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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 14, 2001
______________________
KINDRED HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 001-14057 61-1323993
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification No.)
680 South Fourth Street
Louisville, Kentucky 40202-2412
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
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Item 5. Other Events and Regulation FD Disclosure.
As previously disclosed, on April 20, 2001, Kindred Healthcare, Inc. (the
"Company") (formerly Vencor, Inc.) and its subsidiaries emerged from proceedings
under Chapter 11 of Title 11 of the United States Code pursuant to the terms of
its Amended Plan (as defined). On March 1, 2001, the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") approved the
Company's fourth amended plan of reorganization filed with the Bankruptcy Court
on December 14, 2000, as modified at the confirmation hearing (the "Amended
Plan"). In connection with its emergence, the Company also changed its name to
Kindred Healthcare, Inc.
In connection with its emergence from bankruptcy, the Company reflected the
terms of the Amended Plan in its consolidated financial statements by adopting
the fresh-start accounting provisions of the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code." Under fresh-start accounting, a
new reporting entity is deemed to be created and the recorded amounts of assets
and liabilities are adjusted to reflect their estimated fair values. For
accounting purposes, the fresh-start adjustments have been recorded in the
Company's consolidated balance sheet as of April 1, 2001.
On August 14, 2001, the Company's independent accountants rendered their
opinion with respect to the Company's consolidated balance sheet and
accompanying notes as of April 1, 2001. The independent accountant's report and
related financial statements are included in this Form 8-K.
Certain statements made in this Form 8-K, including, but not limited to,
statements containing the words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ materially from
the Company's expectations as a result of a variety of factors, including,
without limitation, those discussed below. Such forward-looking statements are
based on management's current expectations and include known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the Company's actual results or performance to differ
materially from any future results or performance expressed or implied by such
forward-looking statements. Factors that may affect the plans or results of the
Company include, without limitation, the ability of the Company to operate
pursuant to the terms of its debt and lease obligations; the Company's ability
to meet its rental and debt services obligations; adverse developments with
respect to the Company's liquidity or results of operations; the ability of the
Company to attract and retain key executives 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 Medicare and Medicaid reimbursement rates;
national and regional economic conditions, including their effect on the
availability and cost of labor, materials and other services; the Company's
ability to control costs, including labor costs, in response to the prospective
payment system; implementation of the Corporate Integrity Agreement and other
regulatory actions; the ability of the Company to comply with the terms of its
Corporate Integrity Agreement; the effect of a restatement of the Company's
consolidated financial statements previously filed with the Securities and
Exchange Commission; and the increase in the costs of defending and insuring
against alleged patient care liability claims. Many of these factors are beyond
the control of the Company and its management. The Company cautions investors
that any forward-looking statements made by the Company are not guarantees of
future performance. The Company disclaims any obligation to update any such
factors or to announce publicly the results of any revisions to any of the
forward-looking statements to reflect future events or developments.
2
KINDRED HEALTHCARE, INC.
INDEX TO CONSOLIDATED BALANCE SHEET
Page
----
Report of Independent Accountants..................................... 4
Consolidated Balance Sheet, April 1, 2001............................. 5
Notes to Consolidated Balance Sheet................................... 6
3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Kindred Healthcare, Inc.:
In our opinion, the accompanying consolidated balance sheet, after the
restatement of the March 31, 2001 consolidated balance sheet described in Note
2, presents fairly, in all material respects, the financial position of Kindred
Healthcare, Inc. and its subsidiaries at April 1, 2001 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this statement in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the consolidated balance sheet
provides a reasonable basis for our opinion.
As more fully described in Notes 1, 3 and 4 to the consolidated balance sheet,
the consolidated balance sheet reflects the application of fresh-start reporting
as of April 1, 2001 and, therefore, is not comparable in all respects to
consolidated balance sheets for prior dates.
/s/ PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
August 14, 2001
4
KINDRED HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
April 1,
2001
----------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 155,154
Cash-restricted..................................................................... 14,245
Insurance subsidiary investments.................................................... 90,617
Accounts receivable less allowance for loss of $122,077............................. 403,984
Inventories......................................................................... 29,132
Other............................................................................... 76,092
----------
769,224
Property and equipment:
Land................................................................................ 23,225
Buildings........................................................................... 189,789
Equipment........................................................................... 194,168
Construction in progress (estimated cost to complete and equip after
April 1, 2001--$10 million)....................................................... 32,522
----------
439,704
Reorganization value in excess of amounts allocable to identifiable assets............ 157,958
Investment in affiliates.............................................................. 48,106
Other................................................................................. 70,925
----------
$1,485,917
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 85,587
Salaries, wages and other compensation.............................................. 195,841
Due to third-party payors........................................................... 53,855
Other accrued liabilities........................................................... 189,029
Income taxes........................................................................ 17,717
Long-term debt due within one year.................................................. 18,316
----------
560,345
Long-term debt........................................................................ 343,606
Professional liability risks.......................................................... 106,505
Deferred credits and other liabilities................................................ 40,422
Contingencies
Stockholders' equity:
Preferred stock, $0.25 par value; authorized 1,000 shares; none issued
and outstanding................................................................... -
Common stock, $0.25 par value; authorized 39,000 shares;
issued 15,000 shares.............................................................. 3,750
Capital in excess of par value...................................................... 431,289
----------
435,039
----------
$1,485,917
==========
See accompanying notes.
5
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
NOTE 1 -- ACCOUNTING POLICIES
Business
Kindred Healthcare, Inc. ("Kindred" or the "Company") (formerly Vencor, Inc.)
provides long-term healthcare services primarily through the operation of
nursing centers and hospitals.
Reorganization
On April 20, 2001 (the "Effective Date"), 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 its Amended Plan. On March 1,
2001, the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") approved the Company's fourth amended plan of reorganization
filed with the Bankruptcy Court on December 14, 2000, as modified at the
confirmation hearing (the "Amended Plan"). In connection with its emergence,
the Company also changed its name to Kindred Healthcare, Inc.
Since filing for protection under the Bankruptcy Code on September 13, 1999,
the Company had operated its businesses as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. Accordingly, the previously issued
consolidated financial statements of the Company have been prepared in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7") and generally accepted accounting principles
applicable to a going concern, which assume that assets will be realized and
liabilities will be discharged in the normal course of business.
In connection with its emergence from bankruptcy, the Company reflected the
terms of the Amended Plan in its consolidated financial statements by adopting
the fresh-start accounting provisions of SOP 90-7. Under fresh-start
accounting, a new reporting entity is deemed to be created and the recorded
amounts of assets and liabilities are adjusted to reflect their estimated fair
values. For accounting purposes, the fresh-start adjustments have been recorded
in the Company's consolidated financial statements as of April 1, 2001.
As used herein, the term "Predecessor Company" refers to the Company and its
operations for periods prior to April 1, 2001, while the term "Reorganized
Company" is used to describe the Company and its operations for periods
thereafter.
Spin-off
On May 1, 1998, Ventas, Inc. ("Ventas") completed the spin-off of its
healthcare operations to its stockholders through the distribution of the
Predecessor Company's equity securities (the "Spin-off"). Ventas retained
ownership of substantially all of its real property and leases such real
property to the Company. In anticipation of the Spin-off, the Company was
incorporated on March 27, 1998 as a Delaware corporation. For accounting
purposes, the consolidated historical financial statements of Ventas became the
Company's historical financial statements following the Spin-off.
Basis of Presentation
The Reorganized Company adopted the accounting policies of the Predecessor
Company as of April 1, 2001. The accompanying consolidated balance sheet has
been prepared in accordance with generally accepted accounting principles and
includes amounts based upon the estimates and judgments of management. Actual
amounts may differ from these estimates.
The consolidated balance sheet includes all subsidiaries. Significant
intercompany transactions have been eliminated. Investments in affiliates in
which the Company has a 50% or less interest are accounted for by either the
equity or cost method.
6
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 1 -- ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The adoption of this pronouncement did not
have a material impact on the Company's financial position.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141 ("SFAS 141"), "Business Combinations," which provides that all
business combinations should be accounted for using the purchase method of
accounting and establishes criteria for the initial recognition and measurement
of goodwill and other intangible assets recorded in connection with a business
combination. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001 and to all business combinations accounted for by
the purchase method that are completed after June 30, 2001.
In addition, the FASB issued in June 2001 SFAS No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," which establishes the accounting for
goodwill and other intangible assets following their recognition. SFAS 142
applies to all goodwill and other intangible assets whether acquired singly, as
part of a group, or in a business combination. SFAS 142 also applies to excess
reorganization value recognized in accordance with SOP 90-7. The new
pronouncement provides that goodwill should not be amortized but should be
tested for impairment annually using a fair-value based approach. In addition,
SFAS 142 provides that intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 142 will become effective for the Company
beginning on January 1, 2002. Upon adoption, the Company will be required to
perform a transitional impairment test for the excess reorganization value
recorded as of January 1, 2002. Any impairment loss recorded as a result of the
transitional impairment test will be treated as a change in accounting
principle. Management expects that the annual impact of eliminating the
amortization of excess reorganization value beginning on January 1, 2002 will
approximate $8 million.
Cash, Cash Equivalents and Cash-restricted
Cash, cash equivalents and cash-restricted include highly liquid investments
with an original maturity of three months or less when purchased. Cash-
restricted consists primarily of amounts related to patient trust accounts and
compensating balance arrangements with financial institutions.
Insurance Subsidiary Investments
The Company maintains investments, consisting principally of fixed time
deposits, primarily for the payment of claims and expenses related to self-
insured professional liability risks. These investments have been categorized as
available-for-sale and are classified in the accompanying consolidated balance
sheet based upon their original maturities.
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. Amounts recorded include
estimated provisions for loss related to uncollectible accounts and disputed
items that have continuing significance, such as third-party reimbursements that
continue to be claimed in current cost reports.
Inventories
Inventories consist primarily of medical supplies and are stated at the lower
of cost (first-in, first-out) or market.
7
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 1 -- ACCOUNTING POLICIES (Continued)
Property and Equipment
The Company uses the straight-line method of depreciation. Estimated useful
lives of equipment vary from 5 to 15 years. Depreciation rates for buildings
range generally from 20 to 45 years.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
Reorganization value in excess of amounts allocable to identifiable assets
represent the portion of reorganization value of the Company at April 1, 2001
that could not be attributable to specific tangible or identified intangible
assets recorded in connection with fresh-start accounting. Reorganization value
in excess of amounts allocable to identifiable assets will be amortized over a
20-year period using the straight-line method.
Long-Lived Assets
The Company reviews the carrying value of long-lived assets whenever events
or changes in circumstances indicate an impairment or adjustment to the
estimated useful life is necessary. If such circumstances suggest the recorded
amounts cannot be recovered, calculated based on estimated future cash flows
(undiscounted), the carrying values of such assets are reduced to fair value.
Professional Liability Risks
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
Other Information
On April 20, 2001, the Company announced that PricewaterhouseCoopers LLP
("PwC") had advised the Company that certain non-audit services provided to the
Company during PwC's engagement as the Company's independent accountants by a
subsidiary of PwC in connection with the Company's efforts to sell an equity
investment raised an issue as to PwC's independence. PwC disclosed the
situation to the Securities and Exchange Commission (the "Commission"), which is
currently investigating the issue. PwC has further advised the Company that,
notwithstanding the provision of such non-audit services, PwC was and continues
to be independent accountants with respect to the Company, and it is the present
intention of PwC to sign audit opinions and consents to incorporation as
necessary in connection with documents filed by the Company with the Commission
and other third parties. The Company cannot predict at this time how this issue
will be resolved or what impact, if any, such resolution will have on the
Company's past or future filings with the Commission and other third parties.
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On August 14, 2001, the Company announced that it will restate certain of its
previously issued consolidated financial statements. The Company recently
determined that an oversight related to the allowance for professional liability
risks had occurred in its consolidated financial statements beginning in 1998.
The oversight resulted in the understatement of the provision for professional
liability claims in 1998, 1999 and 2000 because the Company did not record a
reserve for claims incurred but not reported at the respective balance sheet
dates.
The cumulative understatement of professional liability claims reserves
approximated $5 million at December 31, 1998, $28 million at December 31, 1999
and $39 million at December 31, 2000. The effects of the restatement with
respect to the unaudited consolidated balance sheet of the Predecessor Company
at March 31, 2001 have been reflected in the fresh-start accounting
reconciliation included in Note 4.
8
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
The Company has obtained waivers for any default or event of default that may
arise as a result of the restatement under its amended master leases with Ventas
(the "Amended Leases") and the agreements related to the Company's $300 million
senior secured notes (the "Senior Secured Notes") and its $120 million revolving
credit facility (the "Credit Facility").
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On April 20, 2001, the Company and its subsidiaries emerged from proceedings
under Chapter 11 of the Bankruptcy Code pursuant to the terms of the Amended
Plan. The Company and substantially all of its subsidiaries filed voluntary
petitions with the Bankruptcy Court for protection under Chapter 11 of the
Bankruptcy Code on September 13, 1999.
The Chapter 11 cases were consolidated for purposes of joint administration
under Case Nos. 99-3199 (MFW) through 99-3327 (MFW) (collectively, the "Chapter
11 Cases"). Following emergence, the Company is continuing to resolve proofs of
claims filed in the Chapter 11 Cases. On the Effective Date, the automatic stay
imposed by the Bankruptcy Code was terminated.
Amended Plan of Reorganization
The Amended Plan represents a consensual arrangement among Ventas, the
Company's former senior bank lenders (the "Senior Lenders"), holders of the
Company's $300 million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the
"1998 Notes"), the United States Department of Justice (the "DOJ"), acting on
behalf of the Department of Health and Human Services' Office of the Inspector
General (the "OIG"), and the Centers for Medicare and Medicaid Services
(formerly the Health Care Financing Administration) ("CMS") (collectively, the
"Government") and the advisors to the official committee of unsecured creditors.
The following is a summary of certain material provisions of the Amended
Plan. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Amended Plan, as filed
with the Commission.
The Amended Plan provided for, among other things, the following
distributions:
Senior Lender Claims -- On the Effective Date, the Senior Lenders received
the Senior Secured Notes aggregating $300 million, bearing interest at the rate
of LIBOR (as defined in the agreement) plus 4 1/2%, with a maturity of seven
years. The interest on the Senior Secured Notes will begin to accrue
approximately two quarters following the Effective Date and, in lieu of interest
payments, the Company will pay a $25.9 million obligation under the Government
Settlement (as defined) within the first two full fiscal quarters following the
Effective Date as described below. In addition, holders of the Senior Lender
claims received an aggregate distribution of 9,826,092 shares of the new common
stock of Kindred (the "Common Stock") on the Effective Date.
Subordinated Noteholder Claims -- The holders of the 1998 Notes and the
remaining $2.4 million of the Company's 8 5/8% Senior Subordinated Notes due
2007 (collectively, the "Subordinated Noteholder Claims") received, in the
aggregate, 3,675,408 shares of the Common Stock on the Effective Date. In
addition, the holders of the Subordinated Noteholder Claims received warrants
issued by the Company for the purchase of an aggregate of 7,000,000 shares of
Common Stock, with a five-year term, comprised of warrants to purchase 2,000,000
shares at a price per share of $30.00 and warrants to purchase 5,000,000 shares
at a price per share of $33.33 (collectively, the "Warrants").
9
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
Ventas Claim -- Ventas received the following treatment under the Amended
Plan:
On the Effective Date, the four master leases and a single facility lease
with Ventas were assumed and simultaneously amended and restated as the Amended
Leases. The principal economic terms of the Amended Leases are as follows:
(1) A decrease of $52 million in the aggregate minimum rent from the annual
rent as of May 1, 1999 to a new initial aggregate minimum rent of $174.6
million (subject to the escalation described below).
(2) Annual aggregate minimum rent payable in cash will escalate at an annual
rate of 3.5% over the prior period annual aggregate minimum rent for the
period from May 1, 2001 through April 30, 2004. Thereafter, annual aggregate
minimum rent payable in cash will escalate at an annual rate of 2.0%, plus an
additional annual accrued escalator amount of 1.5% of the prior period annual
aggregate minimum rent which will accrete from year to year (with an interest
accrual at LIBOR plus 4 1/2%). All accrued rent will be payable upon the
repayment or refinancing of the Senior Secured Notes, after which the annual
aggregate minimum rent payable in cash will escalate at an annual rate of
3.5% and there will be no further accrual feature. The annual escalator in
each period is contingent upon the attainment of certain financial targets as
described in the Amended Leases.
(3) A one-time option, that can be exercised by Ventas 5 1/4 years after the
Effective Date, to reset the annual aggregate minimum rent under one or more
of the Amended Leases to the then current fair market rental in exchange for
a payment of $5 million (or a pro rata portion thereof if fewer than all of
the Amended Leases are reset) to the Company.
(4) Under the Amended Leases, the "Event of Default" provisions also were
substantially modified and provide Ventas with more flexibility in exercising
remedies for events of default.
In addition to the Amended Leases, Ventas received a distribution of
1,498,500 shares of the Common Stock on the Effective Date.
Ventas and the Company also entered into a tax escrow agreement as of the
Effective Date that provides for the escrow of approximately $30 million of
federal, state and local refunds until the expiration of the applicable statutes
of limitation for the auditing of the refund applications (the "Tax Escrow
Agreement"). The escrowed funds will be available for the payment of certain tax
deficiencies during the escrow period except that all interest paid by the
government in connection with any refund or earned on the escrowed funds will be
distributed equally to the parties. At the end of the escrow period, the Company
and Ventas will each be entitled to 50% of any proceeds remaining in the escrow
account.
All agreements and indemnification obligations between the Company and
Ventas, except those modified by the Amended Plan, were assumed by the Company
as of the Effective Date.
United States Claims -- The claims of the Government (other than claims of
the Internal Revenue Service and criminal claims, if any) were settled through a
government settlement with the Company and Ventas which was effectuated through
the Amended Plan (the "Government Settlement").
Under the Government Settlement, the Company will pay the Government a total
of $25.9 million as follows:
(1) $10 million was paid on the Effective Date, and
10
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
(2) an aggregate of $15.9 million will be paid during the first two full
fiscal quarters following the Effective Date, plus accrued interest at the
rate of 6% per annum beginning as of the Effective Date.
Under the Government Settlement, Ventas will pay the Government a total of
$103.6 million as follows:
(1) $34 million was paid on the Effective Date, and
(2) the remainder will be paid over five years, bearing interest at the rate
of 6% per annum beginning as of the Effective Date.
In addition, the Company agreed to repay the remaining balance of the
obligations owed to CMS (approximately $59 million as of the Effective Date)
pursuant to the terms previously agreed to by the Company (the "CMS Agreement").
As previously announced, the Company entered into a Corporate Integrity
Agreement with the OIG as part of the overall Government Settlement. The
Corporate Integrity Agreement became effective on the Effective Date. The
Government Settlement also provides for the dismissal of certain pending claims
and lawsuits filed against the Company. See Note 13.
General Unsecured Creditors Claims -- The general unsecured creditors of the
Company will be paid the full amount of their allowed claims existing as of the
date of the Company's filing for protection under the Bankruptcy Code. These
amounts generally will be paid in equal quarterly installments over three years
beginning on September 30, 2001. The Company will pay interest on these claims
at the rate of 6% per annum from the Effective Date, subject to certain
exceptions. A convenience class of unsecured creditors, consisting of creditors
holding allowed claims in an amount less than or equal to $3,000, were paid in
full within 30 days of the Effective Date.
Preferred Stockholder and Common Stockholder Claims -- The holders of
preferred stock and common stock of the Company prior to the Effective Date did
not receive any distributions under the Amended Plan. The former preferred stock
and common stock were canceled on the Effective Date.
Other Significant Provisions -- As of the Effective Date, the board of
directors of the Company consisted of seven members: Edward L. Kuntz, Chairman
of the Board of Directors, Jeff Altman of Franklin Mutual Advisors, L.L.C.,
James Bolin of Appaloosa Management, L.P., Garry N. Garrison, Isaac Kaufman of
Advanced Medical Management, Inc., John H. Klein of SBTS and David Tepper of
Appaloosa Management, L.P.
A restricted share plan was approved under the Amended Plan that provided for
the issuance of 600,000 shares of Common Stock to certain key employees of the
Company. The restricted shares are non-transferable and subject to forfeiture
until they have vested generally over a four-year period. In addition, a new
stock option plan was approved under the Amended Plan for the issuance of stock
options for up to 600,000 shares of Common Stock to certain key employees of the
Company. The Board of Directors awarded substantially all of the shares under
these plans in May 2001.
The Amended Plan also approved the Vencor, Inc. 2000 Long-Term Incentive Plan
that provides cash bonus awards to certain key employees on the attainment by
the Company of specified performance goals, and also provided for the
continuation of the Company's management retention plan and the payment of
certain performance bonuses on the Effective Date.
11
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Matters Related to Emergence
On the Effective Date, the Company entered into the Credit Facility, a five-
year $120 million senior revolving credit facility (including a $40 million
letter of credit subfacility) with a lending group led by Morgan Guaranty Trust
Company of New York. The Credit Facility constitutes a working capital facility
for general corporate purposes including payments related to the Company's
obligations under the Amended Plan. Direct borrowings under the Credit Facility
will bear interest, at the option of the Company, at (a) prime (or, if higher,
the federal funds rate plus 1/2%) plus 3% or (b) LIBOR (as defined in the
agreement) plus 4%. The Credit Facility is collateralized by substantially all
of the assets of the Company and its subsidiaries, including certain owned real
property.
On the Effective Date, the Company filed a registration statement on Form 8-A
with the Commission to register its Common Stock and Warrants under Section
12(g) of the Securities Exchange Act of 1934 (the "Exchange Act").
NOTE 4 -- FRESH-START ACCOUNTING
As previously discussed, the Company adopted the provisions of fresh-start
accounting as of April 1, 2001. In adopting fresh-start accounting, the Company
engaged an independent financial advisor to assist in the determination of the
reorganization value or fair value of the entity. The independent financial
advisor determined an estimated reorganization value of $762 million before
considering any long-term debt or other obligations assumed in connection with
the Amended Plan. This estimate was based upon the Company's cash flows,
selected comparable market multiples of publicly traded companies, operating
lease obligations and other applicable ratios and valuation techniques. The
estimated total equity value of the Reorganized Company aggregating $435 million
was determined after taking into account the values of the obligations assumed
in connection with the Amended Plan.
12
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 4 -- FRESH-START ACCOUNTING (Continued)
A reconciliation of fresh-start accounting recorded as of April 1, 2001
follows (in thousands):
Predecessor Fresh-start Reorganized
Company -------------------------------------------------- Company
--------------- Debt -------------
March 31, 2001 Restructuring Adjustments Reclassifications April 1, 2001
--------------- --------------- ------------- ------------------- -------------
ASSETS (Restated)
Current assets:
Cash and cash equivalents..................... $ 160,055 $ - $ (4,901) (i) $ - $ 155,154
Cash-restricted............................... 11,008 (2,763) (a) 6,000 (i) - 14,245
Insurance subsidiary investments.............. 90,617 - - - 90,617
Accounts receivable less allowance for loss... 330,846 73,138 (b) - - 403,984
Inventories................................... 29,132 - - - 29,132
Other......................................... 74,732 1,360 (a) - - 76,092
----------- --------- --------- --------- -------------
696,390 71,735 1,099 - 769,224
Property and equipment........................... 708,232 - (268,528) (j) - 439,704
Accumulated depreciation......................... (316,862) - 316,862 (j) - -
----------- --------- --------- --------- -------------
391,370 - 48,334 - 439,704
Reorganized value in excess of amounts
allocable to identifiable assets.............. - - 157,958 (k) - 157,958
Goodwill......................................... 156,765 - (156,765) (l) - -
Investment in affiliates......................... 7,824 - 40,282 (m) - 48,106
Other............................................ 77,673 (7,668) (a) (1,823) (i) - 70,925
2,795 (c) (52) (j)
----------- --------- --------- --------- -------------
$ 1,330,022 $ 66,862 $ 89,033 $ - $ 1,485,917
=========== ========= ========= ========= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 90,279 $ (2,264) (b) $ (4,030) (i) $ 1,602 (r) $ 85,587
Salaries, wages and other compensation........ 178,319 - (93) (i) 1,404 (r) 195,841
7,700 (n)
8,511 (o)
Due to third-party payors..................... 47,773 (4,569) (b) - 10,651 (r) 53,855
Other accrued liabilities..................... 91,132 2,795 (c) 25,337 (o) 43,865 (r) 189,029
25,900 (d)
Income taxes.................................. 2,850 - - 14,867 (r) 17,717
Long-term debt due within one year............ - - - 18,316 (r) 18,316
----------- --------- --------- --------- -------------
410,353 21,862 37,425 90,705 560,345
Long-term debt................................... - 300,000 (e) - 43,606 (r) 343,606
Professional liability risks..................... 106,505 - - - 106,505
Deferred credits and other liabilities........... 14,128 - (1,777) (p) 28,071 (r) 40,422
Liabilities subject to compromise................ 1,278,223 2,580 (a) (2,028) (i) (162,382) (r) -
(113,576) (b) (2,726) (p)
(902,755) (f)
(94,285) (g)
(3,051) (h)
Series A preferred stock (subject to compromise
at March 31, 2001)............................ 1,743 (1,743) (h) - - -
Stockholders' equity (deficit):
Reorganized Company common stock, par value... - 3,750 (h) - - 3,750
Predecessor Company common stock, par value... 17,565 - (17,565) (q) - -
Capital in excess of par value................ 667,187 431,289 (h) 17,565 (q) (684,752) (s) 431,289
Retained earnings (accumulated deficit)....... (1,165,682) (11,651) (a) 5,427 (i) 684,752 (s) -
193,547 (b) 48,282 (j)
(25,900) (d) 157,958 (k)
(300,000) (e) (156,765) (l)
902,755 (f) 40,282 (m)
94,285 (g) (7,700) (n)
(430,245) (h) (33,848) (o)
4,503 (p)
----------- --------- --------- --------- -------------
(480,930) 857,830 58,139 - 435,039
----------- --------- --------- --------- -------------
$ 1,330,022 $ 66,862 $ 89,033 $ - $ 1,485,917
=========== ========= ========= ========= =============
13
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 4 -- FRESH-START ACCOUNTING (Continued)
(a) To record the effect of the Tax Escrow Agreement.
(b) To record the discharge of pre-petition accounts receivable, allowances
for loss and liabilities related to the Medicare program in connection
with the Government Settlement.
(c) To record deferred financing costs incurred in connection with the
Credit Facility and the Senior Secured Notes.
(d) To record the Government Settlement obligation.
(e) To record the issuance of the Senior Secured Notes.
(f) To record the discharge of indebtedness in accordance with the Amended
Plan (in thousands):
Senior Lender Claims.................. $510,908
Subordinated Noteholder Claims........ 302,391
Accrued interest...................... 99,185
Unamortized deferred financing costs.. (9,729)
--------
$902,755
========
(g) To write off accrued Ventas rent discharged in accordance with the
Amended Plan.
(h) To record the issuance of the Common Stock and Warrants of the
Reorganized Company and eliminate the preferred stock (and related
loans) and accrued dividends of the Predecessor Company in accordance
with the Amended Plan.
(i) To record miscellaneous provisions of the Amended Plan.
(j) To adjust the property and equipment to fair value and to write off
previously recorded accumulated depreciation.
(k) To record the reorganized value of the Company in excess of amounts
allocable to identifiable assets.
(l) To write off historical goodwill of the Predecessor Company.
(m) To adjust investment in affiliates to fair value.
(n) To record the value of the vested portion of restricted stock in
accordance with the Amended Plan.
(o) To record reorganization costs consisting primarily of professional
fees and management compensation to be paid in accordance with the
Amended Plan.
(p) To adjust allowances for loss related to property disposals and non-
income tax deficiencies.
(q) To eliminate the common stock of the Predecessor Company.
(r) To reclassify the pre-petition priority, secured and unsecured claims
that were assumed by the Company in accordance with the Amended Plan.
(s) To eliminate the historical accumulated deficit and adjust
stockholders' equity to reflect the fair value of the Company's total
equity.
14
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 5--BUSINESS SEGMENT DATA
The Company operates two business segments: the health services division and
the hospital division. The health services division operates nursing centers and
a rehabilitation therapy business. The hospital division operates hospitals and
an institutional pharmacy business.
A summary of the Company's assets by operating segment as of April 1, 2001
follows (in thousands):
Assets:
Health services division........................ $ 382,115
Hospital division............................... 471,403
Corporate....................................... 632,399
----------
$1,485,917
==========
NOTE 6--INCOME TAXES
A summary of deferred income taxes by source included in the consolidated
balance sheet at April 1, 2001 follows (in thousands):
Assets Liabilities
----------- -----------
Depreciation......................................................... $ - $58,633
Insurance............................................................ 34,106 -
Doubtful accounts.................................................... 76,037 -
Property valuations.................................................. 102,402 -
Compensation......................................................... 22,195 -
Subsidiary net operating losses...................................... 63,225 -
Other................................................................ 48,134 3,038
---------- --------
346,099 $61,671
Reclassification of deferred tax liabilities......................... (61,671) ========
----------
Net deferred tax assets.............................................. 284,428
Valuation allowance.................................................. (284,428)
----------
$ -
==========
The Company has reduced its net deferred tax assets by a valuation allowance
to the extent management does not believe it is "more likely than not" that the
asset ultimately will be realizable. If all or a portion of the pre-
reorganization deferred tax asset is realized in the future, or considered to
"more likely than not" be realizable by management, the reorganization
intangible recorded in connection with fresh-start accounting will be reduced
accordingly. If the reorganization intangible is eliminated in full, other
intangibles will then be reduced, with any excess treated as an increase to
capital in excess of par value.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness. This gain will not be taxable since the
gain resulted from the reorganization under the Bankruptcy Code. However, the
Company will be required, as of the beginning of its 2002 taxable year, to
reduce certain tax attributes relating to the Company including (a) net
operating loss carryforwards ("NOLs"), (b) certain tax credits and (c) tax bases
in assets in an amount equal to such gain on extinguishment. The reorganization
of the Company on the Effective Date constituted an ownership change under
Section 382 of the Internal Revenue Code and the use of any of the Company's
NOLs and tax credits generated prior to the ownership change, that are not
reduced pursuant to the provisions discussed above, will be subject to an
overall annual limitation of approximately $22 million.
The Company had NOLs of approximately $164 million (after the reductions in
the attributes discussed above) as of April 1, 2001. These carryforwards expire
in various amounts through 2021.
15
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 7--PROFESSIONAL LIABILITY RISKS
The Company insures a substantial portion of its professional and general
liability risks through a wholly owned insurance subsidiary. The allowance for
professional liability risks aggregated $132.9 million at April 1, 2001,
including $26.4 million classified as a current liability. The Company also
maintains reinsurance contracts with an unrelated insurer. Reinsurance
recoverables related to these risks (included in accounts receivable and
noncurrent assets) aggregated $19.1 million at April 1, 2001.
At April 1, 2001, investments held for the payment of claims and expenses
related to self-insured risks aggregated $92.7 million, including $2.1 million
classified as a noncurrent asset.
NOTE 8--LONG-TERM DEBT
A summary of long-term debt at April 1, 2001 follows (in thousands):
Senior Secured Notes due 2008 (effective floating rate of 8.4%)....................... $300,000
Amounts due under CMS Agreement (fixed nominal rate of 13.4%;
effective rate of 10.2%) payable in monthly installments through 2004................ 59,236
Other................................................................................. 2,686
--------
Total debt, average life of six years (effective rates averaging 8.7%)............. 361,922
Amounts due within one year........................................................... (18,316)
--------
Long-term debt..................................................................... $343,606
========
In connection with the emergence from bankruptcy, the Company entered into
the Credit Facility on the Effective Date. The Credit Facility constitutes a
working capital facility for general corporate purposes including payments
related to the Company's obligations under the Amended Plan. The Credit Facility
consists of a five-year $120 million revolving credit facility and provides for
a $40 million letter of credit subfacility. Direct borrowings under the Credit
Facility will bear interest, at the option of the Company, at (a) prime (or, if
higher, the federal funds rate plus 1/2%) plus 3% or (b) one, two, three or six
month LIBOR plus 4%. The Credit Facility is collateralized by substantially all
of the assets of the Company and its subsidiaries, including certain owned real
property. At April 1, 2001, there were no outstanding borrowings under the
Credit Facility.
As part of the Amended Plan, the Company also issued $300 million of Senior
Secured Notes on the Effective Date. The Senior Secured Notes have a maturity
of seven years and bear interest at the rate of one, two, three or six month
LIBOR plus 4 1/2%. The interest on the Senior Secured Notes will begin to accrue
approximately two quarters following the Effective Date. For accounting
purposes, the Company will record the appropriate interest costs subsequent to
April 1, 2001 and intends to amortize the amount accrued during the interest-
free period over the remaining life of the debt. The Senior Secured Notes are
collateralized by a second priority lien on substantially all of the assets of
the Company and its subsidiaries, including certain owned real property.
The Credit Facility and the Senior Secured Notes include certain restrictive
covenants which generally (1) limit annual capital expenditures and the
Company's ability to incur additional borrowings and (2) require the maintenance
of certain leverage ratios.
Scheduled maturities of long-term debt are $12.1 million for the remainder of
2001, $19.5 million in 2002, $21.3 million in 2003, $7.6 million in 2004 and
$48,000 in 2005.
16
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 9--LEASES
The Company leases real estate and equipment under cancelable and non-
cancelable arrangements. Future minimum payments and related sublease income
under non-cancelable operating leases with initial or remaining lease terms
longer than one year are as follows (in thousands):
Minimum Payments
----------------------------------- Sublease
Ventas Other Total Income
---------- ---------- ----------- --------
April 2001 through December 2001......................... $135,609 $ 40,738 $176,347 $1,461
2002..................................................... 180,714 49,317 230,031 464
2003..................................................... 180,714 41,352 222,066 108
2004..................................................... 180,714 32,249 212,963 -
2005..................................................... 180,714 30,964 211,678 -
Thereafter............................................... 791,642 136,437 928,079 -
NOTE 10--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Principal contingencies are described below:
Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. The Company is contesting certain issues
raised in audits of prior year Medicaid cost reports that were not subject to
the terms of the Government Settlement.
Professional liability risks--The Company has provided for loss for
professional liability risks based upon actuarially determined estimates.
Actual settlements may differ from the provisions for loss.
Guarantees of indebtedness--Letters of credit and guarantees of
indebtedness aggregated $3.3 million at April 1, 2001.
Litigation--The 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 13.
NOTE 11--EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution retirement plans covering
employees who meet certain minimum eligibility requirements. Benefits are
determined as a percentage of a participant's contributions and generally are
vested based upon length of service. Amounts equal to retirement plan expense
are funded annually.
17
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 12--ACCRUED LIABILITIES
A summary of other accrued liabilities at April 1, 2001 follows (in
thousands):
Reorganization items.............................. $ 34,963
Patient accounts.................................. 29,057
Taxes other than income........................... 27,313
Professional liability risks...................... 26,428
Government Settlement obligation.................. 25,900
Other............................................. 45,368
--------
$189,029
========
NOTE 13--LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow.
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 Cases have been styled In re: Vencor, Inc., et al., Debtors
and Debtors in Possession, Case Nos. 99-3199 (MFW) through 99-3327 (MFW),
Chapter 11, Jointly Administered. On March 1, 2001, the Bankruptcy Court
approved the Company's fourth amended plan of reorganization filed with the
Bankruptcy Court on December 14, 2000, as modified at the confirmation hearing.
The order confirming the Amended Plan was signed on March 16, 2001 and entered
on the docket of the Bankruptcy Court on March 19, 2001. The effective date of
the Amended Plan was April 20, 2001. See Note 3.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off. The
Company was seeking a reduction in rent and other concessions under its master
lease agreements with Ventas. On March 31, 1999, the Company and Ventas entered
into a standstill agreement which provided that both companies would postpone
through April 12, 1999 any claims either may have against the other. On April
12, 1999, the Company and Ventas entered into a second standstill which provided
that neither party would pursue any claims against the other or any other third
party related to the Spin-off as long as the Company complied with certain rent
payment terms. The second standstill was scheduled to terminate on May 5, 1999.
Pursuant to a tolling agreement, the Company and Ventas also agreed that any
statutes of limitations or other time-related constraints in a bankruptcy or
other proceeding that might be asserted by one party against the other would be
extended and tolled from April 12, 1999 until May 5, 1999 or until the
termination of the second standstill. As a result of the Company's failure to
pay rent, Ventas served the Company with notices of nonpayment under the master
lease agreements. Subsequently, the Company and Ventas entered into further
amendments to the second standstill and the tolling agreement to extend the time
during which no remedies may be pursued by either party and to extend the date
by which the Company may cure its failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the stipulation that provided for the payment by the Company of a reduced
aggregate monthly rent of approximately $15.1 million (the "Stipulation"). The
Stipulation was approved by the Bankruptcy Court. The Stipulation tolled any
statutes of limitations or other time constraints in a bankruptcy proceeding for
claims that might be asserted by the Company against Ventas. The Stipulation
automatically renewed for one-month periods unless either party provided a 14-
day notice of termination. The Stipulation also provided that the Company would
continue to fulfill its indemnification obligations arising from the Spin-off.
The Stipulation was terminated on the Effective Date.
As a result of the consummation of the Amended Plan, the Company believes
that all known material disputes between the Company and Ventas have been
resolved. The Amended Plan also provided for comprehensive mutual releases
between the Company and Ventas, other than for obligations that the Company is
assuming under the Amended Plan.
18
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
The Company's subsidiary, formerly named TheraTx, Incorporated, is a
plaintiff in a declaratory judgment action entitled TheraTx, Incorporated v.
James W. Duncan, Jr., et al., No. 1:95-CV-3193, filed in the United States
District Court for the Northern District of Georgia and currently pending in the
United States Court of Appeals for the Eleventh Circuit, No. 99-11451-FF. The
defendants asserted counterclaims against TheraTx, Incorporated ("TheraTx")
under breach of contract, securities fraud, negligent misrepresentation and
other fraud theories for allegedly not performing as promised under a merger
agreement related to TheraTx's purchase of a company called PersonaCare, Inc.
and for allegedly failing to inform the defendants/counterclaimants prior to the
merger that TheraTx's possible acquisition of Southern Management Services, Inc.
might cause the suspension of TheraTx's shelf registration under relevant rules
of the Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest in
the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both appealed the court's rulings. The United States
Court of Appeals for the Eleventh Circuit affirmed the trial court's rulings in
TheraTx's favor, with the exception of the damages award, and certified the
question of the proper calculation of damages under Delaware law to the Delaware
Supreme Court. The Delaware Supreme Court issued an opinion on June 1, 2001,
which sets forth a rule for determining such damages but did not calculate any
actual damages. On June 25, 2001, the Eleventh Circuit remanded the action to
the trial court to render a decision consistent with the Delaware Supreme
Court's ruling. The Company is defending the action vigorously.
The Company is pursuing various claims against private insurance companies
who issued Medicare supplement insurance policies to individuals who became
patients of the Company's hospitals. After the patients' Medicare benefits are
exhausted, the insurance companies become liable to pay the insureds' bills
pursuant to the terms of these policies. The Company has filed numerous
collection actions against various of these insurers to collect the difference
between what Medicare would have paid and the hospitals' usual and customary
charges. These disputes arise from differences in interpretation of the policy
provisions and federal and state laws governing such policies. Various courts
have issued various rulings on the different issues, some of which have been
adverse to the Company and most of which have been appealed. The Company intends
to continue to pursue these claims vigorously. If the Company does not prevail
on these issues, future results of operations and liquidity could be materially
adversely affected.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company's predecessor against the
Company and Ventas and certain current and former executive officers and
directors of the Company and Ventas. The complaint alleges that the Company,
Ventas and certain current and former executive officers of the Company and
Ventas during a 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 Ventas' then current operations
and the inherent value of its common stock. The complaint further alleges that
as a result of these purported false and misleading statements concerning
Ventas' revenues and successful acquisitions, the price of the common stock was
artificially inflated. In particular, the complaint alleges that the defendants
issued false and misleading financial statements during the first, second and
third calendar quarters of 1997 which misrepresented and understated the impact
that changes in Medicare reimbursement policies would have on Ventas' core
services and profitability. The complaint further alleges that the defendants
issued a series of materially false statements concerning the purportedly
successful integration of Ventas' acquisitions and prospective earnings per
share for 1997 and 1998 which the defendants knew lacked any reasonable basis
and were not being achieved. The suit seeks damages in an amount to be proven at
trial, pre-judgment and post-judgment interest, reasonable attorneys' fees,
expert witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure
19
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
that the plaintiff has an effective remedy. In December 1998, the defendants
filed a motion to dismiss the case. The court converted the defendants' motion
to dismiss into a motion for summary judgment and granted summary judgment as to
all defendants. The plaintiff appealed the ruling to the United States Court of
Appeals for the Sixth Circuit. On April 24, 2000, the Sixth Circuit affirmed the
district court's dismissal of the action on the grounds that the plaintiff
failed to state a claim upon which relief could be granted. On July 14, 2000,
the Sixth Circuit granted the plaintiff's petition for a rehearing en banc. On
May 31, 2001, the Sixth Circuit issued its en banc decision reversing the trial
court's dismissal of the complaint. The Company is defending this action
vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The complaint
alleges that the defendants damaged the Company and Ventas by engaging in
violations of the securities laws, engaging in insider trading, fraud and
securities fraud and damaging the reputation of the Company and Ventas. The
plaintiff asserts that such actions were taken deliberately, in bad faith and
constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., discussed
above. The suit seeks unspecified damages, interest, punitive damages,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the Company and Ventas have an effective remedy. The Company
believes that the allegations in the complaint are without merit and intends to
defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a class
consisting of all persons who sold shares of Transitional Hospitals Corporation
("Transitional") common stock during the period from February 26, 1997 through
May 4, 1997, inclusive. The complaint alleges that Transitional purchased shares
of its common stock from members of the investing public after it had received a
written offer to acquire all of the Transitional common stock and without making
the required disclosure that such an offer had been made. The complaint further
alleges that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had reached
an advanced stage with actual firm offers at substantial premiums to the trading
price of Transitional's stock having been made which were actively being
considered by Transitional's Board of Directors. The complaint asserts claims
pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and common law
principles of negligent misrepresentation and names as defendants Transitional
as well as certain former senior executives and directors of Transitional. The
plaintiff seeks class certification, unspecified damages, attorneys' fees and
costs. In June 1998, the court granted the Company's motion to dismiss with
leave to amend the Section 10(b) claim and the state law claims for
misrepresentation. The court denied the Company's motion to dismiss the Section
14(e) and Section 20(a) claims, after which the Company filed a motion for
reconsideration. On March 23, 1999, the court granted the Company's motion to
dismiss all remaining claims and the case was dismissed. The plaintiff has
appealed this ruling to the United States Court of Appeals for the Ninth
Circuit. The Company is defending this action vigorously.
The Company was informed by the DOJ that the Company and Ventas were the
subjects of investigations into various Medicare reimbursement issues, including
hospital cost reporting issues, billing practices for ancillary services and
various quality of care issues in the hospitals and nursing centers formerly
operated by Ventas and currently operated by the Company. These investigations
included some matters for which the Company indemnified Ventas in the Spin-off.
In cases where neither the Company nor any of its subsidiaries are defendants
but Ventas is the defendant, the Company agreed to defend and indemnify Ventas
for such claims as part of the Spin-off. The Company cooperated fully in the
investigations. All of these investigations have been resolved by the
Government Settlement contained in the Amended Plan.
20
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
The DOJ previously informed the Company that it had intervened in several
pending qui tam actions asserted against the Company and/or Ventas in connection
with these investigations. In addition, the DOJ filed proofs of claims with
respect to certain alleged claims in the Chapter 11 Cases. The Company, Ventas
and the DOJ entered into the Government Settlement, which resolved all of the
DOJ investigations including the pending qui tam actions, as part of the Amended
Plan. The Government Settlement provides that within 30 days after the Effective
Date, the Government will move to dismiss with prejudice to the United States
and the relators (except for certain claims which will be dismissed without
prejudice to the United States in certain of the cases) the pending qui tam
actions as against any or all of the Company and its subsidiaries, Ventas and
any current or former officers, directors and employees of either entity. There
can be no assurance that each court before which a qui tam action is pending
will dismiss the case on the DOJ's motion. For a summary of the terms of the
Government Settlement contained in the Amended Plan, see Note 3.
The following is a summary of the qui tam actions pending or previously
pending against the Company and/or Ventas in which the DOJ intervened. Certain
of the actions described below name other defendants in addition to the Company
and Ventas.
(a) The Company, Ventas and the Company's subsidiary, American X-Rays, Inc.
("AXR"), are defendants in a civil qui tam action styled United States ex
rel. Doe v. American X-Rays Inc., et al., No. LR-C-95-332, pending in the
United States District Court for the Eastern District of Arkansas and served
on AXR on July 7, 1997. The DOJ intervened in the suit which was brought
under the Federal Civil False Claims Act and added the Company and Ventas as
defendants. The Company acquired an interest in AXR when The Hillhaven
Corporation ("Hillhaven") was merged into the Company in September 1995 and
purchased the remaining interest in AXR in February 1996. AXR provided
portable X-ray services to nursing centers (including some of those operated
by Ventas or the Company) and other healthcare providers. The civil suit
alleges that AXR submitted false claims to the Medicare and Medicaid
programs. The suit seeks damages in an amount of not less than $1,000,000,
treble damages and civil penalties. The Company has defended this action
vigorously. The court dismissed the action based upon the pending settlement
between the DOJ, the Company and Ventas. In a related criminal investigation,
the United States Attorney's Office for the Eastern District of Arkansas
("USAO") indicted four former employees of AXR; those individuals were
convicted of various fraud related counts in January 1999. AXR had been
informed previously that it was not a target of the criminal investigation,
and AXR was not indicted. However, the Company received several grand jury
subpoenas for documents and witnesses which it moved to quash. The USAO has
withdrawn the subpoenas which rendered the motion moot. The complaint against
the Company, Ventas and AXR has been dismissed with prejudice as to the
relators and the United States in accordance with the Government Settlement
contained in the Amended Plan.
(b) The Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"),
Ventas and Hillhaven (former parent company to Medisave), are the defendants
in a civil qui tam action styled United States ex rel. Danley v. Medisave
Pharmacies, Inc., et al., No. CV-N-96-00170-HDM, filed in the United States
District Court for the District of Nevada on March 15, 1996. The plaintiff
alleges that Medisave, an institutional pharmacy provider, formerly owned by
Ventas and owned by the Company since the Spin-off: (a) charged the Medicare
program for unit dose drugs when bulk drugs were administered and charged
skilled nursing facilities more for the same drugs for Medicare patients than
for non-Medicare patients; (b) improperly claimed special dispensing fees
that it was not entitled to under Medicaid; and (c) recouped unused drugs
from skilled nursing facilities and returned these drugs to its stock without
crediting Medicare or Medicaid, all in violation of the Federal Civil False
Claims Act. The complaint also alleges that Medisave had a policy of offering
kickbacks, such as free equipment, to skilled nursing centers to secure and
maintain their business. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorneys' fees and other costs. The
Company disputes the allegations in the complaint. The complaint has been
dismissed in accordance with the Government Settlement contained in the
Amended Plan.
21
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
(c) Ventas and the Company's subsidiary, Kindred Rehab Services, Inc.
(formerly Vencare, Inc.) ("Vencare"), among others, are defendants in the
action styled United States ex rel. Roberts v. Vencor, Inc., et al., No.
3:97CV-349-J, filed in the United States District Court for the Western
District of Kansas on June 25, 1996 and consolidated with the action styled
United States of America ex rel. Meharg, et al. v. Vencor, Inc., et al., No.
3:98SC-737-H, filed in the United States District Court for the Middle
District of Florida on June 4, 1998. The complaint alleges that the
defendants knowingly submitted and conspired to submit false claims and
statements to the Medicare program in connection with their purported
provision of respiratory therapy services to skilled nursing center
residents. The defendants allegedly billed Medicare for respiratory therapy
services and supplies when those services were not medically necessary,
billed for services not provided, exaggerated the time required to provide
services or exaggerated the productivity of their therapists. It is further
alleged that the defendants presented false claims and statements to the
Medicare program in violation of the Federal Civil False Claims Act, by,
among other things, allegedly causing skilled nursing centers with which they
had respiratory therapy contracts, to present false claims to Medicare for
respiratory therapy services and supplies. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorneys' fees and
other costs. The Company disputes the allegations in the complaints. The two
complaints have been dismissed in accordance with the Government Settlement
contained in the Amended Plan.
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et al.,
No. 97-10400-GAO, filed in the United States District Court for the District
of Massachusetts on October 15, 1998, the Company's subsidiary, Transitional,
and two unrelated entities, Gambro Healthcare, Inc. and Dialysis Holdings,
Inc., are defendants in this suit alleging that they violated the Federal
Civil False Claims Act and the Medicare and Medicaid antikickback, antifraud
and abuse regulations and committed common law fraud, unjust enrichment and
payment by mistake of fact. Specifically, the complaint alleges that a
predecessor to Transitional formed a joint venture with Damon Clinical
Laboratories to create and operate a clinical testing laboratory in Georgia
that was then used to provide lab testing for dialysis patients, and that the
joint venture billed at below cost in return for referral of substantially
all non-routine testing in violation of Medicare and Medicaid antikickback
and antifraud regulations. It is further alleged that a predecessor to
Transitional and Damon Clinical Laboratories used multiple panel testing of
end stage renal disease rather than single panel testing that allegedly
resulted in the generation of additional revenues from Medicare and that the
entities allegedly added non-routine tests to tests otherwise ordered by
physicians that were not requested or medically necessary but resulted in
additional revenue from Medicare in violation of the antikickback and
antifraud regulations. Transitional has moved to dismiss the case.
Transitional disputes the allegations in the complaint. The claims against
Transitional have been dismissed with prejudice in accordance with the
Government Settlement contained in the Amended Plan.
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM (Mcx),
filed in the United States District Court for the Central District of
California on June 13, 1997. The plaintiff alleges that the defendant
violated the Federal Civil False Claims Act by submitting false claims to the
Medicare, Medicaid and CHAMPUS programs by allegedly: (a) falsifying patient
bills and submitting the bills to the Medicare, Medicaid and CHAMPUS
programs, (b) submitting bills for intensive and critical care not actually
administered to patients, (c) falsifying patient charts in relation to the
billing, (d) charging for physical therapy services allegedly not provided
and pharmacy services allegedly provided by non-pharmacists, and (e) billing
for sales calls made by nurses to prospective patients. The complaint seeks
treble damages, other unspecified damages, civil penalties, attorneys' fees
and other costs. Defendants dispute the allegations in the complaint. The
complaint has been dismissed in accordance with the Government Settlement
contained in the Amended Plan.
22
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997. Ventas
is alleged to have knowingly violated the Federal Civil False Claims Act by
submitting and conspiring to submit false claims to the Medicare program. The
complaint alleges that Ventas: (a) fabricated diagnosis codes by ordering
medically unnecessary services, such as respiratory therapy; (b) changed
referring physicians' diagnoses in order to qualify for Medicare
reimbursement; and (c) billed Medicare for oxygen use by patients regardless
of whether the oxygen was actually administered to particular patients. The
complaint further alleges that Ventas paid illegal kickbacks to referring
healthcare professionals in the form of medical consulting service agreements
as an alleged inducement to refer patients, in violation of the Federal Civil
False Claims Act, the antikickback and antifraud regulations and the Stark
provisions. It is additionally alleged that Ventas consistently submitted
Medicare claims for clinical services that were not performed or were
performed at lower actual costs. The complaint seeks unspecified damages,
civil penalties, attorneys' fees and costs. Ventas disputes the allegations
in the complaint. The complaint has been dismissed in accordance with the
Government Settlement contained in the Amended Plan.
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States intervened in this civil qui tam lawsuit on May 17, 1999. On July 23,
1999, the United States filed its amended complaint in the lawsuit and added
the Company as a defendant. The lawsuit alleges that the Company and Ventas
knowingly submitted false claims and false statements to the Medicare and
Medicaid programs including, but not limited to, claims for reimbursement of
costs for certain ancillary services performed in defendants' nursing centers
and for third-party nursing center operators that the United States alleges
are not properly reimbursable costs through the hospitals' cost reports. The
lawsuit involves the Company's hospitals which were owned by Ventas prior to
the Spin-off. The complaint does not specify the amount of damages sought.
The Company and Ventas dispute the allegations in the amended complaint. The
complaint has been dismissed with prejudice in accordance with the Government
Settlement contained in the Amended Plan.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al.,
filed in the United States District Court for the Eastern District of
Missouri on May 25, 1999, the defendants include the Company, Vencare, and
Ventas. The defendants allegedly submitted and conspired to submit false
claims for payment to the Medicare and CHAMPUS programs, in violation of the
Federal Civil False Claims Act. According to the complaint, the Company,
through its subsidiary, Vencare, allegedly (a) over billed for respiratory
therapy services, (b) rendered medically unnecessary treatment, and (c)
falsified supply, clinical and equipment records. The defendants also
allegedly encouraged or instructed therapists to falsify clinical records and
over prescribe therapy services. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorneys' fees and other costs. The
Company disputes the allegations in the complaint. The plaintiffs have filed
an amended complaint with the court which removes all defendants associated
with the Company or Ventas.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its
two subsidiaries, Vencare and Kindred Hospice, Inc. (formerly Vencor Hospice,
Inc.), are alleged to have violated the Federal Civil False Claims Act by
obtaining improper reimbursement from Medicare concerning the treatment of
hospice patients. Defendants are alleged to have obtained inflated Medicare
reimbursement for admitting, treating and/or failing to discharge in a timely
manner hospice patients who were not "hospice appropriate." The complaint
further alleges that the defendants obtained inflated reimbursement for
providing medications for these hospice patients. The complaint alleges
damages in excess of $1,000,000. The Company disputes the allegations in the
complaint. The complaint has been dismissed in accordance with the Government
Settlement contained in the Amended Plan.
23
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 13--LITIGATION (Continued)
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, Kindred Healthcare Operating, Inc.
(formerly Vencor Operating, Inc.), Ventas, Hillhaven and Medisave, are
alleged to have presented or caused to be presented false or fraudulent
claims for payment to the Medicare program in violation of, among other
things, the Federal Civil False Claims Act. The complaint alleges that
Medisave, a subsidiary of the Company which was transferred from Ventas to
the Company in the Spin-off, systematically up-charged for drugs and supplies
dispensed to Medicare patients. The complaint seeks unspecified damages,
civil penalties, interest, attorneys' fees and other costs. The Company
disputes the allegations in the complaint. The plaintiffs have filed an
amended complaint with the court which removes all defendants associated with
the Company or Ventas.
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to
submit false claims and statements to Medicare, Medicaid, and other federal
and state funded programs during a period commencing in 1993. The conduct
complained of allegedly violates the Federal Civil False Claims Act, the
California False Claims Act, the Florida False Claims Act, the Tennessee
Health Care False Claims Act, and the Illinois Whistleblower Reward and
Protection Act. The defendants allegedly submitted improper and erroneous
claims to Medicare, Medicaid and other programs, for improper or unnecessary
services and services not performed, inadequate collections efforts
associated with billing and collecting bad debts, inflated and nonexistent
laboratory charges, false and inadequate documentation of claims, splitting
charges, shifting revenues and expenses, transferring patients to hospitals
that are reimbursed by Medicare at a higher level, failing to return
duplicate reimbursement payments, and improperly allocating hospital
insurance expenses. In addition, the complaint alleges that the defendants
were inconsistent in their reporting of cost report data, paid kickbacks to
increase patient referrals to hospitals, and incorrectly reported employee
compensation resulting in inflated employee 401(k) contributions. The
complaint seeks unspecified damages. The Company disputes the allegations in
the complaint and intends to defend this action vigorously. On July 27, 2001,
the court ordered that the DOJ be allowed to intervene in the action to
effectuate the Government Settlement contained in the Amended Plan.
In connection with the Spin-off, liabilities arising from various legal
proceedings and other actions were assumed by the Company and the Company agreed
to indemnify Ventas against any losses, including any costs or expenses, it may
incur arising out of or in connection with such legal proceedings and other
actions. The indemnification provided by the Company also covers losses,
including costs and expenses, which may arise from any future claims asserted
against Ventas based on the former healthcare operations of Ventas. In
connection with its indemnification obligation, the Company has assumed the
defense of various legal proceedings and other actions. Under the Amended Plan,
the Company agreed to continue to fulfill its indemnification obligations
arising from the Spin-off.
The Company is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is unable to predict
the ultimate outcome of pending litigation and regulatory investigations. In
addition, there can be no assurance that the DOJ, CMS or other regulatory
agencies will not initiate additional investigations related to the Company's
businesses in the future, nor can there be any assurance that the resolution of
any litigation or investigations, either individually or in the aggregate, would
not have a material adverse effect on the Company's results of operations,
liquidity or financial position. In addition, the above litigation and
investigations (as well as future litigation and investigations) are expected to
consume the time and attention of the Company's management and may have a
disruptive effect upon the Company's operations.
24
KINDRED HEALTHCARE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 14--SUBSEQUENT EVENTS
On May 2, 2001, the Company sold its investment in Behavioral Healthcare
Corporation for $40 million. No gain or loss was recorded in connection with
this transaction because the Company reflected the fair value of the investment
on April 1, 2001 in connection with fresh-start accounting. Under the terms of
the Credit Facility and Senior Secured Notes, proceeds from the sale of assets
will be available to fund future capital expenditures for a period of
approximately one year from the sale. Any proceeds not expended during that
period would be used to permanently reduce the commitments under the Credit
Facility to as low as $75 million and repay any outstanding loans in excess of
such commitment. Any remaining proceeds would be used to repay loans under the
Senior Secured Notes.
On May 30, 2001, the Company prepaid the outstanding balance in full
satisfaction of its obligation under the CMS Agreement, resulting in an
extraordinary gain of $1.4 million. The transaction was financed through the
use of existing cash.
25
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
Exhibit 23.1 - Consent of Independent Accountants.
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 hereunto duly authorized.
KINDRED HEALTHCARE, INC.
Dated: August 21, 2001 By: /s/ RICHARD A. LECHLEITER
----------------------- ----------------------------
Richard A. Lechleiter
Vice President, Finance,
Corporate Controller and Treasurer
26