- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 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 1-10989 VENCOR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 61-1055020 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3300 PROVIDIAN CENTER 400 WEST MARKET STREET LOUISVILLE, KY 40202 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) (502) 596-7300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <CAPTION> CLASS OF COMMON STOCK OUTSTANDING AT SEPTEMBER 30, 1996 --------------------------- --------------------------------- <S> <C> Common stock, $.25 par value 69,158,681 shares </TABLE> - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 of 18
VENCOR, INC. FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ---- <C> <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statement of Operations--for the quarter and nine months ended September 30, 1996 and 1995.............. 3 Condensed Consolidated Balance Sheet--September 30, 1996 and December 31, 1995.............................................. 4 Condensed Consolidated Statement of Cash Flows--for the nine months ended September 30, 1996 and 1995.................................... 5 Notes to Condensed Consolidated Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 18 </TABLE> 2
VENCOR, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> QUARTER NINE MONTHS ------------------ ---------------------- 1996 1995 1996 1995 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Revenues.......................... $650,551 $575,339 $1,911,442 $1,705,831 -------- -------- ---------- ---------- Salaries, wages and benefits...... 372,524 347,251 1,111,547 999,512 Supplies.......................... 54,409 47,868 160,170 138,266 Rent.............................. 19,681 20,225 57,950 59,575 Other operating expenses.......... 115,833 105,335 331,207 309,217 Depreciation and amortization..... 24,787 23,263 74,426 66,940 Interest expense.................. 11,884 15,169 36,505 47,798 Investment income................. (3,132) (3,304) (10,010) (10,032) Non-recurring transactions........ - 103,868 - 109,423 -------- -------- ---------- ---------- 595,986 659,675 1,761,795 1,720,699 -------- -------- ---------- ---------- Income (loss) from operations be- fore income taxes................ 54,565 (84,336) 149,647 (14,868) Provision for income taxes........ 21,007 (21,449) 57,614 5,760 -------- -------- ---------- ---------- Income (loss) from operations..... 33,558 (62,887) 92,033 (20,628) Extraordinary loss on extinguishment of debt, net of income tax benefit............... - (19,196) - (21,987) -------- -------- ---------- ---------- Net income (loss).............. 33,558 (82,083) 92,033 (42,615) Preferred stock dividend require- ments............................ - (1,692) - (5,280) Gain on redemption of preferred stock............................ - 10,176 - 10,176 -------- -------- ---------- ---------- Income (loss) available to com- mon stockholders.............. $ 33,558 $(73,599) $ 92,033 $ (37,719) ======== ======== ========== ========== Earnings (loss) per common and common equivalent share: Primary: Income (loss) from operations... $ .48 $ (.91) $ 1.30 $ (.27) Extraordinary loss on extinguishment of debt......... - (.32) - (.37) -------- -------- ---------- ---------- Net income (loss).............. $ .48 $ (1.23) $ 1.30 $ (.64) ======== ======== ========== ========== Fully diluted: Income (loss) from operations... $ .48 $ (.91) $ 1.30 $ (.27) Extraordinary loss on extinguishment of debt......... - (.32) - (.37) -------- -------- ---------- ---------- Net income (loss).............. $ .48 $ (1.23) $ 1.30 $ (.64) ======== ======== ========== ========== Shares used in computing earnings (loss) per common and common equivalent share: Primary.......................... 70,028 60,011 70,800 59,139 Fully diluted.................... 70,028 60,011 70,800 59,139 </TABLE> See accompanying notes. 3
VENCOR, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents.......................... $ 143,984 $ 35,182 Accounts and notes receivable less allowance for loss of $20,066--September 30 and $16,785--December 31.... 392,426 360,147 Inventories........................................ 26,668 24,862 Income taxes....................................... 52,697 77,997 Other.............................................. 25,818 26,491 ---------- ---------- 641,593 524,679 Property and equipment, at cost..................... 1,645,622 1,552,293 Accumulated depreciation............................ (422,824) (362,199) ---------- ---------- 1,222,798 1,190,094 Notes receivable less allowance for loss of $12,168--September 30 and $15,305--December 31............................... 23,343 78,090 Intangible assets less accumulated amortization of $27,453--September 30 and $22,149--December 31........................... 51,293 42,580 Other............................................... 68,166 77,011 ---------- ---------- $2,007,193 $1,912,454 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 114,454 $ 99,887 Salaries, wages and other compensation............. 95,437 99,937 Other accrued liabilities.......................... 63,063 75,617 Long-term debt due within one year................. 51,822 9,572 ---------- ---------- 324,776 285,013 Long-term debt...................................... 720,527 778,100 Deferred credits and other liabilities.............. 76,222 75,573 Minority interests in equity of consolidated enti- ties............................................... 55,720 1,704 Stockholders' equity: Common stock, $.25 par value; authorized 180,000 shares; issued 72,552 shares--September 30 and 72,158 shares--December 31............................... 18,138 18,040 Capital in excess of par value..................... 691,566 684,377 Retained earnings.................................. 194,898 102,865 ---------- ---------- 904,602 805,282 Common treasury stock; 3,393 shares--September 30 and 2,025 shares--December 31......................... (74,654) (33,218) ---------- ---------- 829,948 772,064 ---------- ---------- $2,007,193 $1,912,454 ========== ========== </TABLE> See accompanying notes. 4
VENCOR, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> 1996 1995 -------- --------- <S> <C> <C> Cash flows from operating activities: Net income (loss)........................................ $ 92,033 $ (42,615) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 74,426 66,940 Deferred income taxes................................... 651 (20,030) Extraordinary loss on extinguishment of debt............ - 35,058 Non-recurring transactions.............................. - 114,311 Other................................................... 8,809 13,867 Changes in operating assets and liabilities: Accounts and notes receivable.......................... (40,364) (63,132) Inventories and other assets........................... 2,020 (2,367) Accounts payable....................................... 14,634 15,673 Other accrued liabilities.............................. 13,196 (3,144) -------- --------- Net cash provided by operating activities............. 165,405 114,561 -------- --------- Cash flows from investing activities: Purchase of property and equipment....................... (85,437) (102,271) Acquisition of healthcare businesses and previously leased facilities....................................... (26,236) (45,257) Sale of assets........................................... 9,103 674 Collection of notes receivable........................... 54,589 2,870 Net change in investments................................ (445) 160 Other.................................................... (1,590) (6,849) -------- --------- Net cash used in investing activities................. (50,016) (150,673) -------- --------- Cash flows from financing activities: Net change in borrowings under revolving lines of cred- it...................................................... 1,000 68,750 Issuance of long-term debt............................... 7,865 656,421 Repayment of long-term debt.............................. (24,377) (610,029) Payment of deferred financing costs...................... (1,816) - Public offering of common stock.......................... 53,089 66,494 Other issuances of common stock.......................... 1,379 6,588 Repurchase of common stock............................... (43,681) - Redemption of preferred stock............................ - (91,268) Payment of dividends..................................... - (2,779) Other.................................................... (46) (20,211) -------- --------- Net cash provided by (used in) financing activities... (6,587) 73,966 -------- --------- Change in cash and cash equivalents....................... 108,802 37,854 Cash and cash equivalents at beginning of period.......... 35,182 39,018 -------- --------- Cash and cash equivalents at end of period................ $143,984 $ 76,872 ======== ========= Supplemental information: Interest payments........................................ $ 38,692 $ 50,813 Income tax payments...................................... 23,553 61,878 </TABLE> See accompanying notes. 5
VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--REPORTING ENTITY Vencor, Inc. ("Vencor") operates an integrated network of healthcare services primarily focused on the needs of the elderly. At September 30, 1996, Vencor operated 37 hospitals, 313 nursing centers, a contract services business ("Vencare") which provides respiratory therapy, rehabilitation therapy and subacute medical services primarily to nursing centers, 51 retail and institutional pharmacy outlets and 22 independent and assisted living communities with 3,022 units. On September 28, 1995, Vencor consummated a merger with The Hillhaven Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the "Hillhaven Merger"). See Note 5. Prior to its merger with Vencor, Hillhaven consummated a merger with Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock- for-stock transaction (the "Nationwide Merger"). See Note 6. In the third quarter of 1996, Vencor completed an initial public offering related to its independent and assisted living business through the issuance of 5,750,000 common shares of Atria Communities, Inc. ("Atria") (the "IPO"). See Note 7. NOTE 2--BASIS OF PRESENTATION The Hillhaven and Nationwide Mergers have been accounted for by the pooling- of-interests method. Accordingly, the accompanying condensed consolidated financial statements give retroactive effect to these transactions and include the combined operations of Vencor, Hillhaven and Nationwide for all periods presented. In connection with the IPO, Vencor retained a controlling interest in Atria. Accordingly, the accounts of Atria continue to be consolidated with those of Vencor, and management has recorded minority interests in the earnings and equity of Atria since consummation of the IPO. The accompanying condensed consolidated financial statements do not include all of the disclosures normally required by generally accepted accounting principles or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of Vencor for the year ended December 31, 1995 filed on Form 10-K with the Securities and Exchange Commission. The accompanying condensed consolidated financial statements have been prepared in accordance with Vencor's customary accounting practices and have not been audited. Management believes that the financial information included herein reflects all adjustments necessary for a fair presentation of interim results and, except as discussed in Note 8, all such adjustments are of a normal and recurring nature. NOTE 3--REVENUES Revenues are recorded based upon estimated amounts due from patients and third-party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid and other third-party payors. 6
VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--REVENUES (CONTINUED) A summary of revenues by payor type follows (dollars in thousands): <TABLE> <CAPTION> QUARTER NINE MONTHS ------------------ ---------------------- 1996 1995 1996 1995 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Medicare............................ $206,270 $158,149 $ 607,753 $ 500,559 Medicaid............................ 212,978 198,563 611,835 572,469 Private and other................... 243,080 221,207 723,034 636,578 -------- -------- ---------- ---------- 662,328 577,919 1,942,622 1,709,606 Elimination......................... (11,777) (2,580) (31,180) (3,775) -------- -------- ---------- ---------- $650,551 $575,339 $1,911,442 $1,705,831 ======== ======== ========== ========== </TABLE> NOTE 4--EARNINGS PER SHARE The computation of earnings per common and common equivalent share give retroactive effect to the Hillhaven and Nationwide Mergers and is based upon the weighted average number of common shares outstanding. In addition, the 1996 computations also include the dilutive effect of common stock equivalents consisting primarily of stock options. NOTE 5--HILLHAVEN MERGER On September 27, 1995, the stockholders of both Vencor and Hillhaven approved the Hillhaven Merger, effective on September 28, 1995. In connection with the Hillhaven Merger, each share of Hillhaven common stock was converted on a tax-free basis into 0.935 of a share of Vencor common stock, resulting in the issuance of approximately 31,651,000 Vencor common shares. The Hillhaven Merger has been accounted for as a pooling of interests, and accordingly, the condensed consolidated financial statements give retroactive effect to the Hillhaven Merger and include the combined operations of Vencor and Hillhaven for all periods presented. A summary of the results of operations of the separate entities for the respective periods ended September 30, 1995 follows (dollars in thousands): <TABLE> <CAPTION> NON-RECURRING VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED -------- ---------- ------------- ----------- ------------ <S> <C> <C> <C> <C> <C> Third quarter: Revenues............... $150,139 $ 452,280 $(24,500) $(2,580) $ 575,339 Income (loss) from op- erations.............. 11,605 15,383 (89,875) - (62,887) Net income (loss)...... 10,750 (2,958) (89,875) - (82,083) Nine months: Revenues............... $411,233 $1,322,873 $(24,500) $(3,775) $1,705,831 Income (loss) from op- erations.............. 31,566 41,367 (93,561) - (20,628) Net income (loss)...... 30,711 20,235 (93,561) - (42,615) </TABLE> NOTE 6--NATIONWIDE MERGER Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger on June 30, 1995. In connection therewith, 4,675,000 shares of common stock (effected for the Hillhaven Merger exchange ratio) were issued in exchange for all of the outstanding shares of Nationwide. 7
VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6--NATIONWIDE MERGER (CONTINUED) The Nationwide Merger has been accounted for as a pooling of interests, and accordingly, the condensed consolidated financial statements give retroactive effect to the Nationwide Merger and include the combined operations of Hillhaven and Nationwide for all periods presented. A summary of the results of operations of the separate entities for the six months ended June 30, 1995 follows (dollars in thousands): <TABLE> <CAPTION> NON-RECURRING HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED --------- ---------- ------------- ------------ <S> <C> <C> <C> <C> Revenues................ $803,793 $66,800 $ - $870,593 Income (loss) from oper- ations................. 23,837 2,147 (3,686) 22,298 Net income (loss)....... 23,459 (266) (3,686) 19,507 </TABLE> NOTE 7--INITIAL PUBLIC OFFERING In the third quarter of 1996, Vencor completed the IPO, the net proceeds from which aggregated approximately $53.1 million. At September 30, 1996, Vencor owned 10,000,000 shares, or 63.1%, of Atria common stock. Significant agreements related to the IPO are discussed below. Credit Facility Concurrently with the consummation of the IPO, Atria entered into a bank credit facility (the "Atria Credit Facility"), which will mature in four years and may be extended at the option of the banks for an additional year. The Atria Credit Facility aggregates up to $200 million, including a letter of credit option not to exceed $70 million. Loans under the Atria Credit Facility will bear interest, at Atria's option, at either (i) a base rate based on PNC Bank's prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus an additional percentage based on certain leverage ratios. The obligations under the Atria Credit Facility are secured by substantially all of Atria's property, the capital stock of Atria's present and future principal subsidiaries and all intercompany indebtedness owed to Atria by its subsidiaries. The Atria Credit Facility is conditioned upon, among other things, Vencor's ownership of at least 30% of Atria's common stock. Agreements with Atria Atria and Vencor or its subsidiaries have entered into certain arrangements which are intended to facilitate an orderly transition of Atria from a division of Vencor to a separate publicly held entity which will be minimally disruptive to both Atria and Vencor. In addition to various agreements related to administrative support, shared services and real estate leases, significant agreements with Atria include: Guarantees--Vencor will guarantee for four years certain borrowings by Atria under the Atria Credit Facility in amounts up to $100 million in the first year following the IPO, declining to $75 million, $50 million and $25 million in each respective year thereafter. Income Taxes--A tax sharing agreement provides for risk-sharing arrangements in connection with various income tax related issues. Registration Rights--Atria has granted demand and piggyback registration rights to Vencor with respect to registration under the Securities Act of 1933 of Atria common stock owned by Vencor. Four demand registrations are permitted. Atria will pay the fees and expenses of two demand registrations and the piggyback registrations, while Vencor will pay all underwriting discounts and commissions. The registration rights expire five years from the completion of the IPO and are subject to certain conditions and limitations, including the right of underwriters of an offering to limit the number of shares owned by Vencor included in such registration. 8
VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7--INITIAL PUBLIC OFFERING (CONTINUED) Liabilities and Indemnifications--Atria has agreed to assume all contractual liabilities relating to the assets transferred by Vencor to Atria. NOTE 8--NON-RECURRING TRANSACTIONS In the third quarter of 1995, Vencor recorded pretax charges aggregating $128.4 million primarily in connection with the Hillhaven Merger. The charges included (i) $23.2 million of investment advisory and professional fees, (ii) $53.8 million of employee benefit plan and severance costs, (iii) $26.9 million of losses associated with the planned disposition of certain nursing center properties and (iv) $24.5 million of losses to reflect Vencor's change in estimates of accrued revenues recorded in connection with certain prior- year nursing center third-party reimbursement issues (recorded as a reduction of revenues). Operating results for the nine months ended September 30, 1995 include pretax charges of $5.5 million recorded in the second quarter related to the Nationwide Merger. NOTE 9--STOCK REPURCHASE PROGRAM In June 1996, the Board of Directors authorized the repurchase of up to 2,000,000 shares of Vencor common stock. During the third quarter of 1996, Vencor repurchased 1,550,000 shares at an aggregate cost of approximately $43.7 million. Subsequent to September 30, 1996, Vencor repurchased an additional 301,600 shares at an aggregate cost of approximately $8.8 million. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT TRANSACTIONS The Hillhaven Merger was consummated on September 28, 1995. At the time of the Hillhaven Merger, Hillhaven operated 311 nursing centers, 56 retail and institutional pharmacies and 23 independent and assisted living communities with 3,122 units. Annualized revenues approximated $1.7 billion. Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger on June 30, 1995. At the time of the Nationwide Merger, Nationwide operated 23 nursing centers containing 3,257 licensed beds and four independent and assisted living communities with 442 units. Annualized revenues approximated $125 million. As discussed in the Notes to Condensed Consolidated Financial Statements, the Hillhaven and Nationwide Mergers have been accounted for by the pooling- of-interests method. Accordingly, the accompanying condensed consolidated financial statements and financial and operating data included herein give retroactive effect to these transactions and include the combined operations of Vencor, Hillhaven and Nationwide for all periods presented. In the third quarter of 1996, Vencor retained approximately 63% of its interest in Atria upon consummation of the IPO. For accounting purposes, the accounts of Atria continue to be consolidated with those of Vencor and management has recorded minority interests in the earnings and equity of Atria since consummation of the IPO. RESULTS OF OPERATIONS Vencor operates an integrated network of healthcare services focused primarily on the needs of the elderly through the operation of hospitals, nursing centers and ancillary services businesses which include Vencare, pharmacies, and independent and assisted living communities. A summary of revenues follows (dollars in thousands): <TABLE> <CAPTION> QUARTER NINE MONTHS ------------------ % ---------------------- % 1996 1995 CHANGE 1996 1995 CHANGE -------- -------- ------ ---------- ---------- ------ <S> <C> <C> <C> <C> <C> <C> Hospitals............... $144,228 $119,705 20.5 $ 412,887 $ 337,036 22.5 -------- -------- ---------- ---------- Nursing centers: Long-term care......... 273,389 265,951 2.8 790,714 779,717 1.4 Subacute care ......... 138,564 125,952 10.0 413,687 361,124 14.6 -------- -------- ---------- ---------- 411,953 391,903 5.1 1,204,401 1,140,841 5.6 Non-recurring transactions.......... - (24,500) - (24,500) -------- -------- ---------- ---------- 411,953 367,403 12.1 1,204,401 1,116,341 7.9 -------- -------- ---------- ---------- Ancillary services: Vencare................ 50,414 37,860 33.2 156,716 93,720 67.2 Pharmacies............. 42,695 40,773 4.7 130,132 127,067 2.4 Independent and assisted living communities........... 13,038 12,178 7.1 38,486 35,442 8.6 -------- -------- ---------- ---------- 106,147 90,811 16.9 325,334 256,229 27.0 -------- -------- ---------- ---------- Elimination............. (11,777) (2,580) (31,180) (3,775) -------- -------- ---------- ---------- $650,551 $575,339 13.1 $1,911,442 $1,705,831 12.1 ======== ======== ========== ========== </TABLE> Hospital revenue increases for the third quarter and nine months ended September 30, 1996 resulted from the acquisition of facilities and growth in same-store patient days. Hospital patient days rose 16% to 144,220 in 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) the third quarter of 1996 and 21% to 438,548 for the first nine months of 1996 from the respective periods a year ago. As part of its integrated growth strategy, Vencor intends to expand its subacute medical and rehabilitation services provided in its nursing centers and reduce the percentage of patient days attributable to custodial patient care. Patient days related to subacute care grew 14% to 478,448 in the third quarter and 20% to 1,475,058 in the nine month period, while patient days related to custodial care declined 2% in the third quarter to 2,693,457 and 3% to 7,931,848 in the nine month period. Revenues related to custodial care during both the third quarter and nine months ended September 30, 1996 were adversely impacted by a decline in private pay patient days. Growth in ancillary services revenues in both periods of 1996 was primarily attributable to the expansion of the Vencare contract services business, which provides respiratory and rehabilitation therapy services and subacute care primarily to nursing centers. Income from operations totaled $33.6 million and $92.0 million in the third quarter and nine months ended September 30, 1996, compared to losses of $82.1 million and $42.6 million during the same periods of 1995. Excluding the effect of non-recurring transactions, income from operations increased 24% in the third quarter and 26% for the nine month period. The improvement in both periods resulted primarily from (i) growth in hospital patient days, Vencare contracts and nursing center subacute volumes and (ii) reductions in interest expense resulting from refinancing activities and reductions of long-term debt. Upon consummation of the Hillhaven Merger, Vencor recorded certain pretax charges aggregating $128.4 million related primarily to merger transaction costs, employee benefit plans, consolidation and restructuring activities, and changes in nursing center accounting estimates. The consolidation of duplicative corporate and operational functions was substantially completed during the third quarter of 1996, and management expects that dispositions of certain nursing center properties will be concluded in 1997. LIQUIDITY Cash provided by operations totaled $165.4 million for the nine months ended September 30, 1996 compared to $114.6 million for the same period of 1995. The increase was attributable to growth in net income, reductions in income tax payments and improved controls over collections of accounts receivable. Net cash used in investing activities totaled $50.0 million and $150.7 million for the nine months ended September 30, 1996 and 1995, respectively. Vencor's investing activities included capital expenditures related to the development and acquisition of new facilities and expansion of existing operations totaling $111.6 million and $147.6 million for the respective periods. In addition, Vencor substantially reduced its notes receivable portfolio in 1996 through the collection of $54.6 million. Net cash used in financing activities totaled $6.6 million in the first nine months of 1996, while net cash provided by financing activities totaled $74.0 million for the same period of 1995. Net cash used in financing activities in 1996 includes net reductions of long-term debt of $15.5 million, proceeds from the Atria IPO of $53.1 million and the repurchase of 1,550,000 shares of Vencor common stock at an aggregate cost of $43.7 million. Net cash provided by financing activities in 1995 includes a net increase in long-term debt of $115.1 million, proceeds of $66.5 million from the public offering of 2,200,000 shares of Vencor common stock, and payments of $91.3 million related to the redemption of all outstanding preferred stock in connection with the Hillhaven Merger. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY (CONTINUED) Since the consummation of the Hillhaven Merger, Vencor has maintained a $1 billion bank credit facility (the "Vencor Credit Facility"). At September 30, 1996, available borrowings under the Vencor Credit Facility approximated $350 million. Following completion of the IPO, Atria consummated the Atria Credit Facility in the aggregate amount of $200 million to finance its expansion and development program. At September 30, 1996, amounts available under the Atria Credit Facility approximated $135 million. Working capital totaled $316.8 million at September 30, 1996 compared to $239.7 million at December 31, 1995. Cash and cash equivalents at September 30, 1996 includes $65.3 million related to Atria, a substantial portion of which will be used to finance Atria's expansion and development program, and approximately $28.1 million of proceeds from notes receivable which were collected on the last day of the quarter. Management believes that cash flows from operations and amounts available under the bank credit agreements are sufficient to meet future expected liquidity needs. CAPITAL RESOURCES Excluding acquisitions, capital expenditures totaled $85.4 million in the first nine months of 1996 compared to $102.3 million for the same period of 1995. Planned capital expenditures in 1996 (excluding acquisitions) related to the improvement and expansion of existing properties and construction of new facilities are expected to approximate $140 million and include significant expenditures related to the expansion of the independent and assisted living business. Management believes that its capital expenditure program is adequate to expand, improve and equip existing facilities. At September 30, 1996, the estimated cost to complete and equip construction in progress approximated $60 million. Vencor also expended $26.2 million and $45.3 million for acquisitions of new facilities (and related healthcare businesses) and previously leased nursing centers during the nine months ended September 30, 1996 and 1995, respectively. Management intends to acquire additional hospitals, nursing centers and related healthcare businesses in the future. Capital expenditures were financed primarily through internally generated funds and, in 1995, from the public offering of 2,200,000 shares of Vencor common stock, the proceeds from which aggregated $66.5 million. Vencor intends to finance a substantial portion of its capital expenditures with internally generated funds, issuance of long-term debt and, with respect to Atria, proceeds from the IPO. Sources of capital include available borrowings under existing bank credit agreements, public or private debt and equity. HEALTH CARE LEGISLATION Congress is currently considering various proposals which could reduce expenditures under certain government health and welfare programs, including Medicare and Medicaid. Management cannot predict whether such proposals will be adopted, or if adopted, what effect, if any, such proposals would have on its business. Medicare revenues as a percentage of total revenues were 31% and 29% for the nine months ended September 30, 1996 and September 30, 1995, respectively, while Medicaid percentages of revenues approximated 31% and 33% for the respective periods. 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER INFORMATION Various lawsuits and claims arising in the ordinary course of business are pending against Vencor. Resolution of such litigation and other loss contingencies is not expected to have a material adverse effect on Vencor's liquidity, financial position or results of operations. The Vencor Credit Facility and the Atria Credit Facility contain covenants which, among other things, require maintenance of certain financial ratios and limit amounts of additional debt, capital expenditures and purchases of common stock. Vencor was in substantial compliance with all such covenants at September 30, 1996. In connection with the Atria Credit Facility, Vencor will guarantee for four years certain borrowings by Atria in amounts up to $100 million in the first year following the IPO, declining to $75 million, $50 million and $25 million in each respective year thereafter. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 1996 QUARTERS ---------------------------- FIRST SECOND THIRD NINE MONTHS -------- -------- -------- ----------- <S> <C> <C> <C> <C> Revenues............................ $626,337 $634,554 $650,551 $1,911,442 -------- -------- -------- ---------- Salaries, wages and benefits........ 372,318 366,705 372,524 1,111,547 Supplies............................ 51,762 53,999 54,409 160,170 Rent................................ 19,167 19,102 19,681 57,950 Other operating expenses............ 104,501 110,873 115,833 331,207 Depreciation and amortization....... 24,793 24,846 24,787 74,426 Interest expense.................... 12,480 12,141 11,884 36,505 Investment income................... (3,578) (3,300) (3,132) (10,010) -------- -------- -------- ---------- 581,443 584,366 595,986 1,761,795 -------- -------- -------- ---------- Income from operations before income taxes.............................. 44,894 50,188 54,565 149,647 Provision for income taxes.......... 17,284 19,323 21,007 57,614 -------- -------- -------- ---------- Net income...................... $ 27,610 $ 30,865 $ 33,558 $ 92,033 ======== ======== ======== ========== Earnings per common and common equivalent share: Primary............................ $ .39 $ .43 $ .48 $ 1.30 Fully diluted...................... $ .39 $ .43 $ .48 $ 1.30 Shares used in computing earnings per common and common equivalent share: Primary............................ 71,455 71,373 70,028 70,800 Fully diluted...................... 71,455 71,373 70,028 70,800 </TABLE> 14
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) <TABLE> <CAPTION> 1995 QUARTERS -------------------------------------- FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> Revenues.................. $552,178 $578,314 $575,339 $618,125 $2,323,956 -------- -------- -------- -------- ---------- Salaries, wages and benefits................. 321,806 330,455 347,251 360,506 1,360,018 Supplies.................. 43,516 46,882 47,868 50,488 188,754 Rent...................... 19,579 19,771 20,225 19,901 79,476 Other operating expenses.. 99,247 104,635 105,335 107,752 416,969 Depreciation and amortization............. 21,170 22,507 23,263 22,538 89,478 Interest expense.......... 15,458 17,171 15,169 13,120 60,918 Investment income......... (3,180) (3,548) (3,304) (3,412) (13,444) Non-recurring transactions............. - 5,555 103,868 - 109,423 -------- -------- -------- -------- ---------- 517,596 543,428 659,675 570,893 2,291,592 -------- -------- -------- -------- ---------- Income (loss) from operations before income taxes............. 34,582 34,886 (84,336) 47,232 32,364 Provision for income taxes.................... 13,410 13,799 (21,449) 18,241 24,001 -------- -------- -------- -------- ---------- Income (loss) from operations............... 21,172 21,087 (62,887) 28,991 8,363 Extraordinary loss on extinguishment of debt, net of income taxes...... (66) (2,725) (19,196) (1,265) (23,252) -------- -------- -------- -------- ---------- Net income (loss)..... 21,106 18,362 (82,083) 27,726 (14,889) Preferred stock dividend requirements............. (1,793) (1,795) (1,692) - (5,280) Gain on redemption of preferred stock.......... - - 10,176 - 10,176 -------- -------- -------- -------- ---------- Income (loss) available to common stockholders......... $ 19,313 $ 16,567 $(73,599) $ 27,726 $ (9,993) ======== ======== ======== ======== ========== Earnings (loss) per common and common equivalent share: Primary: Income (loss) from operations............. $ .33 $ .32 $ (.91) $ .43 $ .21 Extraordinary loss on extinguishment of debt................... - (.05) (.32) (.02) (.37) -------- -------- -------- -------- ---------- Net income (loss)..... $ .33 $ .27 $ (1.23) $ .41 $ (.16) ======== ======== ======== ======== ========== Fully diluted: Income (loss) from oper- ations................. $ .31 $ .30 $ (.91) $ .41 $ .29 Extraordinary loss on extinguishment of debt................... - (.04) (.32) (.02) (.32) -------- -------- -------- -------- ---------- Net income (loss)..... $ .31 $ .26 $ (1.23) $ .39 $ (.03) ======== ======== ======== ======== ========== Shares used in computing earnings (loss) per common and common equivalent share: Primary.................. 58,981 60,673 60,011 68,270 62,318 Fully diluted............ 70,826 72,454 60,011 71,547 71,967 </TABLE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING DATA (UNAUDITED) <TABLE> <CAPTION> 1996 QUARTERS ------------------------------- FIRST SECOND THIRD NINE MONTHS --------- --------- --------- ----------- <S> <C> <C> <C> <C> REVENUES (IN THOUSANDS) (A): Hospitals......................... $ 130,047 $ 138,612 $ 144,228 $ 412,887 --------- --------- --------- ---------- Nursing centers: Long-term care................... 257,423 259,902 273,389 790,714 Subacute care.................... 138,324 136,799 138,564 413,687 --------- --------- --------- ---------- 395,747 396,701 411,953 1,204,401 --------- --------- --------- ---------- Ancillary services: Vencare ......................... 52,726 53,576 50,414 156,716 Pharmacies ...................... 43,447 43,990 42,695 130,132 Independent and assisted living communities..................... 12,611 12,837 13,038 38,486 --------- --------- --------- ---------- 108,784 110,403 106,147 325,334 --------- --------- --------- ---------- Elimination....................... (8,241) (11,162) (11,777) (31,180) --------- --------- --------- ---------- $ 626,337 $ 634,554 $ 650,551 $1,911,442 ========= ========= ========= ========== HOSPITAL DATA: End of period data: Number of hospitals.............. 36 37 37 Number of licensed beds.......... 3,225 3,265 3,265 Revenue mix %: Medicare......................... 57 60 58 59 Medicaid......................... 13 12 14 13 Private and other................ 30 28 28 28 Patient days: Medicare......................... 94,087 95,680 90,224 279,991 Medicaid......................... 24,152 23,898 26,280 74,330 Private and other................ 27,776 28,735 27,716 84,227 --------- --------- --------- ---------- 146,015 148,313 144,220 438,548 ========= ========= ========= ========== NURSING CENTER DATA: End of period data: Number of nursing centers........ 311 310 313 Number of licensed beds.......... 39,510 39,378 39,640 Revenue mix %: Medicare......................... 30 30 29 30 Medicaid......................... 44 44 44 44 Private and other................ 26 26 27 26 Patient days: Long-term care................... 2,624,013 2,614,378 2,693,457 7,931,848 Subacute care.................... 503,507 493,103 478,448 1,475,058 --------- --------- --------- ---------- 3,127,520 3,107,481 3,171,905 9,406,906 ========= ========= ========= ========== ANCILLARY SERVICES DATA: End of period data: Number of Vencare contracts...... 2,133 2,185 2,090 Number of pharmacy outlets....... 54 53 51 Number of Atria communities...... 22 22 22 Number of Atria units............ 3,022 3,022 3,022 </TABLE> - -------- (a) Prior period revenues have been reclassified to conform with the third quarter presentation. 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING DATA (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> 1995 QUARTERS ---------------------------------------------- FIRST SECOND THIRD FOURTH YEAR ---------- ---------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> REVENUES (IN THOUSANDS) (A): Hospitals............... $ 101,145 $ 116,186 $ 119,705 $ 119,450 $ 456,486 ---------- ---------- ---------- ---------- ----------- Nursing centers: Long-term care ........ 257,124 256,642 265,951 274,203 1,053,920 Subacute care.......... 114,668 120,504 125,952 131,788 492,912 Non-recurring transactions.......... - - (24,500) - (24,500) ---------- ---------- ---------- ---------- ----------- 371,792 377,146 367,403 405,991 1,522,332 ---------- ---------- ---------- ---------- ----------- Ancillary services: Vencare ............... 24,599 31,261 37,860 44,114 137,834 Pharmacies ............ 43,620 42,674 40,773 41,700 168,767 Independent and assisted living communities........... 11,367 11,897 12,178 12,534 47,976 ---------- ---------- ---------- ---------- ----------- 79,586 85,832 90,811 98,348 354,577 ---------- ---------- ---------- ---------- ----------- Elimination............. (345) (850) (2,580) (5,664) (9,439) ---------- ---------- ---------- ---------- ----------- $ 552,178 $ 578,314 $ 575,339 $ 618,125 $ 2,323,956 ========== ========== ========== ========== =========== HOSPITAL DATA: End of period data: Number of hospitals.... 34 36 35 36 Number of licensed beds.................. 2,859 3,275 3,214 3,263 Revenue mix %: Medicare............... 58 57 57 58 57 Medicaid............... 11 11 11 13 12 Private and other...... 31 32 32 29 31 Patient days: Medicare............... 74,742 80,236 79,282 79,749 314,009 Medicaid............... 14,609 19,330 21,014 21,828 76,781 Private and other...... 23,814 25,120 24,179 25,709 98,822 ---------- ---------- ---------- ---------- ----------- 113,165 124,686 124,475 127,286 489,612 ========== ========== ========== ========== =========== NURSING CENTER DATA: End of period data: Number of nursing centers............... 310 311 311 311 Number of licensed beds.................. 39,418 39,509 39,513 39,480 Revenue mix %: Medicare............... 28 29 24 29 28 Medicaid............... 44 44 48 45 45 Private and other...... 28 27 28 26 27 Patient days: Long-term care......... 2,700,250 2,710,176 2,758,760 2,700,914 10,870,100 Subacute care.......... 402,261 412,250 419,499 465,490 1,699,500 ---------- ---------- ---------- ---------- ----------- 3,102,511 3,122,426 3,178,259 3,166,404 12,569,600 ========== ========== ========== ========== =========== ANCILLARY SERVICES DATA: End of period data: Number of Vencare contracts............. 1,093 1,703 1,917 2,008 Number of pharmacy outlets............... 57 55 56 55 Number of Atria communities........... 22 22 22 22 Number of Atria units.. 3,022 3,022 3,022 3,022 </TABLE> - -------- (a) Revenues have been reclassified to conform with the 1996 presentation. 17
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS: <TABLE> <S> <C> 11 Statement Re: Computation of earnings per common and common equivalent share for the quarter and nine months ended September 30, 1996 and 1995. 27 Financial Data Schedule (included only in filings submitted under the Electronic Data Gathering Analysis and Retrieval system). </TABLE> (B) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1996. 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. VENCOR, INC. Date: October 24, 1996 /s/ W. Bruce Lunsford _____________________________________ W. Bruce Lunsford Chairman of the Board, President and Chief Executive Officer Date: October 24, 1996 /s/ W. Earl Reed, III _____________________________________ W. Earl Reed, III Executive Vice President and Chief Financial Officer (Principal Financial Officer) 18