
(In thousands, except per share amount)
2003 Quarters |
Year |
First Quarter |
||||||||||||||||||||||
First |
Second |
Third |
Fourth |
|||||||||||||||||||||
Revenues |
$ | 802,158 | $ | 813,848 | $ | 837,035 | $ | 830,978 | $ | 3,284,019 | $ | 871,262 | ||||||||||||
Salaries, wages and benefits |
460,752 | 462,320 | 469,112 | 473,263 | 1,865,447 | 492,071 | ||||||||||||||||||
Supplies |
104,182 | 104,440 | 107,701 | 113,293 | 429,616 | 116,733 | ||||||||||||||||||
Rent |
63,078 | 64,215 | 64,783 | 64,230 | 256,306 | 64,459 | ||||||||||||||||||
Other operating expenses |
146,839 | 140,776 | 144,368 | 131,524 | 563,507 | 145,406 | ||||||||||||||||||
Depreciation |
19,195 | 19,927 | 20,407 | 21,328 | 80,857 | 22,046 | ||||||||||||||||||
Interest expense |
2,888 | 2,992 | 1,054 | 3,388 | 10,322 | 3,656 | ||||||||||||||||||
Investment income |
(1,635 | ) | (1,676 | ) | (1,333 | ) | (1,491 | ) | (6,135 | ) | (1,218 | ) | ||||||||||||
795,299 | 792,994 | 806,092 | 805,535 | 3,199,920 | 843,153 | |||||||||||||||||||
Income from continuing operations before reorganization items and income taxes |
6,859 | 20,854 | 30,943 | 25,443 | 84,099 | 28,109 | ||||||||||||||||||
Reorganization items |
| | | 1,010 | 1,010 | | ||||||||||||||||||
Income from continuing operations before income taxes |
6,859 | 20,854 | 30,943 | 26,453 | 85,109 | 28,109 | ||||||||||||||||||
Provision for income taxes |
4,348 | 7,710 | 12,629 | 10,968 | 35,655 | 11,834 | ||||||||||||||||||
Income from continuing operations |
2,511 | 13,144 | 18,314 | 15,485 | 49,454 | 16,275 | ||||||||||||||||||
Discontinued operations, net of income taxes: |
||||||||||||||||||||||||
Loss from operations |
(15,635 | ) | (20,555 | ) | (5,780 | ) | (3,407 | ) | (45,377 | ) | (2,435 | ) | ||||||||||||
Loss on divestiture of operations |
| (36,019 | ) | (827 | ) | (42,567 | ) | (79,413 | ) | | ||||||||||||||
Net income (loss) |
$ | (13,124 | ) | $ | (43,430 | ) | $ | 11,707 | $ | (30,489 | ) | $ | (75,336 | ) | $ | 13,840 | ||||||||
Earnings (loss) per common share: |
||||||||||||||||||||||||
Basic: |
||||||||||||||||||||||||
Income from continuing operations |
$ | 0.07 | $ | 0.38 | $ | 0.53 | $ | 0.44 | $ | 1.42 | $ | 0.46 | ||||||||||||
Discontinued operations: |
||||||||||||||||||||||||
Loss from operations |
(0.45 | ) | (0.59 | ) | (0.17 | ) | (0.10 | ) | (1.30 | ) | (0.07 | ) | ||||||||||||
Loss on divestiture of operations |
| (1.04 | ) | (0.02 | ) | (1.21 | ) | (2.28 | ) | | ||||||||||||||
Net income (loss) |
$ | (0.38 | ) | $ | (1.25 | ) | $ | 0.34 | $ | (0.87 | ) | $ | (2.16 | ) | $ | 0.39 | ||||||||
Diluted: |
||||||||||||||||||||||||
Income from continuing operations |
$ | 0.07 | $ | 0.38 | $ | 0.52 | $ | 0.38 | $ | 1.41 | $ | 0.38 | ||||||||||||
Discontinued operations: |
||||||||||||||||||||||||
Loss from operations |
(0.45 | ) | (0.59 | ) | (0.17 | ) | (0.08 | ) | (1.29 | ) | (0.06 | ) | ||||||||||||
Loss on divestiture of operations |
| (1.04 | ) | (0.02 | ) | (1.05 | ) | (2.27 | ) | | ||||||||||||||
Net income (loss) |
$ | (0.38 | ) | $ | (1.25 | ) | $ | 0.33 | $ | (0.75 | ) | $ | (2.15 | ) | $ | 0.32 | ||||||||
Shares used in computing earnings (loss) per common share: |
||||||||||||||||||||||||
Basic |
34,755 | 34,813 | 34,885 | 35,062 | 34,880 | 35,414 | ||||||||||||||||||
Diluted |
34,767 | 34,828 | 35,143 | 40,685 | 35,047 | 42,721 |
(a) | Share and per share data for all periods presented have been adjusted retroactively to reflect a 2-for-1 stock split to be distributed in May 2004. |
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands)
2003 Quarters |
Year |
First Quarter |
||||||||||||||||||||||
First |
Second |
Third |
Fourth |
|||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Hospital division |
$ | 331,862 | $ | 338,360 | $ | 341,368 | $ | 325,619 | $ | 1,337,209 | $ | 348,648 | ||||||||||||
Health services division (a) |
410,832 | 416,768 | 431,978 | 433,532 | 1,693,110 | 444,994 | ||||||||||||||||||
Rehabilitation division (a) |
8,502 | 8,795 | 12,065 | 14,121 | 43,483 | 52,699 | ||||||||||||||||||
Pharmacy division |
66,126 | 64,850 | 67,075 | 74,382 | 272,433 | 79,746 | ||||||||||||||||||
817,322 | 828,773 | 852,486 | 847,654 | 3,346,235 | 926,087 | |||||||||||||||||||
Eliminations: |
||||||||||||||||||||||||
Pharmacy |
(15,164 | ) | (14,925 | ) | (15,451 | ) | (16,676 | ) | (62,216 | ) | (18,136 | ) | ||||||||||||
Rehabilitation (a) |
| | | | | (36,689 | ) | |||||||||||||||||
(15,164 | ) | (14,925 | ) | (15,451 | ) | (16,676 | ) | (62,216 | ) | (54,825 | ) | |||||||||||||
$ | 802,158 | $ | 813,848 | $ | 837,035 | $ | 830,978 | $ | 3,284,019 | $ | 871,262 | |||||||||||||
Income from continuing operations: |
||||||||||||||||||||||||
Operating income (loss): |
||||||||||||||||||||||||
Hospital division |
$ | 70,538 | $ | 75,455 | $ | 87,171 | $ | 73,702 | $ | 306,866 | $ | 80,066 | ||||||||||||
Health services division (a) |
43,424 | 57,235 | 54,944 | 64,436 | 220,039 | 49,469 | ||||||||||||||||||
Rehabilitation division (a) |
(959 | ) | (750 | ) | 261 | (315 | ) | (1,763 | ) | 8,519 | ||||||||||||||
Pharmacy division |
6,702 | 6,133 | 6,150 | 7,508 | 26,493 | 7,609 | ||||||||||||||||||
Corporate: |
||||||||||||||||||||||||
Overhead |
(26,713 | ) | (28,354 | ) | (28,670 | ) | (28,898 | ) | (112,635 | ) | (26,834 | ) | ||||||||||||
Insurance subsidiary |
(2,607 | ) | (3,407 | ) | (4,002 | ) | (3,535 | ) | (13,551 | ) | (1,777 | ) | ||||||||||||
(29,320 | ) | (31,761 | ) | (32,672 | ) | (32,433 | ) | (126,186 | ) | (28,611 | ) | |||||||||||||
90,385 | 106,312 | 115,854 | 112,898 | 425,449 | 117,052 | |||||||||||||||||||
Reorganization items |
| | | 1,010 | 1,010 | | ||||||||||||||||||
Operating income |
90,385 | 106,312 | 115,854 | 113,908 | 426,459 | 117,052 | ||||||||||||||||||
Rent |
(63,078 | ) | (64,215 | ) | (64,783 | ) | (64,230 | ) | (256,306 | ) | (64,459 | ) | ||||||||||||
Depreciation |
(19,195 | ) | (19,927 | ) | (20,407 | ) | (21,328 | ) | (80,857 | ) | (22,046 | ) | ||||||||||||
Interest, net |
(1,253 | ) | (1,316 | ) | 279 | (1,897 | ) | (4,187 | ) | (2,438 | ) | |||||||||||||
Income from continuing operations before income taxes |
6,859 | 20,854 | 30,943 | 26,453 | 85,109 | 28,109 | ||||||||||||||||||
Provision for income taxes |
4,348 | 7,710 | 12,629 | 10,968 | 35,655 | 11,834 | ||||||||||||||||||
$ | 2,511 | $ | 13,144 | $ | 18,314 | $ | 15,485 | $ | 49,454 | $ | 16,275 | |||||||||||||
(a) | Financial data presented for periods prior to January 1, 2004 have not been restated to reflect the Rehabilitation Services Reorganization. |
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
(In thousands)
2003 Quarters |
Year |
First Quarter | ||||||||||||||||
First |
Second |
Third |
Fourth |
|||||||||||||||
Rent: |
||||||||||||||||||
Hospital division |
$ | 23,284 | $ | 23,706 | $ | 23,441 | $ | 22,753 | $ | 93,184 | $ | 22,844 | ||||||
Health services division (a) |
39,031 | 39,808 | 40,459 | 40,530 | 159,828 | 40,283 | ||||||||||||
Rehabilitation division (a) |
69 | 95 | 123 | 185 | 472 | 611 | ||||||||||||
Pharmacy division |
630 | 547 | 698 | 703 | 2,578 | 662 | ||||||||||||
Corporate |
64 | 59 | 62 | 59 | 244 | 59 | ||||||||||||
$ | 63,078 | $ | 64,215 | $ | 64,783 | $ | 64,230 | $ | 256,306 | $ | 64,459 | |||||||
Depreciation: |
||||||||||||||||||
Hospital division |
$ | 7,054 | $ | 7,450 | $ | 7,684 | $ | 8,257 | $ | 30,445 | $ | 8,464 | ||||||
Health services division (a) |
6,373 | 6,569 | 6,688 | 6,740 | 26,370 | 6,893 | ||||||||||||
Rehabilitation division (a) |
16 | 20 | 22 | 25 | 83 | 33 | ||||||||||||
Pharmacy division |
517 | 539 | 561 | 560 | 2,177 | 530 | ||||||||||||
Corporate |
5,235 | 5,349 | 5,452 | 5,746 | 21,782 | 6,126 | ||||||||||||
$ | 19,195 | $ | 19,927 | $ | 20,407 | $ | 21,328 | $ | 80,857 | $ | 22,046 | |||||||
Capital expenditures, excluding acquisitions (including discontinued operations): |
||||||||||||||||||
Hospital division |
$ | 2,822 | $ | 4,133 | $ | 5,773 | $ | 13,388 | $ | 26,116 | $ | 5,406 | ||||||
Health services division (a) |
3,222 | 6,375 | 9,768 | 9,804 | 29,169 | 8,450 | ||||||||||||
Rehabilitation division (a) |
51 | 47 | 35 | 11 | 144 | 47 | ||||||||||||
Pharmacy division |
616 | 522 | 815 | 2,254 | 4,207 | 773 | ||||||||||||
Corporate: |
||||||||||||||||||
Information systems |
3,207 | 5,992 | 4,071 | 8,223 | 21,493 | 2,651 | ||||||||||||
Other |
647 | 408 | 361 | 1,551 | 2,967 | 554 | ||||||||||||
$ | 10,565 | $ | 17,477 | $ | 20,823 | $ | 35,231 | $ | 84,096 | $ | 17,881 | |||||||
(a) | Financial data presented for periods prior to January 1, 2004 have not been restated to reflect the Rehabilitation Services Reorganization. |
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
2003 Quarters |
Year |
First Quarter | ||||||||||||||||
First |
Second |
Third |
Fourth |
|||||||||||||||
Hospital data: |
||||||||||||||||||
End of period data: |
||||||||||||||||||
Number of hospitals |
63 | 63 | 64 | 66 | 68 | |||||||||||||
Number of licensed beds |
5,076 | 5,098 | 5,129 | 5,219 | 5,323 | |||||||||||||
Revenue mix % (a): |
||||||||||||||||||
Medicare |
60 | 59 | 62 | 63 | 61 | 66 | ||||||||||||
Medicaid |
8 | 8 | 7 | 8 | 8 | 7 | ||||||||||||
Private and other |
32 | 33 | 31 | 29 | 31 | 27 | ||||||||||||
Admissions: |
||||||||||||||||||
Medicare |
6,612 | 6,346 | 6,053 | 6,681 | 25,692 | 6,900 | ||||||||||||
Medicaid |
648 | 604 | 670 | 661 | 2,583 | 715 | ||||||||||||
Private and other |
1,281 | 1,322 | 1,333 | 1,359 | 5,295 | 1,460 | ||||||||||||
8,541 | 8,272 | 8,056 | 8,701 | 33,570 | 9,075 | |||||||||||||
Admissions mix %: |
||||||||||||||||||
Medicare |
77 | 77 | 75 | 77 | 76 | 76 | ||||||||||||
Medicaid |
8 | 7 | 8 | 7 | 8 | 8 | ||||||||||||
Private and other |
15 | 16 | 17 | 16 | 16 | 16 | ||||||||||||
Patient days: |
||||||||||||||||||
Medicare |
216,266 | 214,116 | 193,069 | 191,904 | 815,355 | 207,052 | ||||||||||||
Medicaid |
31,764 | 32,470 | 31,362 | 29,488 | 125,084 | 27,754 | ||||||||||||
Private and other |
56,225 | 59,339 | 54,080 | 52,725 | 222,369 | 52,391 | ||||||||||||
304,255 | 305,925 | 278,511 | 274,117 | 1,162,808 | 287,197 | |||||||||||||
Average length of stay: |
||||||||||||||||||
Medicare |
32.7 | 33.7 | 31.9 | 28.7 | 31.7 | 30.0 | ||||||||||||
Medicaid |
49.0 | 53.8 | 46.8 | 44.6 | 48.4 | 38.8 | ||||||||||||
Private and other |
43.9 | 44.9 | 40.6 | 38.8 | 42.0 | 35.9 | ||||||||||||
Weighted average |
35.6 | 37.0 | 34.6 | 31.5 | 34.6 | 31.6 | ||||||||||||
Revenues per admission (a): |
||||||||||||||||||
Medicare |
$ | 30,050 | $ | 31,594 | $ | 35,157 | $ | 30,987 | $ | 31,878 | $ | 33,321 | ||||||
Medicaid |
40,547 | 44,766 | 36,974 | 37,825 | 39,910 | 33,228 | ||||||||||||
Private and other |
83,449 | 83,830 | 77,860 | 68,870 | 78,395 | 65,054 | ||||||||||||
Weighted average |
38,855 | 40,904 | 42,374 | 37,423 | 39,833 | 38,419 | ||||||||||||
Revenues per patient day (a): |
||||||||||||||||||
Medicare |
$ | 919 | $ | 936 | $ | 1,102 | $ | 1,079 | $ | 1,004 | $ | 1,110 | ||||||
Medicaid |
827 | 833 | 790 | 848 | 824 | 856 | ||||||||||||
Private and other |
1,901 | 1,868 | 1,919 | 1,775 | 1,867 | 1,813 | ||||||||||||
Weighted average |
1,091 | 1,106 | 1,226 | 1,188 | 1,150 | 1,214 | ||||||||||||
Medicare case mix index (discharged patients only) |
N/A | N/A | N/A | 1.20 | N/A | 1.26 | ||||||||||||
Average daily census |
3,381 | 3,362 | 3,027 | 2,980 | 3,186 | 3,156 | ||||||||||||
Occupancy % |
69.8 | 69.0 | 61.9 | 59.9 | 65.1 | 62.4 |
(a) | Includes income of $14 million in the third quarter of 2003 and $2 million in the first quarter of 2004 related to certain Medicare reimbursement issues. |
N/A | not available. |
32
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
2003 Quarters |
Year |
First Quarter | ||||||||||||||||
First |
Second |
Third |
Fourth |
|||||||||||||||
Nursing center data: |
||||||||||||||||||
End of period data: |
||||||||||||||||||
Number of nursing centers: |
||||||||||||||||||
Owned or leased |
248 | 248 | 248 | 248 | 247 | |||||||||||||
Managed |
7 | 7 | 7 | 7 | 7 | |||||||||||||
255 | 255 | 255 | 255 | 254 | ||||||||||||||
Number of licensed beds: |
||||||||||||||||||
Owned or leased |
32,293 | 32,124 | 32,118 | 32,124 | 32,009 | |||||||||||||
Managed |
803 | 803 | 803 | 803 | 803 | |||||||||||||
33,096 | 32,927 | 32,921 | 32,927 | 32,812 | ||||||||||||||
Revenue mix %: |
||||||||||||||||||
Medicare |
33 | 33 | 32 | 33 | 32 | 36 | ||||||||||||
Medicaid |
48 | 48 | 50 | 48 | 49 | 46 | ||||||||||||
Private and other |
19 | 19 | 18 | 19 | 19 | 18 | ||||||||||||
Patient days (excludes managed facilities): |
||||||||||||||||||
Medicare |
398,646 | 399,150 | 394,957 | 397,254 | 1,590,007 | 433,162 | ||||||||||||
Medicaid |
1,699,726 | 1,707,907 | 1,757,580 | 1,737,615 | 6,902,828 | 1,675,706 | ||||||||||||
Private and other |
410,378 | 418,824 | 422,529 | 426,890 | 1,678,621 | 407,684 | ||||||||||||
2,508,750 | 2,525,881 | 2,575,066 | 2,561,759 | 10,171,456 | 2,516,552 | |||||||||||||
Patient day mix %: |
||||||||||||||||||
Medicare |
16 | 16 | 15 | 15 | 16 | 17 | ||||||||||||
Medicaid |
68 | 68 | 68 | 68 | 68 | 67 | ||||||||||||
Private and other |
16 | 16 | 17 | 17 | 16 | 16 | ||||||||||||
Revenues per patient day: |
||||||||||||||||||
Medicare |
$ | 338 | $ | 342 | $ | 344 | $ | 364 | $ | 347 | $ | 372 | ||||||
Medicaid |
117 | 118 | 123 | 120 | 119 | 121 | ||||||||||||
Private and other |
188 | 189 | 188 | 190 | 189 | 197 | ||||||||||||
Weighted average |
164 | 165 | 168 | 169 | 167 | 177 | ||||||||||||
Average daily census |
27,875 | 27,757 | 27,990 | 27,845 | 27,867 | 27,654 | ||||||||||||
Occupancy % |
86.0 | 85.6 | 86.8 | 86.4 | 86.2 | 86.0 | ||||||||||||
Rehabilitation data: |
||||||||||||||||||
Revenue mix %: |
||||||||||||||||||
Company-operated |
N/A | N/A | N/A | N/A | N/A | 70 | ||||||||||||
Non-affiliated |
N/A | N/A | N/A | N/A | N/A | 30 | ||||||||||||
Pharmacy data: |
||||||||||||||||||
Number of customer licensed beds at end of period: |
||||||||||||||||||
Company-operated |
29,804 | 27,566 | 27,886 | 28,280 | 28,188 | |||||||||||||
Non-affiliated |
28,365 | 28,848 | 29,507 | 33,127 | 35,102 | |||||||||||||
58,169 | 56,414 | 57,393 | 61,407 | 63,290 | ||||||||||||||
N/A | not applicable. |
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Companys exposure to market risk contains forward-looking statements that involve risks and uncertainties. The information presented has been prepared utilizing certain assumptions considered reasonable in light of information currently available to the Company. Given the unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking information.
The Companys exposure to market risk relates to changes in the prime rate, federal funds rate and the London Interbank Offered Rate which affect the interest paid on certain borrowings.
The following table provides information about the Companys financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity date.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in thousands)
Expected maturities |
Fair value | |||||||||||||||||||||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Long-term debt, including amounts due within one year: |
||||||||||||||||||||||||||||||
Fixed rate: |
||||||||||||||||||||||||||||||
Ventas debt obligation: |
||||||||||||||||||||||||||||||
Principal |
$ | 3,447 | $ | 5,311 | $ | 6,264 | $ | 7,338 | $ | 5,660 | $ | 12,880 | $ | 40,900 | $ | 40,900 | ||||||||||||||
Interest |
3,190 | 3,778 | 3,143 | 2,399 | 1,646 | 2,376 | 16,532 | | ||||||||||||||||||||||
6,637 | 9,089 | 9,407 | 9,737 | 7,306 | 15,256 | 57,432 | 40,900 | |||||||||||||||||||||||
Other |
40 | 63 | 67 | 71 | 76 | 820 | 1,137 | 1,096 | ||||||||||||||||||||||
$ | 6,677 | $ | 9,152 | $ | 9,474 | $ | 9,808 | $ | 7,382 | $ | 16,076 | $ | 58,569 | $ | 41,996 | |||||||||||||||
Average interest rate |
10.9 | % | 10.9 | % | 10.9 | % | 11.0 | % | 10.9 | % | 10.7 | % | ||||||||||||||||||
Variable rate |
$ | | $ | | $ | 16,900 | (a) | $ | | $ | 100,500 | (b) | $ | | $ | 117,400 | $ | 118,154 |
(a) | Interest is payable, at the Companys option, at prime (or, if higher, the federal funds rate plus ½%) plus 3% or the London Interbank Offered Rate plus 4%. |
(b) | Interest is payable, at the Companys option, at one, two, three or six month London Interbank Offered Rate plus 4½%. |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has carried out an evaluation under the supervision and with the participation of management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention
34
ITEM 4. CONTROLS AND PROCEDURES (Continued)
Evaluation of Disclosure Controls and Procedures (Continued)
or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2004, the Companys disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
There has been no change in the Companys internal control over financial reporting during the Companys quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
35
PART II. OTHER INFORMATION
Summary descriptions of various significant legal and regulatory activities follow.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor, Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was filed on July 2, 1998 in the Jefferson County, Kentucky, Circuit Court. The suit was brought on behalf of the Company and Ventas against certain former executive officers and directors of the Company and Ventas. The complaint alleges that the defendants damaged the Company and Ventas by engaging in violations of the securities laws, engaging in insider trading, fraud and securities fraud and damaging the reputation of the Company and Ventas. The plaintiff asserts that such actions were taken deliberately, in bad faith and constitute breaches of the defendants duties of loyalty and due care. The complaint alleges that certain of the Companys and Ventass former executive officers during a specified time frame violated Sections 10(b) and 20(a) of the Exchange Act by, among other things, issuing to the investing public a series of false and misleading statements concerning Ventass then current operations and the inherent value of its common stock. The complaint further alleges that as a result of these purported false and misleading statements concerning Ventass revenues and successful acquisitions, the price of its common stock was artificially inflated. In particular, the complaint alleges that the defendants issued false and misleading financial statements during the first, second and third calendar quarters of 1997 which misrepresented and understated the impact that changes in Medicare reimbursement policies would have on Ventass core services and profitability. The complaint further alleges that the defendants issued a series of materially false statements concerning the purportedly successful integration of Ventass acquisitions and prospective earnings per share for 1997 and 1998, which the defendants knew lacked any reasonable basis and were not being achieved. The suit seeks unspecified damages, interest, punitive damages, reasonable attorneys fees, expert witness fees and other costs, and any extraordinary equitable and/or injunctive relief permitted by law or equity to assure that the Company and Ventas have an effective remedy. In October 2002, the defendants filed a motion to dismiss for failure to prosecute the case. The court granted the motion to dismiss but the plaintiff subsequently moved the court to vacate the dismissal. The defendants filed an opposition to the plaintiffs motion to vacate the dismissal, but in August 2003 the court reinstated the lawsuit. In September 2003, the Company filed a renewed motion to dismiss, as to all defendants, based on the plaintiffs failure to make a demand for remedy upon the appropriate board of directors. The Company also has argued that it is an improper party to this lawsuit. In March 2004, the judge who had been presiding over this lawsuit recused himself because of a possible conflict of interest. The case was then assigned to another judge, who has not yet ruled on the renewed motion to dismiss. The Company believes that the allegations in the complaint are without merit and intends to defend this action vigorously.
A putative class action lawsuit entitled Massachusetts State Carpenters Pension Fund v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-600-J, was filed against the Company and certain of the Companys current and former officers and directors on October 16, 2002, in the United States District Court for the Western District of Kentucky, Louisville Division. The complaint alleges that from August 14, 2001 to October 10, 2002 the defendants violated Sections 10(b) and 20(a) of the Exchange Act by, among other things, issuing to the investing public a series of allegedly false and misleading statements that inaccurately indicated that the Company was successfully emerging from bankruptcy and implementing a growth plan. In particular, the complaint alleges that these statements were materially false and misleading because they failed to disclose that the 2001 Florida tort reform legislation had resulted in a marked increase in claims against the Company in Florida, and also because the statements reflected a materially understated reserve for professional liability costs. The complaint further alleges that as a result of the purportedly false and misleading statements, the price of the Companys common stock was artificially inflated, the investing public was deceptively induced to purchase the stock at those inflated prices, and the defendants profited by selling shares at those prices. The suit seeks an unspecified amount of monetary damages plus interest, reasonable attorneys fees and other costs, and any other equitable, injunctive or other relief that the court deems just and proper. After October 16, 2002, several other purported class action complaints, which assert essentially similar allegations as those contained in the
36
PART II. OTHER INFORMATION (Continued)
Item 1. Legal Proceedings (Continued)
Massachusetts State Carpenters Pension Fund complaint discussed above, also were filed against the same defendants in the United States District Court for the Western District of Kentucky, Louisville Division, including but not limited to the cases entitled Mark Ramsdell v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-625-R; Paula Hillenbrand v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-654-R; Marilyn Buck v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-732-S; and Eastside Holdings Ltd. v. Kindred Healthcare, Inc., et al., Civil Action No. 3:02CV-617-H. All of these actions were consolidated by the District Court. In May 2003, the defendants filed a motion to dismiss the consolidated lawsuits, and on January 9, 2004, the District Court granted that motion with prejudice. The plaintiffs did not appeal the District Courts dismissal, which became final on February 12, 2004 when the appeal period expired.
The Company was previously informed by the Kentucky Attorney Generals Office that the Company and certain of its present and former officers and employees are the subject of several investigations into care issues at the Companys Kentucky-based nursing facilities that could lead to civil and/or criminal charges against the Company and/or the individual officers and employees. Subsequently, the Company was informed that the Kentucky Attorney Generals Office had transferred these investigations to the Fayette County, Kentucky prosecutor as a special prosecutor with statewide jurisdiction. On February 10, 2004, the Company announced a civil settlement with the Kentucky Attorney Generals Office to resolve all issues associated with these investigations on terms which were not material to the Companys consolidated financial results.
In connection with the Spin-off, liabilities arising from various legal proceedings and other actions were assumed by the Company and the Company agreed to indemnify Ventas against any losses, including any costs or expenses, it may incur arising out of or in connection with such legal proceedings and other actions. The indemnification provided by the Company also covers losses, including costs and expenses, which may arise from any future claims asserted against Ventas based on the former healthcare operations of Ventas. In connection with the Companys indemnification obligation, the Company assumed the defense of various legal proceedings and other actions. Under the Plan of Reorganization, the Company agreed to continue to fulfill the Companys indemnification obligations arising from the Spin-off.
The Company is a party to various legal actions (some of which are not insured), and regulatory investigations and sanctions arising in the ordinary course of its business. The Company is unable to predict the ultimate outcome of pending litigation and regulatory investigations. In addition, there can be no assurance that the DOJ, CMS or other federal and state enforcement and regulatory agencies will not initiate additional investigations related to the Companys businesses in the future, nor can there be any assurance that the resolution of any litigation or investigations, either individually or in the aggregate, would not have a material adverse effect on the Companys financial position, results of operations and liquidity. In addition, the litigation and investigations discussed above (as well as future litigation and investigations) are expected to consume the time and attention of management and may have a disruptive effect upon the Companys operations.
37
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits: |
3.1 | Amended and Restated By-Laws of Kindred Healthcare, Inc. Exhibit 3.3 to the Companys Form 10-K for the year ended December 31, 2003 (Comm. File No. 001-14057) is hereby incorporated by reference. | |||
31 | Rule 13a-14(a)/15d-14(a) Certifications. | |||
32 | Section 1350 Certifications. |
(b) | Reports on Form 8-K: |
On March 9, 2004, the Company filed a Current Report on Form 8-K announcing its financial results for the year ended December 31, 2003.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KINDRED HEALTHCARE, INC. | ||||||||
Date: May 7, 2004 | /s/ PAUL J. DIAZ | |||||||
Paul J. Diaz President and Chief Executive Officer | ||||||||
Date: May 7, 2004 | /s/ RICHARD A. LECHLEITER | |||||||
Richard A. Lechleiter Senior Vice President and Chief Financial Officer |
39