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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
(Registrant's telephone number, including area code)
Vencor, Inc.
(Former name)
Not Applicable
(Former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 2001
--------------------- -----------------------------
Common stock, $0.25 par value 15,000,000 shares
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1 of 37
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations -- for the three months ended
March 31, 2001 and 2000 (restated in 2000)..................................................... 3
Condensed Consolidated Balance Sheet (restated) -- March 31, 2001 and December 31, 2000........ 4
Condensed Consolidated Statement of Cash Flows -- for the three months ended
March 31, 2001 and 2000 (restated in 2000)..................................................... 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 36
2
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 2001 and 2000
(Unaudited)
(In thousands, except per share amounts)
(Restated - see
Note 2)
---------------
2001 2000
-------- --------
Revenues........................................... $752,409 $715,456
-------- --------
Salaries, wages and benefits....................... 427,649 405,313
Supplies........................................... 94,319 93,398
Rent............................................... 76,995 76,220
Other operating expenses........................... 126,701 122,589
Depreciation and amortization...................... 18,645 17,902
Interest expense................................... 14,000 16,239
Investment income.................................. (1,919) (1,206)
-------- --------
756,390 730,455
-------- --------
Loss before reorganization costs and income taxes.. (3,981) (14,999)
Reorganization costs............................... 4,473 3,065
-------- --------
Loss before income taxes........................... (8,454) (18,064)
Provision for income taxes......................... 500 500
-------- --------
Net loss.................................. (8,954) (18,564)
Preferred stock dividend requirements.............. (261) (261)
-------- --------
Loss to common stockholders............... $ (9,215) $(18,825)
======== ========
Loss per common share:
Basic............................................. $ (0.13) $ (0.27)
Diluted........................................... $ (0.13) $ (0.27)
Shares used in computing loss per common share:
Basic............................................. 70,261 70,240
Diluted........................................... 70,261 70,240
See accompanying notes.
3
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
(Restated)
--------------------------
March 31, December 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 160,055 $ 184,642
Accounts receivable less allowance for loss......................... 330,846 322,483
Inventories......................................................... 29,132 29,707
Insurance subsidiary investments.................................... 90,617 62,453
Other............................................................... 85,740 96,567
----------- -----------
696,390 695,852
Property and equipment, at cost...................................... 708,232 693,586
Accumulated depreciation............................................. (316,862) (300,881)
----------- -----------
391,370 392,705
Goodwill less accumulated amortization............................... 156,765 159,277
Other................................................................ 85,497 86,580
----------- -----------
$ 1,330,022 $ 1,334,414
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $ 90,279 $ 115,468
Salaries, wages and other compensation.............................. 178,319 184,860
Due to third-party payors........................................... 47,773 44,561
Other accrued liabilities........................................... 93,982 83,802
----------- -----------
410,353 428,691
Professional liability risks......................................... 106,505 101,209
Deferred credits and other liabilities............................... 14,128 14,132
Liabilities subject to compromise.................................... 1,278,223 1,260,373
Series A preferred stock (subject to compromise)..................... 1,743 1,743
Stockholders' equity (deficit):
Common stock, $0.25 par value; authorized 180,000 shares;
issued 70,261 shares -- March 31 and 70,261 shares -- December 31.. 17,565 17,565
Capital in excess of par value...................................... 667,187 667,168
Accumulated deficit................................................. (1,165,682) (1,156,467)
----------- -----------
(480,930) (471,734)
----------- -----------
$ 1,330,022 $ 1,334,414
=========== ===========
See accompanying notes.
4
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2001 and 2000
(Unaudited)
(In thousands)
(Restated)
--------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss......................................................................... $ (8,954) $(18,564)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................................................. 18,645 17,902
Provision for doubtful accounts............................................... 6,305 8,801
Reorganization costs.......................................................... 4,473 3,065
Other......................................................................... 1,357 3,586
Changes in operating assets and liabilities:
Accounts receivable........................................................ (14,668) (1,851)
Inventories and other assets............................................... 12,476 (2,697)
Accounts payable........................................................... (10,845) (387)
Income taxes............................................................... 108 775
Due to third-party payors.................................................. 2,051 12,635
Other accrued liabilities.................................................. 28,628 21,746
-------- --------
Net cash provided by operating activities before reorganization costs... 39,576 45,011
Payment of reorganization costs.................................................. (3,745) (2,348)
-------- --------
Net cash provided by operating activities............................... 35,831 42,663
-------- --------
Cash flows from investing activities:
Purchase of property and equipment............................................... (22,038) (8,250)
Sale of assets................................................................... - 2,354
Surety bond deposits............................................................. - (3,947)
Net change in investments........................................................ (28,178) (22,570)
Other............................................................................ 224 1,702
-------- --------
Net cash used in investing activities................................... (49,992) (30,711)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt...................................................... (4,355) (5,711)
Payment of debtor-in-possession deferred financing costs......................... (100) (600)
Other............................................................................ (5,971) (12,085)
-------- --------
Net cash used in financing activities................................... (10,426) (18,396)
-------- --------
Change in cash and cash equivalents................................................. (24,587) (6,444)
Cash and cash equivalents at beginning of period.................................... 184,642 148,350
-------- --------
Cash and cash equivalents at end of period.......................................... $160,055 $141,906
======== ========
Supplemental information:
Interest payments................................................................ $ 2,606 $ 3,444
Income tax payments (refunds).................................................... 392 (275)
See accompanying notes.
5
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
Kindred Healthcare, Inc. ("Kindred" or the "Company") (formerly Vencor, Inc.)
provides long-term healthcare services primarily through the operation of
nursing centers and hospitals. At March 31, 2001, the Company's health services
division operated 313 nursing centers (40,330 licensed beds) in 31 states and a
rehabilitation therapy business. The Company's hospital division operated 56
hospitals (4,867 licensed beds) in 23 states and an institutional pharmacy
business.
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). 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 "Amended Plan"). 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 Amended Plan became effective on April 20, 2001 (the
"Effective Date"). In connection with its emergence, the Company also changed
its name to Kindred Healthcare, Inc.
During the first quarter of 2001, the Company operated its businesses as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
Accordingly, the unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally
accepted accounting principles applicable to a going concern, which assumes that
assets will be realized and liabilities will be discharged in the normal course
of business. The unaudited condensed consolidated financial statements do not
include any adjustments that will result from the resolution of the Chapter 11
Cases (as defined) or other matters discussed in the accompanying notes.
Management believes that the Amended Plan will change materially the amounts
currently recorded in the unaudited condensed consolidated financial statements.
See Note 3.
On May 1, 1998, Ventas, Inc. ("Ventas") completed the spin-off of its
healthcare operations to its stockholders through the distribution of the
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 under four master lease agreements. In anticipation of the Spin-off, the
Company was incorporated on March 27, 1998 as a Delaware corporation. For
accounting purposes, the consolidated historical financial statements of Ventas
became the Company's historical financial statements following the Spin-off. Any
discussion concerning events prior to May 1, 1998 refers to the Company's
business as it was conducted by Ventas prior to the Spin-off.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133"), which was required
to be adopted in fiscal years beginning after June 15, 1999. In June 1999, FASB
delayed the effective date of SFAS 133 for one year. Management has determined
that the adoption of SFAS 133 on January 1, 2001 did not have a material impact
on the Company's financial position or results of operations.
The accompanying unaudited condensed consolidated financial statements do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
2000 filed with the Securities and Exchange Commission (the "Commission") on
Form 10-K/A.
6
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION (Continued)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the Company's customary accounting practices
and the provisions of SOP 90-7. Management believes that the financial
information included herein reflects all adjustments necessary for a fair
presentation of interim results and, except for the costs described in Note 5,
all such adjustments are of a normal and recurring nature.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
In connection with its emergence from bankruptcy, the Company will adopt the
fresh start accounting provisions of SOP 90-7 in the second quarter of 2001,
which will result in the revaluation of assets and liabilities to reflect the
provisions of the Amended Plan.
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 previously reported cash flows of the
Company were not affected by the restatement. The restatement of prior year
results had no effect on the Company's reported operating results for the first
quarter of 2001.
The unaudited condensed consolidated financial statements included herein
amend those previously included in the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 2001. Consolidated financial statement
information and related disclosures included in these amended unaudited
condensed consolidated financial statements reflect, where appropriate, changes
resulting from the restatement.
7
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
The effect of the restatement on the Company's previously issued unaudited
condensed consolidated financial statements follows (in thousands, except per
share amounts):
Three months ended March 31,
-----------------------------
2000
-----------------------------
As previously As
reported restated
------------- ---------
Loss from operations................................................... $(15,771) $(18,564)
Net loss............................................................... (15,771) (18,564)
Loss per common share:
Basic:
Loss from operations............................................... $ (0.23) $ (0.27)
Net loss........................................................... (0.23) (0.27)
Diluted:
Loss from operations............................................... $ (0.23) $ (0.27)
Net loss........................................................... (0.23) (0.27)
March 31, 2001 December 31, 2000
-------------------------- -----------------------------
As previously As As previously As
reported restated reported restated
------------- -------- ------------- ---------
Professional liability risks.............. $ 67,623 $ 106,505 $ 62,327 $ 101,209
Total liabilities......................... 1,770,327 1,809,209 1,765,523 1,804,405
Accumulated deficit....................... (1,126,800) (1,165,682) (1,117,585) (1,156,467)
Stockholders' deficit..................... (442,048) (480,930) (432,852) (471,734)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 cases have been consolidated for purposes of joint
administration under Case Nos. 99-3199 (MFW) through 99-3327 (MFW)
(collectively, the "Chapter 11 Cases").
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.
In connection with the emergence from bankruptcy, the Company entered into a
$120 million senior exit facility with a lending group led by Morgan Guaranty
Trust Company of New York (the "Exit Facility") on the Effective Date. The Exit
Facility constitutes a working capital facility for general corporate purposes
including paying the Company's obligations under the Amended Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity."
8
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization
The Amended Plan represents a consensual arrangement among Ventas, the
Company's 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 Health Care Financing Administration ("HCFA") (collectively,
the "Government") and the advisors to the official committee of unsecured
creditors.
The Company distributed its disclosure materials soliciting approval of the
Amended Plan on December 29, 2000. Voting on the Amended Plan concluded on
February 15, 2001 (other than for Ventas, which voted prior to the confirmation
hearing) and the Company received the requisite acceptances from various
creditor classes to confirm the Amended Plan.
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--The Senior Lenders received on the Effective Date, in
the aggregate, new senior subordinated secured notes in the principal amount of
$300 million, bearing interest at the rate of LIBOR plus 4 1/2%, with a maturity
of seven years (the "Senior Secured Notes"). 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 65.51% of the new common stock (the "New Common Stock") of the reorganized
Company (subject to dilution from stock issuances occurring after the Effective
Date).
Senior 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 on the
Effective Date, in the aggregate, 24.50% of the New Common Stock (subject to
dilution from stock issuances occurring after 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 New 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.
Ventas Claim--Ventas received the following treatment under the Amended Plan:
The four master leases and a single facility lease with Ventas were assumed
and simultaneously amended and restated as of the Effective Date (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).
9
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
(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.
(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 9.99% of
the New Common Stock (subject to dilution from stock issuances occurring after
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
(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
10
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
(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 will repay the remaining balance of the obligations
owed to HCFA (approximately $59.2 million as of March 31, 2001) pursuant to the
terms previously agreed to by the Company (the "HCFA Agreement"). As previously
announced, the Company has 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 9.
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, will be 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 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 consists 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 BI-Logix, Inc. and David
Tepper of Appaloosa Management, L.P.
A restricted share plan was approved under the Amended Plan that provides for
the issuance of 600,000 shares of New Common Stock to certain key employees of
the Company. The restricted shares will be 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 New Common Stock to
certain key employees of the Company. 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.
The Amended Plan also provided for the continuation of the Company's current
management retention plan for its employees and the payment of certain
performance bonuses on the Effective Date.
Debtor-in-Possession Financing Agreement
In connection with the Chapter 11 Cases, the Company entered into a $100
million debtor-in-possession financing agreement (the "DIP Financing"). The DIP
Financing was initially comprised of a $75 million tranche A revolving loan (the
"Tranche A Loan") and a $25 million tranche B revolving loan (the "Tranche B
Loan"). Interest was payable at prime plus 2 1/2% on the Tranche A Loan and
prime plus 4 1/2% on the Tranche B Loan.
11
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Debtor-in-Possession Financing Agreement (Continued)
The DIP Financing was secured by substantially all of the assets of the
Company and its subsidiaries, including certain owned real property. The DIP
Financing contained standard representations and warranties and other
affirmative and restrictive covenants. The DIP Financing matured on March 31,
2001, at which time there were no outstanding borrowings thereunder.
Agreements with Ventas
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off (the
"Spin-off Agreement"). The Company was seeking a reduction in rent and other
concessions under its lease agreements with Ventas (the "Master Lease
Agreements"). Shortly thereafter, the Company and Ventas entered into a series
of standstill and tolling agreements which provided that both companies would
postpone any claims either may have against the other and extend any applicable
statutes of limitation.
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 agreements to extend the time during which no remedies may be
pursued by either party and to extend the date by which the Company may cure its
failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
a stipulation (the "Stipulation") that provided for the payment by the Company
of a reduced aggregate monthly rent of approximately $15.1 million. The
Stipulation was approved by the Bankruptcy Court. The difference between the
base rent under the Master Lease Agreements and the reduced aggregate monthly
rent under the Stipulation was accrued through March 31, 2001 as an
administrative expense subject to compromise in the Chapter 11 Cases. The
Stipulation was terminated on the Effective Date.
On May 31, 2000, the Company announced that the Bankruptcy Court had approved
a tax stipulation agreement between the Company and Ventas (the "Tax
Stipulation"). The Tax Stipulation provided that certain refunds of federal,
state and local taxes received by either party on or after September 13, 1999
would be held by the recipient of such refunds in segregated interest bearing
accounts. The Tax Stipulation was terminated on the Effective Date and was
essentially replaced by the Tax Escrow Agreement.
The Company believes that the Amended Plan resolves all material disputes
between the Company and Ventas. The Amended Plan also provides for comprehensive
mutual releases between the Company and Ventas, other than for obligations that
the Company assumed under the Amended Plan.
General
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the unaudited condensed consolidated balance sheet
as liabilities subject to compromise. The Company has paid the post-petition
claims of all vendors and providers in the ordinary course of business.
12
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third-party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims and other events. Payment terms for these amounts are set forth
in the Amended Plan.
All pre-petition liabilities, other than those for which the Company has
received Bankruptcy Court approval to pay, have been classified in the unaudited
condensed consolidated balance sheet as liabilities subject to compromise. A
summary of the principal categories of claims classified as liabilities subject
to compromise under the Chapter 11 Cases follows (in thousands):
March 31, December 31,
2001 2000
---------- ------------
Long-term debt:
1998 Credit Agreement (as defined).... $ 510,908 $ 510,908
1998 Notes............................ 300,000 300,000
Amounts due under the HCFA Agreement.. 59,236 63,405
8 5/8% Senior Subordinated Notes...... 2,391 2,391
Unamortized deferred financing costs.. (9,729) (10,306)
Other................................. 2,687 2,873
---------- ------------
865,493 869,271
---------- ------------
Due to third-party payors.............. 114,899 116,062
Accounts payable....................... 35,703 36,053
Income taxes........................... 13,086 13,478
Accrued liabilities:
Interest.............................. 101,703 90,655
Ventas rent........................... 94,285 81,902
Other................................. 53,054 52,952
---------- ------------
249,042 225,509
---------- ------------
$1,278,223 $ 1,260,373
========== ============
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
13
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of first quarter revenues by payor type follows (in thousands):
2001 2000
-------- --------
Medicare.......................... $288,390 $263,877
Medicaid.......................... 233,160 222,513
Private and other................. 245,532 243,653
-------- --------
767,082 730,043
Elimination....................... (14,673) (14,587)
-------- --------
$752,409 $715,456
======== ========
NOTE 5 -- REORGANIZATION COSTS
Reorganization costs, consisting principally of professional fees incurred in
connection with the Company's restructuring activities, aggregated $4.5 million
for the first quarter of 2001 and $3.1 million for the first quarter of 2000.
NOTE 6 -- EARNINGS PER SHARE
Basic and diluted earnings per common share are based upon the weighted
average number of common shares outstanding during the respective periods. No
incremental shares are included in the calculations of the diluted loss per
common share since the result would be antidilutive.
14
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7 -- BUSINESS SEGMENT DATA
The Company operates two business segments: the health services division and
the hospital division. The health services division operates nursing centers and
a rehabilitation therapy business. The hospital division operates hospitals and
an institutional pharmacy business. The Company defines operating income as
earnings before interest, income taxes, depreciation, amortization and rent.
Operating income reported for each of the Company's business segments excludes
allocations of corporate overhead.
The following table sets forth the Company's revenues, operating results,
capital expenditures and assets by business segment (in thousands):
First Quarter
------------------------------
Revenues: 2001 2000
---------- ----------
( Restated)
Health services division:
Nursing centers........................................... $ 429,523 $ 412,703
Rehabilitation services................................... 10,695 34,377
Other ancillary services.................................. - (5)
Elimination............................................... - (18,091)
---------- ----------
440,218 428,984
Hospital division:
Hospitals................................................. 271,984 253,591
Pharmacy.................................................. 54,880 47,468
---------- ----------
326,864 301,059
---------- ----------
767,082 730,043
Elimination of pharmacy charges to Company nursing centers.. (14,673) (14,587)
---------- ----------
$ 752,409 $ 715,456
========== ==========
Income (loss) from operations:
Operating income (loss):
Health services division:
Nursing centers......................................... $ 70,543 $ 68,712
Rehabilitation services................................. 690 486
Other ancillary services................................ 250 130
---------- ----------
71,483 69,328
Hospital division:
Hospitals............................................... 54,778 55,398
Pharmacy................................................ 6,176 (1,200)
---------- ----------
60,954 54,198
---------- ----------
Corporate overhead........................................ (28,697) (29,370)
Reorganization costs...................................... (4,473) (3,065)
---------- ----------
Operating income...................................... 99,267 91,091
Rent........................................................ (76,995) (76,220)
Depreciation and amortization............................... (18,645) (17,902)
Interest, net............................................... (12,081) (15,033)
---------- ----------
Loss before income taxes.................................... (8,454) (18,064)
Provision for income taxes.................................. 500 500
---------- ----------
$ (8,954) $ (18,564)
========== ==========
Capital expenditures:
Health services division.................................. $ 7,962 $ 2,908
Hospital division......................................... 8,901 3,536
Corporate:
Information systems..................................... 3,496 1,346
Other................................................... 1,679 460
---------- ----------
$ 22,038 $ 8,250
========== ==========
March 31, 2001 December 31, 2000
-------------- -----------------
Assets:
Health services division.................................. $ 488,926 $ 494,636
Hospital division......................................... 365,599 354,302
Corporate................................................. 475,497 485,476
---------- ----------
$1,330,022 $1,334,414
========== ==========
15
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- INCOME TAXES
The provision for income taxes is based upon management's estimate of taxable
income or loss for the year and includes the effect of certain non-deductible
items such as goodwill amortization and the recording of additional deferred tax
valuation allowances.
The provision for income taxes for the first quarter of 2001 and 2000
included charges of $685,000 and $6 million, respectively, related to the
deferred tax valuation allowance. At March 31, 2001, the deferred tax valuation
allowance included in the Company's unaudited condensed consolidated balance
sheet aggregated $373 million.
NOTE 9 -- 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 for further discussion of the
Chapter 11 Cases.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Spin-off Agreement. The Company was seeking a reduction in rent
and other concessions under its Master Lease Agreements with Ventas. On March
31, 1999, the Company and Ventas entered into 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 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.
16
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
As a result of the consummation of the Amended Plan, the Company believes
that all 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.
The Company's subsidiary, formerly named TheraTx, Incorporated, is plaintiff
in a declaratory judgment action entitled TheraTx, Incorporated v. James W.
Duncan, Jr., et al., No. 1:95-CV-3193, filed in the United States District Court
for the Northern District of Georgia and currently pending in the United States
Court of Appeals for the Eleventh Circuit, No. 99-11451-FF. The defendants have
asserted counterclaims against TheraTx, 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
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
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
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 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
17
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
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 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. 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
18
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
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.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of Los
Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various causes
of action arising out of the Company's sale and lease of several nursing centers
to Lenox in 1997. Lenox subsequently removed certain of its causes of action and
refiled these claims before the United States District Court for the Western
District of Kentucky in a case entitled Lenox Healthcare, Inc. v. Vencor, Inc.,
et al., Case No. 3:99 CV-348-H. The Company asserted counterclaims, including
RICO claims, against Lenox in the Kentucky action. The Company believes that the
allegations made by Lenox in both complaints are without merit. Lenox and its
subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code on
November 3, 1999. By virtue of both the Company's and Lenox's separate filings
for Chapter 11 protection, the two Lenox actions and the Company's counterclaims
were stayed. Subsequently, the parties entered into a settlement, which was
approved by their respective bankruptcy courts, that requires the dismissal of
the two above actions. Orders to dismiss both actions have been entered by the
respective courts.
The Company was informed by the DOJ that the Company and Ventas are the
subjects of investigations into various Medicare reimbursement issues, including
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in the hospitals and nursing centers formerly operated by Ventas and
currently operated by the Company. These investigations 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 has cooperated fully in the investigations.
The DOJ has informed the Company that it has intervened in several pending
qui tam actions asserted against the Company and/or Ventas in connection with
these investigations. In addition, the DOJ has filed proofs of claims with
respect to certain alleged claims in the Chapter 11 Cases. The Company, Ventas
and the DOJ finalized the terms of the Government Settlement which resolved all
of the DOJ investigations including the pending qui tam actions. 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 against the Company
and/or Ventas in which the DOJ has 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
19
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
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.
(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 defendants intend to defend
this action vigorously.
(c) Ventas and the Company's subsidiary, Vencare, Inc. ("Vencare"), among
others, are defendants in the action styled United States ex rel. Roberts v.
Vencor, Inc., et al., No. 3:97CV-349-J, filed in the United States District
Court for the Western District of Kansas on June 25, 1996 and consolidated
with the action styled United States of America ex rel. Meharg, et al. v.
Vencor, Inc., et al., No. 3:98SC-737-H, filed in the United States District
Court for the Middle District of Florida on June 4, 1998. The complaint
alleges that the defendants knowingly submitted and conspired to submit false
claims and statements to the Medicare program in connection with their
purported provision of respiratory therapy services to skilled nursing center
residents. The defendants allegedly billed Medicare for respiratory therapy
services and supplies when those services were not medically necessary, billed
for services not provided, exaggerated the time required to provide services
or exaggerated the productivity of their therapists. It is further alleged
that the defendants presented false claims and statements to the Medicare
program in violation of the Federal Civil False Claims Act, by, among other
things, allegedly causing skilled nursing centers with which they had
respiratory therapy contracts, to present false claims to Medicare for
respiratory therapy services and supplies. The complaint seeks treble damages,
other unspecified damages, civil penalties, attorneys' fees and other costs.
The Company disputes the allegations in the complaint. The defendants intend
to defend this action vigorously.
20
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et al.,
No. 97-10400-GAO, filed in the United States District Court for the District
of Massachusetts on October 15, 1998, the Company's subsidiary, Transitional,
and two unrelated entities, Gambro Healthcare, Inc. and Dialysis Holdings,
Inc., are defendants in this suit alleging that they violated the Federal
Civil False Claims Act and the Medicare and Medicaid antikickback, antifraud
and abuse 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 and is defending the
action vigorously.
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM (Mcx),
filed in the United States District Court for the Central District of
California on June 13, 1997. The plaintiff alleges that the defendant violated
the Federal Civil False Claims Act by submitting false claims to the Medicare,
Medicaid and CHAMPUS programs by allegedly: (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 Company, on
behalf of itself and Ventas, intends to defend this action vigorously.
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997. Ventas
is alleged to have knowingly violated the Federal Civil False Claims Act by
submitting and conspiring to submit false claims to the Medicare program. The
complaint alleges that Ventas: (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 Company, on behalf of Ventas, intends to defend the action
vigorously.
21
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States of America intervened in this civil qui tam lawsuit on May 17, 1999. On
July 23, 1999, the United States filed its amended complaint in the lawsuit
and added the Company as a defendant. The lawsuit alleges that the Company and
Ventas knowingly submitted false claims and false statements to the Medicare
and Medicaid programs including, but not limited to, claims for reimbursement
of costs for certain ancillary services performed in defendants' nursing
centers and for third-party nursing center operators that the United States
alleges are not properly reimbursable costs through the hospitals' cost
reports. The lawsuit involves the Company's hospitals which were owned by
Ventas prior to the Spin-off. The complaint does not specify the amount of
damages sought. The Company and Ventas dispute the allegations in the amended
complaint and intend to defend this action vigorously.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al., filed
in the 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 and intends to defend this
action vigorously. The action has been dismissed with prejudice as to the
relator and without prejudice as to the United States.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its two
subsidiaries, Vencare and Vencor Hospice, Inc., are alleged to have violated
the Federal Civil False Claims Act by obtaining improper reimbursement from
Medicare concerning the treatment of hospice patients. Defendants are alleged
to have obtained inflated Medicare reimbursement for admitting, treating
and/or failing to discharge in a timely manner hospice patients who were not
"hospice appropriate." The complaint further alleges that the defendants
obtained inflated reimbursement for providing medications for these hospice
patients. The complaint alleges damages in excess of $1,000,000. The Company
disputes the allegations in the complaint and intends to defend vigorously the
action.
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, 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 and intends to defend this action vigorously.
22
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- LITIGATION (Continued)
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to
submit false claims and statements to Medicare, Medicaid, and other federal
and state funded programs during a period commencing in 1993. The conduct
complained of allegedly violates the Federal Civil False Claims Act, the
California False Claims Act, the Florida False Claims Act, the Tennessee
Health Care False Claims Act, and the Illinois Whistleblower Reward and
Protection Act. 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.
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, HCFA or other regulatory
agencies will not initiate additional investigations related to the Company's
businesses in the future, nor can there be any assurance that the resolution of
any litigation or investigations, either individually or in the aggregate, would
not have a material adverse effect on the Company's results of operations,
liquidity or financial position. In addition, the above litigation and
investigations (as well as future litigation and investigations) are expected to
consume the time and attention of the Company's management and may have a
disruptive effect upon the Company's operations.
23
KINDRED HEALTHCARE, INC.
(Formerly Vencor, Inc., a Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10 -- SUBSEQUENT EVENTS
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 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.
On April 20, 2001, the Company filed a registration statement on Form 8-A
(the "Form 8-A") with the Commission to register its New Common Stock under
Section 12(g) of the Exchange Act. The Form 8-A also registered the Company's
two series of warrants to purchase New Common Stock issued pursuant to the
Amended Plan.
On May 2, 2001, the Company sold its investment in Behavioral Healthcare
Corporation for $40 million. Under the terms of its debt agreements, proceeds
from the sale will be available to fund future capital expenditures. The Company
does not expect to record any gain or loss from this transaction.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
Certain statements made in this Form 10-Q/A, including, but not limited to,
statements containing the words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ materially from
the Company's expectations as a result of a variety of factors, including,
without limitation, those discussed below. Such forward-looking statements are
based on management's current expectations and include known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the Company's actual results or performance to differ
materially from any future results or performance expressed or implied by such
forward-looking statements. Factors that may affect the plans or results of the
Company include, without limitation, the ability of the Company to operate
pursuant to the terms of its debt obligations and the Amended Leases; 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; 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.
General
The business segment data in Note 7 of the Notes to Condensed Consolidated
Financial Statements should be read in conjunction with the following discussion
and analysis.
The Company provides long-term healthcare services primarily through the
operation of nursing centers and hospitals. At March 31, 2001, the Company's
health services division operated 313 nursing centers (40,330 licensed beds) in
31 states and a rehabilitation therapy business. The Company's hospital division
operated 56 hospitals (4,867 licensed beds) in 23 states and an institutional
pharmacy business.
Reorganization. On September 13, 1999, the Company and substantially all of
its subsidiaries filed voluntary petitions for protection under Chapter 11 of
the Bankruptcy Code. 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.
During the first quarter of 2001, the Company operated its businesses as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
Accordingly, the unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with SOP 90-7 and generally accepted
accounting principles applicable to a going concern, which assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. The unaudited condensed consolidated financial statements do not
include any adjustments that will result from the resolution of the Chapter 11
Cases or other matters discussed in the accompanying notes. Management believes
that the Amended Plan will change materially the amounts currently recorded in
the
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General (Continued)
unaudited condensed consolidated financial statements. See Note 3 of the Notes
to Condensed Consolidated Financial Statements.
Regulatory Changes
The Balanced Budget Act of 1997 (the "Budget Act") contained extensive
changes to the Medicare and Medicaid programs intended to reduce the projected
amount of increase in payments under those programs over a five year period.
Virtually all spending reductions come from reimbursements to providers and
changes in program components. The Budget Act has affected adversely the
revenues in each of the Company's operating divisions.
The Budget Act established a Medicare prospective payment system ("PPS") for
nursing centers for cost reporting periods beginning on or after July 1, 1998.
While most nursing centers in the United States became subject to PPS during the
first quarter of 1999, all of the Company's nursing centers adopted PPS on July
1, 1998. During the first three years, the per diem rates for nursing centers
are based on a blend of facility-specific costs and federal costs. Thereafter,
the per diem rates are based solely on federal costs. The payments received
under PPS cover all services for Medicare patients including all ancillary
services, such as respiratory therapy, physical therapy, occupational therapy,
speech therapy and certain covered pharmaceuticals.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division by reducing incentive payments pursuant to the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), allowable costs for
capital expenditures and bad debts, and payments for services to patients
transferred from a general acute care hospital. The reductions in allowable
costs for capital expenditures became effective October 1, 1997. The reductions
in the TEFRA incentive payments and allowable costs for bad debts became
effective between May 1, 1998 and September 1, 1998. The reductions in payments
for services to patients transferred from a general acute care hospital became
effective October 1, 1998. These reductions have had a material adverse impact
on hospital revenues. In addition, these reductions also may affect adversely
the hospital division's ability to develop additional long-term care hospitals
in the future.
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients also has declined dramatically. As previously discussed,
Medicare reimbursements to nursing centers under PPS include substantially all
services provided to patients, including ancillary services. Prior to the
implementation of PPS, the costs of such services were reimbursed under cost-
based reimbursement rules. The decline in the demand for ancillary services is
mostly attributable to efforts by nursing centers to reduce operating costs. As
a result, many nursing centers are electing to provide ancillary services to
their patients through internal staff or are seeking lower acuity patients who
require less ancillary services. In response to PPS and a significant decline in
the demand for ancillary services, the Company realigned its Vencare division in
the fourth quarter of 1999 by integrating the physical rehabilitation, speech
and occupational therapy businesses into the health services division and
assigning the institutional pharmacy business to the hospital division.
Vencare's respiratory therapy and other ancillary businesses were discontinued.
Since November 1999, various legislative and regulatory actions have provided
a measure of relief from some of the impact of the Budget Act. In November 1999,
the Balanced Budget Refinement Act (the "BBRA") was enacted. Effective April 1,
2000, the BBRA made a temporary 20% upward adjustment in the payment rates for
the care of higher acuity patients and allowed nursing centers to transition
more rapidly to the federal payment rates. The BBRA also imposed a two-year
moratorium on certain therapy limitations for skilled nursing center patients
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Regulatory Changes (Continued)
covered under Medicare Part B. Effective October 1, 2000, the BBRA increased all
PPS payment categories by 4% for two years.
In April 2000, HCFA published a proposed rule which set forth updates to the
Resource Utilization Grouping ("RUG") payment rates used under PPS for nursing
centers. On July 31, 2000, HCFA issued a final rule that indefinitely postponed
any refinements to the RUG categories used under PPS. It also provided for the
continuance of Medicare payment relief set forth in the BBRA, including the 20%
upward adjustment for certain higher acuity RUG categories through September 30,
2001 and the 4% increase (effective October 2000) for all RUG categories through
September 30, 2002.
In December 2000, the Medicare, Medicaid, and State Child Health Insurance
Program Benefits Improvement and Protection Act of 2000 ("BIPA") was enacted to
provide up to $35 billion in additional funding to the Medicare and Medicaid
programs over the next five years. Under BIPA, the nursing component for each
RUG category will increase by 16.66% over the current rates for skilled nursing
care for the period April 1, 2001 through September 30, 2002. BIPA also will
provide some relief from scheduled reductions to the annual inflation
adjustments to the RUG payment rates through September 2001.
In addition, BIPA slightly increased payments for inpatient services and
TEFRA incentive payments for long-term acute care hospitals. Allowable costs for
bad debts also will be increased by 10%. Both of these provisions will become
effective for cost reporting periods beginning September 1, 2001.
Despite the recent legislation and regulatory actions discussed above,
Medicare revenues recorded under PPS in the Company's health services division
have been substantially less than the cost-based reimbursement it received
before the enactment of the Budget Act. In addition, the recent legislation did
not impact materially the reductions in Medicare revenues received by the
Company's hospitals as a result of the Budget Act.
There also continues to be state legislative proposals that would impose more
limitations on government and private payments to providers of healthcare
services such as the Company. By repealing the Boren Amendment, the Budget Act
eased existing impediments on the states' ability to reduce their Medicaid
reimbursement levels. Many states have enacted or are considering enacting
measures that are designed to reduce their Medicaid expenditures and to make
certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals. Regulatory changes in the Medicare and
Medicaid reimbursement systems applicable to the hospital division also are
being considered. There also are legislative proposals including cost caps and
the establishment of Medicaid prospective payment systems for nursing centers.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that payments
under governmental and private third-party payor programs will remain at levels
comparable to present levels or will be sufficient to cover the costs allocable
to patients eligible for reimbursement pursuant to such programs. In addition,
there can be no assurance that facilities operated by the Company, or the
provision of services and supplies by the Company, will meet the requirements
for participation in such programs.
There can be no assurance that future healthcare legislation or other changes
in the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the Company's results of operations,
liquidity and financial position.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
Health Services Division - Nursing Centers
Revenues increased 4% to $430 million in the first quarter of 2001 from $413
million in the same quarter of 2000. Average daily patient census declined 2.5%
from the first quarter of 2000. The increase in revenues was attributable to
increased Medicare and Medicaid funding and price increases to private payors.
Medicare revenues per patient day grew 11% to $325 in the first quarter of 2001
compared to $292 in the first quarter a year ago. The increase was primarily
attributable to reimbursement increases associated with the BBRA. As previously
discussed, the BBRA established, among other things, a 20% increase in Medicare
payment rates for higher acuity patients effective April 1, 2000 and a 4%
increase in all PPS payment categories effective October 1, 2000.
Nursing center operating income was $71 million for the first quarter of
2001 compared to $69 million for the first quarter of 2000. Despite an increase
in revenues, operating margins declined to 16.4% in the first quarter of 2001
from 16.6% last year, principally due to growth in costs for employee health
benefits, general liability insurance and utilities. Operating margins also were
adversely impacted by the decline in patient census.
Health Services Division - Rehabilitation Services
Revenues declined 69% to $11 million in the first quarter of 2001 from $34
million a year ago. The decline in revenues was primarily attributable to the
transfer, beginning January 1, 2001, of all remaining services provided to
Company-operated nursing centers to the internal staff of those nursing centers.
Revenues for these services approximated $18 million in the first quarter of
2000. Revenues also declined as a result of the elimination of unprofitable
external contracts.
Operating income increased slightly in the first quarter of 2001 from last
year as a result of the elimination of unprofitable external contracts and
reduced provisions for doubtful accounts based upon collections of past due
accounts. Effective January 1, 2000, revenues for rehabilitation services
provided to Company-operated nursing centers approximate the costs of providing
such services. Accordingly, operating results for the first quarter of 2001 were
not impacted by the transfer of these services to the internal staff of Company-
operated nursing centers. While the health services division will continue to
provide rehabilitation services to nursing center customers, revenues related to
these services may continue to decline.
Health Services Division - Other Ancillary Services
Other ancillary services refers to certain ancillary businesses (primarily
respiratory therapy) that were discontinued as part of the realignment of the
Company's former Vencare ancillary services business in the fourth quarter of
1999.
Hospital Division - Hospitals
Revenues increased 7% to $272 million in the first quarter of 2001 from $254
million in the same period a year ago. Patient days were relatively unchanged
from a yearago. The increase in revenues was primarily attributable to a 7%
growth in aggregate revenues per patient day, most of which was attributable to
increased Medicare and Medicaid funding and price increases to private payors.
Hospital operating income totaled $55 million in both the first quarter of
2001 and 2000. Despite an increase in revenues per patient day, hospital
operating margins declined to 20.1% in the first quarter of 2001 from 21.8% for
the same period last year primarily as a result of growth in labor costs. On a
per patient day basis, labor costs increased 10% to $496 in 2001 from $453 in
the first quarter of 2000. Operating margins also were adversely impacted by
growth in general liability insurance and utility costs.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Hospital Division - Pharmacy
Revenues increased 16% to $55 million in the first quarter of 2001 compared
to $47 million a year ago. The increase resulted primarily from growth in the
number of nursing center customers and price increases.
The Company's pharmacies reported an operating profit of $6 million in the
first quarter of 2001 compared to an operating loss of $1 million in the same
period of the prior year. The cost of goods sold as a percentage of revenues
declined to 58% in the first quarter of 2001 from 65% in 2000. The improvement
in operating income in the first quarter of 2001 was primarily attributable to
growth in revenues, improved inventory and cost controls, and a decline in the
provision for doubtful accounts resulting from improved cash collections.
Corporate Overhead
Operating income for the Company's operating divisions excludes allocation of
corporate overhead. These costs aggregated $29 million in the first quarter of
both 2001 and 2000. As a percentage of revenues (before eliminations), the
overhead ratio was 3.7% in the first quarter of 2001 compared to 4% in the same
period of 2000.
Capital Costs
The Company leases substantially all of its facilities. Depreciation and
amortization, rents and net interest costs aggregated $108 million in the first
quarter of 2001 compared to $109 million last year.
During the pendency of the Chapter 11 Cases, the Company recorded the
contractual amount of interest expense related to the Company's former $1.0
billion bank credit facility (the "1998 Credit Agreement") and the rents due to
Ventas under the Master Lease Agreements. No interest costs have been recorded
related to the 1998 Notes since the filing of the Chapter 11 Cases. Contractual
interest expense not accrued for the 1998 Notes in each of the first quarter of
2001 and 2000 was approximately $7 million.
Income Taxes
The provision for income taxes is based upon management's estimate of taxable
income or loss for the year and includes the effect of certain non-deductible
items such as goodwill amortization and the recording of additional deferred tax
valuation allowances.
The provision for income taxes for the first quarter of 2001 and 2000
included charges of $685,000 and $6 million, respectively, related to the
deferred tax valuation allowance. At March 31, 2001, the deferred tax valuation
allowance included in the Company's unaudited condensed consolidated balance
sheet aggregated $373 million.
Consolidated Results
The Company reported a pretax loss from operations before reorganization
costs of $4 million for the first quarter of 2001 compared to $15 million for
the same period a year ago. Reorganization costs, consisting principally of
professional fees incurred in connection with the Company's restructuring
activities, aggregated $4 million and $3 million for the first quarter of 2001
and 2000, respectively.
The net loss from operations in the first quarter of 2001 aggregated $9
million compared to $19 million in the first quarter of 2000.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity
In connection with the emergence from bankruptcy, the Company entered into
the Exit Facility on the Effective Date. The Exit Facility constitutes a working
capital facility for general corporate purposes including paying the Company's
obligations under the Amended Plan. The Exit 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 Exit 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 Exit Facility is secured by substantially all of the assets of the
Company and its subsidiaries, including certain owned real property.
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 LIBOR plus 4 1/2%. The interest on
the Senior Secured Notes will begin to accrue approximately two quarters
following the Effective Date. The Senior Secured Notes are secured by a second
priority lien on substantially all of the assets of the Company and its
subsidiaries, including certain owned real property.
In connection with the Chapter 11 Cases, the Company entered into a $100
million DIP Financing. The DIP Financing was initially comprised of a $75
million Tranche A Loan and a $25 million Tranche B Loan. Interest was payable at
prime plus 2 1/2% on the Tranche A Loan and prime plus 4 1/2% on the Tranche B
Loan. The DIP Financing was secured by substantially all of the assets of the
Company and its subsidiaries, including certain owned real property. The DIP
Financing contained standard representations and warranties and other
affirmative and restrictive covenants. The DIP Financing matured on March 31,
2001, at which time there were no outstanding borrowings thereunder.
The Company reported a net loss from operations in 1998 aggregating $578
million, resulting in certain financial covenant violations under the 1998
Credit Agreement. Prior to the commencement of the Chapter 11 Cases, the Company
received a series of temporary waivers of these covenant violations. The waivers
generally included certain borrowing limitations under the $300 million
revolving credit portion of the 1998 Credit Agreement. The final waiver was
scheduled to expire on September 24, 1999.
The Company was informed on April 9, 1999 by HCFA that the Medicare program
had made a demand for repayment of approximately $90 million of reimbursement
overpayments. On April 21, 1999, the Company reached an agreement with HCFA to
extend the repayment of such amounts over 60 monthly installments. Under the
HCFA Agreement, non-interest bearing monthly payments of approximately $1.5
million commenced in May 1999. Beginning in December 1999, interest began to
accrue on the balance of the overpayments at a statutory rate approximating
13.4%, resulting in a monthly payment of approximately $2.0 million through
March 2004. If the Company is delinquent with two consecutive payments, the HCFA
Agreement will be defaulted and all subsequent Medicare reimbursement payments
to the Company may be withheld. Amounts due under the HCFA Agreement aggregated
$59.2 million at March 31, 2001 and have been classified as liabilities subject
to compromise in the Company's unaudited condensed consolidated balance sheet.
The Company received Bankruptcy Court approval to continue to make the monthly
payments under the HCFA Agreement during the pendency of the Chapter 11 Cases.
Under the Amended Plan, the Company agreed to repay the remaining balance of the
obligations pursuant to the terms of the HCFA Agreement.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The failure to pay interest
resulted in an event of default under the 1998 Notes.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
In accordance with SOP 90-7, outstanding borrowings under the 1998 Credit
Agreement ($511 million) and the principal amount of the 1998 Notes ($300
million) have been presented as liabilities subject to compromise in the
Company's unaudited condensed consolidated balance sheet at March 31, 2001. If
the Chapter 11 Cases had not been filed, the Company would have reported a
working capital deficit approximating $945 million at March 31, 2001. During the
pendency of the Chapter 11 Cases, the Company continued to record the
contractual amount of interest expense related to the 1998 Credit Agreement. No
interest costs have been recorded related to the 1998 Notes since the filing of
the Chapter 11 Cases. Contractual interest expense for the 1998 Notes not
recorded in the unaudited condensed consolidated statement of operations
aggregated $7 million in both the first quarter of 2001 and 2000. The unaudited
condensed consolidated financial statements do not include any adjustments that
will result from the resolution of the Chapter 11 Cases or other matters
discussed herein.
As previously reported, the Company was informed by the DOJ that the Company
and Ventas are the subjects of ongoing investigations into various Medicare
reimbursement issues, including hospital cost reporting issues, Vencare billing
practices and various quality of care issues in the hospitals and nursing
centers formerly operated by Ventas and currently operated by the Company. In
connection with the Amended Plan, the claims of the DOJ were settled through the
Government Settlement. The Government Settlement also provides for the dismissal
of certain pending claims and lawsuits filed against the Company. See Note 3 of
the Notes to Condensed Consolidated Financial Statements.
As a result of the uncertainty related to the Chapter 11 Cases, the report of
the Company's independent accountants, PwC, refers to the Company's ability to
continue as a going concern at December 31, 2000 and December 31, 1999. As a
result of the Company's net loss in 1998, its working capital deficiency and its
covenant defaults under the 1998 Credit Agreement at December 31, 1998, the
report of the Company's former independent accountants, Ernst & Young LLP,
refers to the Company's ability to continue as a going concern at December 31,
1998.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third-party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims and other events. Payment terms for these amounts are set forth
in the Amended Plan.
The Company received approval from the Bankruptcy Court to pay pre-petition
and post-petition employee wages, salaries, benefits and other employee
obligations. The Bankruptcy Court also approved orders granting authority, among
other things, to pay pre-petition claims of certain critical vendors, utilities
and patient obligations. All other pre-petition liabilities are classified in
the unaudited condensed consolidated balance sheet as liabilities subject to
compromise.
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
Cash Flows
Since the filing of the Chapter 11 Cases, cash flows from operations have
allowed the Company to fund post-petition obligations, sustain adequate
liquidity levels and minimize borrowings under the DIP Financing. Cash flows
from operations before reorganization costs totaled $40 million in the first
quarter of 2001 compared to $45 million in the first quarter of 2000.
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. These documents are filed annually in settlement of
amounts due to or from the various agencies administering the reimbursement
programs. These cost reports indicated amounts due from the Company aggregating
$58 million. This liability arose during 1999 as part of the Company's routine
settlement of Medicare reimbursement overpayments. Such amounts were classified
as liabilities subject to compromise in the unaudited condensed consolidated
balance sheet and, accordingly, no funds were disbursed by the Company in
settlement of such pre-petition liabilities. Under the terms of the Amended
Plan, this obligation was discharged.
Capital Resources
Capital expenditures totaled $22 million and $8 million in the first three
months of 2001 and 2000, respectively. Excluding acquisitions, capital
expenditures could approximate $75 million in 2001. Management believes that its
capital expenditure program is adequate to improve and equip existing
facilities.
Capital expenditures in both periods were financed through internally
generated funds. At March 31, 2001, the estimated cost to complete and equip
construction in progress approximated $10 million.
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 legislators have limited the Company's
ability to recover its cost increases through increased pricing of its
healthcare services. Medicare revenues in the Company's nursing centers are
subject to fixed payments under PPS. Medicaid reimbursement rates in many states
in which the Company operates nursing centers also are based on fixed payment
systems. In addition, by repealing the Boren Amendment, the Budget Act eased
existing impediments on the states' ability to reduce their Medicaid
reimbursement levels to the Company's nursing centers. Medicare revenues in the
Company's hospitals also have been reduced by the Budget Act.
During 2000, the BBRA provided a measure of relief to the Medicare
reimbursement reductions imposed by the Budget Act. The enactment of BIPA in
December 2000 will provide additional Medicare reimbursement beginning in April
2001. Management believes that these legislative actions will have a positive
impact on the Company's revenues in 2001, particularly in the health services
division.
Management believes, however, that its operating margins may continue to be
under pressure because of continuing regulatory scrutiny and growth in operating
expenses in excess of anticipated increases in payments by third-party payors.
In addition, as a result of competitive pressures, the Company's 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 9 of the
Notes to Condensed Consolidated Financial Statements.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
(Restated)
-------------------------------------------------------
2000 Quarters First
------------------------------------------ Quarter
First Second Third Fourth Year 2001
-------- -------- -------- -------- ---------- --------
Revenues.......................... $715,456 $713,424 $717,253 $742,409 $2,888,542 $752,409
-------- -------- -------- -------- ---------- --------
Salaries, wages and benefits...... 405,313 392,383 405,510 420,749 1,623,955 427,649
Supplies.......................... 93,398 94,619 92,251 94,272 374,540 94,319
Rent.............................. 76,220 76,788 77,870 76,931 307,809 76,995
Other operating expenses.......... 122,589 122,770 135,345 123,066 503,770 126,701
Depreciation and amortization..... 17,902 18,168 17,464 20,011 73,545 18,645
Interest expense.................. 16,239 14,663 14,415 15,114 60,431 14,000
Investment income................. (1,206) (1,012) (1,490) (1,685) (5,393) (1,919)
-------- -------- -------- -------- ---------- --------
730,455 718,379 741,365 748,458 2,938,657 756,390
-------- -------- -------- -------- ---------- --------
Loss before reorganization costs
and income taxes................ (14,999) (4,955) (24,112) (6,049) (50,115) (3,981)
Reorganization costs.............. 3,065 2,530 4,745 2,296 12,636 4,473
-------- -------- -------- -------- ---------- --------
Loss before income taxes.......... (18,064) (7,485) (28,857) (8,345) (62,751) (8,454)
Provision for income taxes........ 500 500 500 500 2,000 500
-------- -------- -------- -------- ---------- --------
Net loss................ (18,564) (7,985) (29,357) (8,845) (64,751) (8,954)
Preferred stock dividend
requirements.................... (261) (262) (261) (262) (1,046) (261)
-------- -------- -------- -------- ---------- --------
Loss to common
stockholders.......... $(18,825) $ (8,247) $(29,618) $ (9,107) $ (65,797) $ (9,215)
======== ======== ======== ======== ========== ========
Loss per common share:
Basic.......................... $ (0.27) $ (0.12) $ (0.42) $ (0.13) $ (0.94) $ (0.13)
Diluted........................ (0.27) (0.12) (0.42) (0.13) (0.94) (0.13)
Shares used in computing loss
per common share:
Basic....................... 70,240 70,147 70,265 70,262 70,229 70,261
Diluted..................... 70,240 70,147 70,265 70,262 70,229 70,261
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands)
(Restated)
------------------------------------------------------
2000 Quarters First
----------------------------------------- Quarter
First Second Third Fourth Year 2001
-------- -------- -------- -------- ---------- --------
Revenues:
Health services division:
Nursing centers................ $412,703 $413,159 $420,588 $429,177 $1,675,627 $429,523
Rehabilitation services........ 34,377 33,173 34,032 33,454 135,036 10,695
Other ancillary services....... (5) (2) (1) 8 - -
Elimination.................... (18,091) (18,509) (19,671) (20,920) (77,191) -
-------- -------- -------- -------- ---------- --------
428,984 427,821 434,948 441,719 1,733,472 440,218
Hospital division:
Hospitals...................... 253,591 250,027 244,391 259,938 1,007,947 271,984
Pharmacy....................... 47,468 49,949 51,593 55,242 204,252 54,880
-------- -------- -------- -------- ---------- --------
301,059 299,976 295,984 315,180 1,212,199 326,864
-------- -------- -------- -------- ---------- --------
730,043 727,797 730,932 756,899 2,945,671 767,082
Elimination of pharmacy charges
to Company nursing centers.... (14,587) (14,373) (13,679) (14,490) (57,129) (14,673)
-------- -------- -------- -------- ---------- --------
$715,456 $713,424 $717,253 $742,409 $2,888,542 $752,409
======== ======== ======== ======== ========== ========
Income (loss) from operations:
Operating income (loss):
Health services division:
Nursing centers............. $ 68,712 $ 75,348 $ 69,493 $ 65,185 $ 278,738 $ 70,543
Rehabilitation services..... 486 (1,059) 2,837 5,783 8,047 690
Other ancillary services.... 130 242 2,687 1,678 4,737 250
-------- -------- -------- -------- ---------- --------
69,328 74,531 75,017 72,646 291,522 71,483
Hospital division:
Hospitals................... 55,398 51,547 47,284 51,629 205,858 54,778
Pharmacy.................... (1,200) 789 1,075 6,757 7,421 6,176
-------- -------- -------- -------- ---------- --------
54,198 52,336 48,359 58,386 213,279 60,954
-------- -------- -------- -------- ---------- --------
Corporate overhead............ (29,370) (27,750) (29,993) (26,710) (113,823) (28,697)
Unusual transactions.......... - 4,535 (9,236) - (4,701) -
Reorganization costs.......... (3,065) (2,530) (4,745) (2,296) (12,636) (4,473)
-------- -------- -------- -------- ---------- --------
Operating income........... 91,091 101,122 79,402 102,026 373,641 99,267
Rent............................. (76,220) (76,788) (77,870) (76,931) (307,809) (76,995)
Depreciation and amortization.... (17,902) (18,168) (17,464) (20,011) (73,545) (18,645)
Interest, net.................... (15,033) (13,651) (12,925) (13,429) (55,038) (12,081)
-------- -------- -------- -------- ---------- --------
Loss before income taxes......... (18,064) (7,485) (28,857) (8,345) (62,751) (8,454)
Provision for income taxes....... 500 500 500 500 2,000 500
-------- -------- -------- -------- ---------- --------
$(18,564) $ (7,985) $(29,357) $ (8,845) $ (64,751) $ (8,954)
======== ======== ======== ======== ========== ========
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
2000 Quarters First
---------------------------------------------- Quarter
First Second Third Fourth Year 2001
---------- ---------- ---------- ---------- ----------- ----------
Nursing Center Data:
End of period data:
Number of nursing centers:
Owned or leased.......... 280 280 278 278 278
Managed.................. 40 41 39 34 35
---------- ---------- ---------- ---------- ----------
320 321 317 312 313
========== ========== ========== ========== ==========
Number of licensed beds:
Owned or leased.......... 36,653 36,677 36,465 36,466 36,469
Managed.................. 4,262 4,436 4,070 3,723 3,861
---------- ---------- ---------- ---------- ----------
40,915 41,113 40,535 40,189 40,330
========== ========== ========== ========== ==========
Revenue mix %:
Medicare..................... 28 28 27 28 28 31
Medicaid..................... 48 48 50 49 49 47
Private and other............ 24 24 23 23 23 22
Patient days (excludes managed
facilities):
Medicare..................... 398,329 382,933 381,890 378,782 1,541,934 411,783
Medicaid..................... 1,918,732 1,917,429 1,960,359 1,939,047 7,735,567 1,860,256
Private and other............ 590,619 579,128 570,679 562,368 2,302,794 532,943
---------- ---------- ---------- ---------- ----------- ----------
2,907,680 2,879,490 2,912,928 2,880,197 11,580,295 2,804,982
========== ========== ========== ========== =========== ==========
Revenues per patient day:
Medicare..................... $ 292 $ 301 $ 301 $ 321 $ 303 $ 325
Medicaid..................... 103 104 107 109 106 109
Private and other............ 167 171 169 171 169 175
Weighted average............. 142 143 144 149 145 153
Hospital Data:
End of period data:
Number of hospitals.......... 56 56 56 56 56
Number of licensed beds...... 4,931 4,880 4,886 4,886 4,867
Revenue mix %:
Medicare..................... 58 53 56 53 55 56
Medicaid..................... 10 9 12 11 10 11
Private and other............ 32 38 32 36 35 33
Patient days:
Medicare..................... 188,063 177,083 167,946 171,060 704,152 185,731
Medicaid..................... 31,964 33,416 34,052 35,322 134,754 34,872
Private and other............ 51,747 51,743 50,567 51,700 205,757 52,426
---------- ---------- ---------- ---------- ----------- ----------
271,774 262,242 252,565 258,082 1,044,663 273,029
========== ========== ========== ========== =========== ==========
Revenues per patient day:
Medicare..................... $ 782 $ 754 $ 814 $ 808 $ 789 $ 820
Medicaid..................... 767 632 847 839 773 871
Private and other............ 1,584 1,845 1,557 1,782 1,693 1,703
Weighted average............. 933 953 968 1,007 965 996
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only significant exposure to market risk is changes in the
levels of various interest rates. In this regard, changes in LIBOR interest
rates affect the interest paid on its borrowings. In addition, the interest
rates on borrowings under the DIP Financing were affected by changes in the
federal funds rate and the prime rate of Morgan Guaranty Trust Company of New
York. To mitigate the impact of fluctuations in these interest rates, the
Company generally maintained a portion of its borrowings on a fixed rate, long-
term basis. Prior to its financial difficulties, the Company also entered into
interest rate swap transactions. The Company was not a party to any interest
rate swap agreements at March 31, 2001.
As previously discussed, the Company filed the Chapter 11 Cases on September
13, 1999. Accordingly, all amounts disclosed in the table below are subject to
compromise in connection with the Chapter 11 Cases. Management believes that the
fair values of the Company's debt obligations at March 31, 2001 may reflect the
resolution of the Chapter 11 Cases pursuant to the terms of the Amended Plan.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table
constitutes a forward-looking statement. The table presents principal cash flows
and related weighted average interest rates by expected maturity date. The
Amended Plan will change materially the historical carrying values reflected in
the following table.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in thousands)
Expected Maturities Fair
-------------------------------------------------------------------------- Value
2001 2002 2003 2004 2005 Thereafter Total 3/31/01
------- -------- ------- -------- -------- ---------- -------- --------
Liabilities:
Long-term debt, including
amounts due within one year:
Fixed rate.................... $13,602 $ 19,619 $21,503 $ 5,717 $300,047 $3,826 $364,314 $243,500
Average interest rate......... 11.6% 11.6% 10.4% 9.3% 8.9% 8.6%
Variable rate................. $66,768 $128,640 $96,509 $177,344 $ 41,647 $ - $510,908 $587,500
Average interest rate (a)
---------------
(a) Interest is payable, depending on the debt instrument, certain leverage
ratios and other factors, at a rate of LIBOR plus 3/4% to 3 1/2% or prime
plus 2% to 3 1/2%.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINDRED HEALTHCARE, INC.
Date: August 29, 2001 /s/ EDWARD L. KUNTZ
---------------------- ---------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
Date: August 29, 2001 /s/ RICHARD A. SCHWEINHART
---------------------- ---------------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
37