- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 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 VENTAS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 61-1055020 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3300 AEGON 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) VENCOR, INC. (FORMER NAME, 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, 1998 ---------------------------- ----------------------------- Common stock, $.25 par value 67,638,980 shares - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 of 23
VENTAS, INC. (FORMERLY VENCOR, INC.) FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ---- PART I. FINANCIAL INFORMATION <C> <S> <C> Item 1. Financial Statements: Condensed Consolidated Statement of Income -- for the three months ended March 31, 1998 and 1997.......................... 3 Condensed Consolidated Balance Sheet -- March 31, 1998 and December 31, 1997............................................. 4 Condensed Consolidated Statement of Cash Flows -- for the three months ended March 31, 1998 and 1997....................................... 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 21 Item 6. Exhibits and Reports on Form 8-K............................... 22 </TABLE> 2
VENTAS, INC. (FORMERLY VENCOR, INC.) CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 1998 1997 -------- -------- <S> <C> <C> Revenues................................................... $823,316 $680,696 -------- -------- Salaries, wages and benefits............................... 480,364 396,573 Supplies................................................... 76,052 66,033 Rent....................................................... 24,135 18,948 Other operating expenses................................... 127,258 109,786 Depreciation and amortization.............................. 35,470 24,372 Interest expense........................................... 37,195 10,660 Investment income.......................................... (1,180) (1,567) Non-recurring transactions................................. 7,664 - -------- -------- 786,958 624,805 -------- -------- Income before income taxes................................. 36,358 55,891 Provision for income taxes................................. 17,477 21,909 -------- -------- Income from operations..................................... 18,881 33,982 Extraordinary loss on extinguishment of debt, net of income tax benefit............................................... - (2,259) -------- -------- Net income.............................................. $ 18,881 $ 31,723 ======== ======== Earnings per common share: Basic: Income from operations................................... $ 0.28 $ 0.49 Extraordinary loss on extinguishment of debt............. - (0.03) -------- -------- Net income.............................................. $ 0.28 $ 0.46 ======== ======== Diluted: Income from operations................................... $ 0.28 $ 0.48 Extraordinary loss on extinguishment of debt............. - (0.03) -------- -------- Net income.............................................. $ 0.28 $ 0.45 ======== ======== Shares used in computing earnings per common share: Basic..................................................... 67,448 68,929 Diluted................................................... 67,857 70,207 </TABLE> See accompanying notes. 3
VENTAS, INC. (FORMERLY VENCOR, INC.) CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1998 1997 ---------- ------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents............................ $ 51,165 $ 82,473 Accounts and notes receivable less allowance for loss of $68,428 -- March 31 and $63,551 -- December 31...... 633,775 619,068 Inventories.......................................... 27,683 27,605 Income taxes......................................... 77,921 73,413 Other................................................ 45,629 55,589 ---------- ---------- 836,173 858,148 Property and equipment, at cost....................... 2,089,991 1,996,030 Accumulated depreciation.............................. (518,895) (488,212) ---------- ---------- 1,571,096 1,507,818 Goodwill less accumulated amortization of $22,744 -- March 31 and $18,886 -- December 31........................... 669,327 659,311 Investments in affiliates............................. 181,862 178,301 Other................................................. 129,779 131,161 ---------- ---------- $3,388,237 $3,334,739 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 97,646 $ 106,019 Salaries, wages and other compensation............... 184,252 163,642 Other accrued liabilities............................ 125,828 115,933 Long-term debt due within one year................... 32,666 27,468 ---------- ---------- 440,392 413,062 Long-term debt........................................ 1,920,901 1,919,624 Deferred credits and other liabilities................ 93,649 94,653 Minority interests in equity of consolidated entities. 2,462 2,050 Stockholders' equity: Common stock, $.25 par value; authorized 180,000 shares; issued 73,551 shares -- March 31 and 73,470 shares -- December 31............................... 18,388 18,368 Capital in excess of par value....................... 770,505 766,078 Retained earnings.................................... 300,684 281,803 ---------- ---------- 1,089,577 1,066,249 Common treasury stock; 5,987 shares -- March 31 and 6,159 shares -- December 31......................... (158,744) (160,899) ---------- ---------- 930,833 905,350 ---------- ---------- $3,388,237 $3,334,739 ========== ========== </TABLE> See accompanying notes. 4
VENTAS, INC. (FORMERLY VENCOR, INC.) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> 1998 1997 -------- --------- <S> <C> <C> Cash flows from operating activities: Net income............................................... $ 18,881 $ 31,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 35,470 24,372 Provision for doubtful accounts......................... 7,194 3,615 Deferred income taxes................................... 430 - Extraordinary loss on extinguishment of debt............ - 3,672 Non-recurring transactions.............................. 4,221 - Other................................................... (952) 150 Changes in operating assets and liabilities: Accounts and notes receivable.......................... (22,635) (40,913) Inventories and other assets........................... 3,866 (6,200) Accounts payable....................................... (8,090) 16,568 Income taxes........................................... 15,631 19,737 Other accrued liabilities.............................. 3,976 7,303 -------- --------- Net cash provided by operating activities............. 57,992 60,027 -------- --------- Cash flows from investing activities: Purchase of property and equipment....................... (78,732) (60,887) Acquisition of TheraTx, Incorporated..................... - (336,458) Acquisition of other healthcare businesses and previously leased facilities....................................... (12,275) (9,652) Sale of assets........................................... - 10,342 Collection of notes receivable........................... 802 420 Net change in investments................................ (262) (1,234) Other.................................................... (1,526) (749) -------- --------- Net cash used in investing activities................. (91,993) (398,218) -------- --------- Cash flows from financing activities: Net change in borrowings under revolving lines of credit. 5,600 344,950 Issuance of long-term debt............................... - 868 Repayment of long-term debt.............................. (1,895) (5,079) Payment of deferred financing costs...................... (1,115) (4,225) Issuances of common stock................................ 103 604 Other.................................................... - (78) -------- --------- Net cash provided by financing activities............. 2,693 337,040 -------- --------- Change in cash and cash equivalents....................... (31,308) (1,151) Cash and cash equivalents at beginning of period.......... 82,473 112,466 -------- --------- Cash and cash equivalents at end of period................ $ 51,165 $ 111,315 ======== ========= Supplemental information: Interest payments........................................ $ 53,307 $ 12,520 Income tax payments...................................... 1,896 1,210 </TABLE> See accompanying notes. 5
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- REPORTING ENTITY Ventas, Inc., formerly Vencor, Inc. (the "Company"), operates an integrated network of healthcare services in 45 states primarily focused on the needs of the elderly. At March 31, 1998, the Company operated 62 long-term acute care hospitals (5,313 licensed beds), 305 nursing centers (39,960 licensed beds), and a contract services business ("Vencare") which primarily provides respiratory and rehabilitation therapies, medical services and pharmacy management services under approximately 3,700 contracts to nursing centers and other healthcare providers. On April 30, 1998, the Company changed its name to Ventas, Inc. and refinanced all of its long-term debt in anticipation of spinning off its healthcare operations through the distribution of the common stock of a new entity named Vencor, Inc. ("New Vencor") to stockholders of record as of April 27, 1998 (the "Reorganization Transactions"). The distribution was effected on May 1, 1998. For financial reporting periods subsequent to the Reorganization Transactions, the historical financial statements of the Company will be assumed by New Vencor and the Company will not report any historical financial information prior to May 1, 1998. Accordingly, the financial results included herein will not be reflected in the future financial statements of the Company after May 1, 1998. See Note 12. On March 21, 1997, the Company completed the acquisition of TheraTx, Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy management services and operator of nursing centers (the "TheraTx Merger"), pursuant to a cash tender offer. See Note 5. On June 24, 1997, the Company acquired substantially all of the outstanding common stock of Transitional Hospitals Corporation ("Transitional"), an operator of 19 long-term acute care hospitals, pursuant to a cash tender offer. The Company completed the merger of its wholly owned subsidiary with and into Transitional on August 26, 1997 (the "Transitional Merger"). See Note 6. NOTE 2 -- BASIS OF PRESENTATION The TheraTx Merger and Transitional Merger have been accounted for by the purchase method, which requires that the accounts and operations of acquired entities be included with those of the Company since the acquisition of a controlling interest. Accordingly, the accompanying condensed consolidated financial statements include the operations of TheraTx and Transitional since March 21, 1997 and June 24, 1997, respectively. Beginning July 1, 1997, the accounts of the Company's publicly held assisted and independent living affiliate, Atria Communities, Inc. ("Atria"), were accounted for under the equity method. Prior thereto, such accounts were consolidated with those of the Company and provisions related to minority interests in the earnings and equity of Atria had been recorded since the consummation of the initial public offering in 1996. Beginning in 1998, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130 ("SFAS 130"), "Reporting Comprehensive Income", which establishes new rules for the reporting of comprehensive income and its components. SFAS 130 requires, among other things, unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported as changes in common stockholders' equity, to be disclosed as other comprehensive income. The adoption of SFAS 130 had no impact on the Company's net income or common stockholders' equity for the three months ended March 31, 1998. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information", which will become effective in December 1998 and requires interim disclosures beginning in 1999. SFAS 131 requires public companies to 6
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 2 -- BASIS OF PRESENTATION (CONTINUED) report certain information about operating segments, products and services, the geographic areas in which they operate and major customers. The operating segments are to be based on the structure of the enterprise's internal organization whose operating results are regularly reviewed by senior management. Management has not yet determined the effect, if any, of SFAS 131 on the consolidated financial statement disclosures. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires entities to expense start-up costs, including organizational costs, as incurred. SOP 98-5 requires most entities to write off as a cumulative effect of a change in accounting principle any previously capitalized start-up or organizational costs. SOP 98-5 is effective for most entities for fiscal years beginning after December 15, 1998. The Company plans to adopt the provisions of SOP 98-5 in the first quarter of 1999. The amount of such unamortized costs were $14.4 million at March 31, 1998. 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 statements should be read in conjunction with the audited consolidated financial statements of Vencor, Inc. for the year ended December 31, 1997 filed with the Securities and Exchange Commission on Form 10-K. The accompanying condensed consolidated financial statements have been prepared in accordance with the Company'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 for the costs described 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. A summary of first quarter revenues by payor type follows (in thousands): <TABLE> <CAPTION> 1998 1997 -------- -------- <S> <C> <C> Medicare.............................................. $298,837 $233,133 Medicaid.............................................. 208,406 199,506 Private and other..................................... 343,085 259,777 -------- -------- 850,328 692,416 Elimination........................................... (27,012) (11,720) -------- -------- $823,316 $680,696 ======== ======== </TABLE> NOTE 4 -- EARNINGS PER COMMON SHARE In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share", replacing the calculation of primary and fully diluted earnings per common share with basic and diluted earnings per common share. The computation of basic earnings per common share is based upon the weighted average number of 7
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4 -- EARNINGS PER COMMON SHARE (CONTINUED) common shares outstanding, while the diluted computation also includes the effect of common stock equivalents consisting primarily of stock options. Earnings per common share for all prior periods have been restated to conform to the requirements of SFAS 128. The impact of the restatement was not significant. A computation of earnings per common share for the three months ended March 31 follows (in thousands, except per share amounts): <TABLE> <CAPTION> 1998 1997 ------- ------- <S> <C> <C> Income from operations.................................. $18,881 $33,982 Extraordinary loss on extinguishment of debt............ - (2,259) ------- ------- Net income........................................... $18,881 $31,723 ======= ======= Shares used in the computation: Weighted average shares outstanding--basic computation. 67,448 68,929 Dilutive effect of employee stock options and other dilutive securities................................... 409 1,278 ------- ------- Adjusted weighted average shares outstanding--diluted computation......................................... 67,857 70,207 ======= ======= Earnings per common share: Basic: Income from operations................................ $ 0.28 $ 0.49 Extraordinary loss on extinguishment of debt.......... - (0.03) ------- ------- Net income........................................... $ 0.28 $ 0.46 ======= ======= Diluted: Income from operations................................ $ 0.28 $ 0.48 Extraordinary loss on extinguishment of debt.......... - (0.03) ------- ------- Net income........................................... $ 0.28 $ 0.45 ======= ======= </TABLE> NOTE 5 -- THERATX MERGER On March 21, 1997, the TheraTx Merger was consummated following a cash tender offer in which the Company paid $17.10 for each outstanding share of TheraTx common stock. A summary of the TheraTx Merger as of March 31, 1998 follows (in thousands): <TABLE> <S> <C> Fair value of assets acquired.................................. $ 633,793 Fair value of liabilities assumed.............................. (259,439) --------- Net assets acquired.......................................... 374,354 Cash received from acquired entity............................. (14,915) --------- Net cash paid................................................ $ 359,439 ========= </TABLE> The purchase price paid in excess of the fair value of identifiable net assets acquired (to be amortized over 40 years by the straight-line method) aggregated $314.7 million. 8
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6 -- TRANSITIONAL MERGER On June 24, 1997, the Company acquired approximately 95% of the outstanding shares of common stock of Transitional through a cash tender offer in which the Company paid $16.00 per common share. The Company completed the merger of its wholly owned subsidiary with and into Transitional on August 26, 1997. A summary of the Transitional Merger as of March 31, 1998 follows (in thousands): <TABLE> <S> <C> Fair value of assets acquired................................... $713,336 Fair value of liabilities assumed............................... (44,842) -------- Net assets acquired........................................... 668,494 Cash received from acquired entity.............................. (52,874) -------- Net cash paid................................................. $615,620 ======== </TABLE> The purchase price paid in excess of the fair value of identifiable net assets acquired (to be amortized over 40 years by the straight-line method) aggregated $349.1 million. NOTE 7 -- PRO FORMA INFORMATION The pro forma effect of the TheraTx Merger and the Transitional Merger assuming that the transactions occurred on January 1, 1997 follows (in thousands, except per share amounts): <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1997 -------------- <S> <C> Revenues.................................................. $850,429 Income from operations.................................... 13,137 Net income................................................ 10,878 Earnings per common share: Basic: Income from operations.................................. $ 0.19 Net income.............................................. 0.16 Diluted: Income from operations.................................. $ 0.19 Net income.............................................. 0.16 </TABLE> Pro forma income from operations includes $29.7 million of costs incurred by both TheraTx and Transitional in connection with the acquisitions. Pro forma financial data have been derived by combining the financial results of the Company and TheraTx (based upon a three month reporting period ending March 31) and Transitional (based upon a three month reporting period ending February 28). NOTE 8 -- NON-RECURRING TRANSACTIONS During the first quarter of 1998, the Company incurred $7.7 million of professional fees and administrative expenses related to the Company's Reorganization Transactions. The Company expects to record additional costs associated with the consummation of the Reorganization Transactions in the second quarter of 1998. NOTE 9 -- LONG-TERM DEBT In connection with the TheraTx Merger, the Company refinanced a substantial portion of its long-term debt. These transactions resulted in an after-tax loss of $2.3 million in the first quarter of 1997. 9
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9 -- LONG-TERM DEBT (CONTINUED) The Company entered into certain interest rate swap agreements in the fourth quarter of 1995 to eliminate the impact of changes in interest rates on $400 million of floating rate debt outstanding. The agreements expire in varying amounts through April 1998 and provide for fixed rates at 5.7% plus 3/8% to 1 1/8%. In addition, the Company entered into interest rate swap agreements in May 1997 on $300 million of floating rate debt. These agreements expire in $100 million increments in May 1999, November 1999 and May 2000, and provide for fixed rates at 6.4% plus 3/8% to 1 1/8%. The fair values of the swap agreements are not recognized in the condensed consolidated financial statements. NOTE 10 -- LITIGATION On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida, issued a temporary injunction order against the Company's nursing center in Tampa, Florida which ordered the nursing center to cease notifying and requiring the discharge of any resident. The Company discontinued requiring the discharge of any resident from its Tampa nursing center on April 7, 1998. Following the conduct of a complaint survey at the facility, the State of Florida Agency for Health Care Administration ("AHCA") imposed a fine of $270,000 for related regulatory violations. In addition, the Health Care Financing Administration ("HCFA") has imposed a fine of $10,000 per day, effective from March 30, 1998 and continuing until April 9, 1998 at which time the facility was determined to have removed any "immediate jeopardy" to patients. A fine of $50 per day became effective on April 10, 1998 and will continue until the facility has achieved substantial compliance. If substantial compliance is not achieved by October 9, 1998, the facility's Medicare and Medicaid provider agreements could be terminated. The Company instituted a plan of correction at the Tampa nursing center to respond to the findings of AHCA and HCFA. AHCA also has changed the rating of the nursing center's license to conditional. The Company has appealed these regulatory sanctions. The Company believes that it has submitted an acceptable plan of correction which will terminate the running of per day fines and avoid the termination of the Tampa nursing center's provider agreements. The Company is awaiting decisions from HCFA and AHCA and no assurance can be given that the plan will be accepted. The Florida Attorney General's office and the Tampa Prosecuting Attorney's office have indicated to the Company that they are conducting independent civil and criminal investigations into the circumstances surrounding the Tampa resident discharges. The Company is cooperating fully with the ongoing investigations. In addition to its action with the nursing center in Tampa, Florida, the HCFA Administrator of the Medicare and Medicaid programs recently indicated that the Company's facilities in other states also are being monitored. The Company has not received notice that any other state has instituted an investigation into any similar issues at another Company facility. However, there can be no assurances that HCFA or other regulators in other jurisdictions will not initiate investigations relating to this matter or other circumstances, and there can be no assurance that the results of any such investigations would not have a material adverse effect on the Company. On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v. Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States District Court for the Middle District of Florida on behalf of a purported class consisting of certain residents of the Tampa nursing center and other residents in the Company's nursing centers nationwide. The complaint alleges various breaches of contract, and statutory and regulatory violations including violations of Federal and state RICO statutes. The plaintiffs seek class certification, unspecified damages, attorneys' fees and costs. The Company intends to defend vigorously this action. 10
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- LITIGATION (CONTINUED) 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 against the Company and certain executive officers and directors of the Company, namely W. Bruce Lunsford, W. Earl Reed, III, Michael R. Barr, Thomas T. Ladt, Jill L. Force and James H. Gillenwater, Jr. The complaint alleges that the Company and certain executive officers of the Company during a specified time frame violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by, among other things, issuing to the investing public a series of false and misleading statements concerning the Company's current operations and the inherent value of the Company's common stock. The complaint further alleges that as a result of these purported false and misleading statements concerning the Company's revenues and successful acquisitions, the price of the Company's common stock was artificially inflated. In particular, the complaint alleges that the Company 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 the Company's core services and profitability. The complaint further alleges that the Company issued a series of materially false statements concerning the purportedly successful integration of its recent acquisitions and prospective earnings per share for 1997 and 1998 which the Company 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. The Company believes that the allegations in the complaint are without merit and intends to defend vigorously this action. On June 19, 1997, a class action lawsuit was filed 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 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 Transitional's 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) and 20(a) of the Securities Exchange Act of 1934, as amended, 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. The Company has filed a motion to dismiss and is awaiting the court's decision. The Company is vigorously defending this action. The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in a qui tam lawsuit which was filed in the United States District Court for the Eastern District of Arkansas and served on the Company on July 7, 1997. The United States Department of Justice intervened in the suit which was brought under the Federal Civil False Claims Act. AXR provided portable X-ray services to nursing facilities (including those operated by the Company) and other healthcare providers. The Company acquired an interest in AXR when The Hillhaven Corporation was merged into the Company in September 1995 and purchased the remaining interest in AXR in February 1996. The suit alleges that AXR submitted false claims to the Medicare and Medicaid programs. In conjunction with the qui tam action, the United States Attorney's Office for the Eastern District of Arkansas also is conducting a criminal investigation into the allegations contained in the qui tam complaint. The suit seeks damages in an amount of not less than $1,000,000, treble damages and civil penalties. The Company is cooperating fully in the investigation. 11
VENTAS, INC. (FORMERLY VENCOR, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- LITIGATION (CONTINUED) On June 6, 1997, Transitional announced that it had been advised that it is a target of a Federal grand jury investigation being conducted by the United States Attorney's Office for the District of Massachusetts (the "USAO") arising from activities of Transitional's formerly owned dialysis business. The investigation involves an alleged illegal arrangement in the form of a partnership which existed from June 1987 to June 1992 between Damon Corporation and Transitional. Transitional spun off its dialysis business, now called Vivra Incorporated, on September 1, 1989. In January 1998, the Company was informed that no criminal charges would be filed against the Company. The Company has been informed that the USAO intends to file a civil action against Transitional relating to the partnership's former business. If such a suit is filed, the Company will vigorously defend the action. NOTE 11 -- ATRIA MERGER On April 20, 1998, Atria announced that it entered into a definitive merger agreement with Kapson Senior Quarters Corp. ("Kapson"), an affiliate of Lazard Freres Real Estate Investors LLC, under which Kapson will acquire Atria. Under the terms of the merger agreement, a subsidiary of Kapson will merge into Atria and the public stockholders of Atria will receive $20.25 per share in cash. The Company, which currently owns 10 million shares of Atria common stock, will also receive $20.25 per share in cash for approximately 88% of its Atria common stock (valued at approximately $177.5 million). The Company will retain its remaining shares and will beneficially own 10% of Atria following the merger. In consideration of its continuing investment, the Company will retain a seat on Atria's Board of Directors and is entitled to certain registration rights with respect to its retained shares of Atria common stock. The merger is subject to customary conditions, including approval of Atria's stockholders and certain regulatory approvals. Proceeds from the transaction will be used to reduce long-term debt. NOTE 12 -- REORGANIZATION TRANSACTIONS On April 30, 1998, the Company completed its internal reorganization and the refinancing of all of its long-term debt necessary to complete the spin-off of its healthcare operations through the distribution of the common stock of New Vencor. The previously announced distribution of one share of New Vencor common stock for each share of the Company's common stock was made on May 1, 1998. The Company retained substantially all of its real property, buildings and other improvements (primarily long-term hospitals and nursing centers), and leases these facilities to New Vencor. In connection with the Reorganization Transactions, the Company was renamed Ventas, Inc. Following the Reorganization Transactions, the Company will operate as a self-administered, self-managed realty company. The Company expects that it will be taxed as a real estate investment trust for Federal income tax purposes commencing on January 1, 1999. The Company's properties include 46 long-term acute care hospitals and 218 nursing centers in 36 states. The Company's primary source of revenue will be the annual base rent payments under the leases with New Vencor. 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND INFORMATION The following discussion describes the Company's business as it was conducted prior to the Reorganization Transactions. See "Reorganization Transactions." The Company is one of the nation's largest providers of healthcare services focused primarily on the needs of the elderly. At March 31, 1998, the Company operated 62 long-term acute care hospitals (5,313 licensed beds), 305 nursing centers (39,960 licensed beds) and Vencare contract services which provided respiratory and rehabilitation therapies, medical services and pharmacy management services under approximately 3,700 contracts to nursing centers and other healthcare providers. In July 1997, Atria completed a secondary equity offering which reduced the Company's ownership percentage to less than 50%. Accordingly, the Company's investment in Atria beginning July 1, 1997 has been accounted for under the equity method. On March 21, 1997, the TheraTx Merger was completed. TheraTx primarily provided rehabilitation and respiratory therapy management services and operated 26 nursing centers with annualized revenues approximating $425 million. See Note 5 of the Notes to Condensed Consolidated Financial Statements. On June 24, 1997, the Company acquired a controlling interest in Transitional and, on August 26, 1997, completed the Transitional Merger. Transitional primarily operated 19 long-term acute care hospitals with annualized revenues approximating $350 million. See Note 6 of the Notes to Condensed Consolidated Financial Statements. RESULTS OF OPERATIONS A summary of revenues follows (dollars in thousands): <TABLE> <CAPTION> FIRST QUARTER ------------------ % 1998 1997 CHANGE -------- -------- ------ <S> <C> <C> <C> Hospitals...................................... $246,365 $154,900 59.0 Nursing centers................................ 434,190 404,253 7.4 Vencare........................................ 169,773 119,046 42.6 Atria.......................................... - 14,217 -------- -------- 850,328 692,416 22.8 Elimination.................................... (27,012) (11,720) -------- -------- $823,316 $680,696 21.0 ======== ======== </TABLE> Hospital revenue increases in the first quarter of 1998 resulted primarily from the Transitional Merger and an increase in patient days and improved patient mix. Revenues attributable to the Transitional Merger were $69.6 million. Hospital patient days rose 55% to 248,249 from 159,853 in the same period last year. Non-Medicaid patient days (for which payment rates are generally higher than Medicaid) increased 59% to 219,714 in the first quarter of 1998, while Medicaid patient days increased 31% to 28,535. Excluding the effect of sales and acquisitions, nursing center revenues increased 3% over the first quarter of 1997. Revenue growth was adversely impacted by a 2% decline in private patient days in the first quarter 1998. In an effort to attract increased volumes of Medicare and private pay patients, the Company began implementing a plan in 1996 to expend approximately $200 million by the end of 1998 to improve existing facilities and expand the range of services provided to accommodate higher acuity patients. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Vencare revenues include $60.3 million related to contract rehabilitation therapy and certain other ancillary service businesses acquired as part of the TheraTx Merger. Vencare ancillary service contracts in effect at March 31, 1998 totaled 3,738 compared to 4,946 at March 31, 1997. During 1997, the Company terminated approximately 700 contracts which did not meet certain growth criteria and eliminated approximately 670 contracts by combining previously separate pharmacy, enteral and infusion therapy contracts. These transactions did not materially impact Vencare operating results. Pharmacy revenues (included in Vencare operations) declined 3% to $40.1 million in the first quarter of 1998 from $41.5 million in the same period last year. In 1997, the Company initiated the marketing of its Vencare full-service ancillary services contracts to provide a full range of services to nursing centers not operated by the Company. The change in the Company's marketing strategy for selling ancillary services was developed in response to the anticipated prospective payment system established under the Balanced Budget Act of 1997 (the "Budget Act"). The Company believes that by bundling services through one provider, nursing centers can provide quality patient care more efficiently with the added benefit of centralized patient medical records. Under the new prospective payment system, ancillary services provided by nursing centers will be subject to fixed payments. In this new environment, the Company believes that its full-service ancillary services contracts will enhance the ability of nursing center operators to manage effectively the costs of providing quality patient care. First quarter 1998 income from operations totaled $18.9 million ($0.28 per diluted share), down 44% from $34.0 million ($0.48 per diluted share) for the same period in 1997. During the first quarter of 1998, the Company incurred non-recurring charges of $7.7 million net of tax, or $0.11 per diluted share, for professional and administrative expenses related to the Reorganization Transactions. The Company expects to record additional costs associated with the consummation of the Reorganization Transactions in the second quarter of 1998. Excluding non-recurring charges, the decline in operating income was attributable to growth in costs, primarily information systems, related to anticipated changes in the Company's nursing center and Vencare businesses resulting from the provisions of the Budget Act. Management believes that these cost increases will continue for the remainder of 1998. During the first quarter of 1997, the Company recorded an after-tax loss of $2.3 million ($0.03 per share) in connection with the refinancing of the bank credit agreements of both the Company and TheraTx. LIQUIDITY Cash provided by operations totaled $58.0 million for the first quarter of 1998 compared to $60.0 million for the same period of 1997. Days of revenues in accounts receivable decreased to 66 at March 31, 1998 compared to 67 at December 31, 1997. Working capital totaled $395.8 million at March 31, 1998 compared to $445.1 million at December 31, 1997. At March 31, 1998, available borrowings under the Company's $2.0 billion credit facility (the "Credit Facility") approximated $817 million. Management believes that cash flows from operations and amounts available under the Credit Facility are sufficient to meet the Company's future expected liquidity needs. At March 31, 1998, the Company's ratio of debt to debt and equity approximated 68%. Management intends to reduce the Company's future leverage through, among other things, the sale of Atria common stock. See Note 11 of the Notes to Condensed Consolidated Financial Statements. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES Excluding acquisitions, capital expenditures totaled $78.7 million for the first quarter of 1998 compared to $60.9 million for the same period of 1997. Planned capital expenditures in 1998 (excluding acquisitions) are expected to approximate $250 million to $300 million and include significant expenditures related to nursing center improvements, construction of additional nursing centers, information systems and administrative facilities. Management believes that its capital expenditure program is adequate to expand, improve and equip existing facilities. At March 31, 1998, the estimated cost to complete and equip construction in progress approximated $158 million. In March 1997, the Company expended approximately $359.4 million in connection with the TheraTx Merger. This acquisition was financed primarily through the issuance of long-term debt. See Note 5 of the Notes to Condensed Consolidated Financial Statements for a discussion of the acquisition. The Company also expended $12.3 million and $9.7 million for acquisitions of new facilities (and related healthcare businesses) and previously leased nursing centers during the first quarters of 1998 and 1997, respectively. Subject to certain limitations related to management's plans to reduce long- term debt discussed above, the Company may acquire additional hospitals, nursing centers and ancillary service businesses in the future. Capital expenditures were financed primarily through internally generated funds and, in 1997, from the issuance of long-term debt. The Company intends to finance a substantial portion of its future capital expenditures with internally generated funds and long-term debt. Sources of capital include available borrowings under the Credit Facility, public or private debt and equity. HEALTHCARE LEGISLATION Healthcare is one of the largest industries in the United States and continues to attract much legislative interest and public attention. The Budget Act, enacted in August 1997, contains extensive changes to the Medicare and Medicaid programs intended to reduce the projected amount of increase in payments under those programs by $115 billion and $13 billion, respectively, over the next five years. Under the Budget Act, annual growth rates for Medicare will be reduced from over 10% to approximately 7.5% for the next five years based on specific program baseline projections from the last five years. Virtually all spending reductions will come from providers and changes in program components. The Budget Act will affect reimbursement systems for each of the Company's operating units. The Budget Act will reduce payments to many of the Company's facilities, including, but not limited to, payments made to the Company's hospitals, 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 prospective payment system ("PPS") 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 are expected to be effective beginning on September 1, 1998 with respect to the Company's hospitals. The reductions for payments for services to patients transferred from a PPS hospital are expected to be effective October 1, 1998. The Budget Act also requires the establishment of a prospective payment system for nursing centers for cost reporting periods beginning on or after July 1, 1998. During the first three years, the per diem rates for nursing centers will be based on a blend of facility-specific costs and Federal costs. Thereafter, the per diem rates will be based solely on Federal costs. The rates for such services were published on May 5, 1998 and will become effective for cost reporting periods beginning on or after July 1, 1998. The payment received under the new prospective payment system will cover all services for Medicare patients, including all ancillary services, such as respiratory therapy, physical therapy, 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) HEALTHCARE LEGISLATION (CONTINUED) occupational therapy, speech therapy and certain covered drugs. 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 leased by the Company, or the provision of services and supplies by the Company, will meet the requirements for participation in such programs. The Company could be adversely affected by the continuing efforts of governmental and private third-party payors to contain the amount of reimbursement for healthcare services. The Budget Act also requires an adjustment to the prospective payment system for home health services for cost reporting periods beginning on or after October 1, 1997. The new system will adjust per visit limits and establish per beneficiary annual spending limits. A prospective payment system for home health services will be established by October 1, 1999. Management believes that the Budget Act will adversely impact its hospital business by reducing the payments previously described. Based on information currently available, management believes that the new prospective payment system will benefit nursing center operations because (i) management believes that the average acuity levels of its patients will exceed the national average (which should result in increased payments per patient day) and (ii) because the Company expects to benefit from its ability to reduce the cost of providing ancillary services to patient in its facilities. The new Medicare prospective payment rates and related patient acuity measures were published by HCFA on May 5, 1998. At this time, management has begun its evaluation of the prospective payment rates and related patient acuity measures but has not reached a conclusion as to their impact on nursing center operations. As the nursing center industry adapts to the cost containment measures inherent in the new prospective payment system, management believes that the volume of ancillary services provided per patient day to nursing center patients could decline. In addition, as a result of these changes, many nursing centers may elect to provide ancillary services to their patients through internal staff and will no longer contract with outside parties for ancillary services. For these reasons and others, since the enactment of the Budget Act, sales of new contracts have declined and may continue to decline subject to the Company's success in implementing its Vencare comprehensive, full-service contracts sales strategy. The Company is developing, and will be actively implementing, strategies and operational modifications to address changes in the Federal reimbursement system. In January 1998, HCFA issued rules changing Medicare reimbursement guidelines for therapy services provided by the Company (including the rehabilitation contract therapy business acquired as part of the TheraTx Merger). Under the new rules, HCFA established salary equivalency limits for speech and occupational therapy services and revised existing limits for physical and respiratory therapy services. The limits are based on a blend of data from wage rates for hospitals and nursing centers, and include salary, fringe benefit and expense factors. Rates are defined by specific geographic market areas, based upon a modified version of the hospital wage index. The new limits are effective for services provided on or after April 1, 1998 and are expected to impact negatively Vencare operating results in 1998. The Company will continue to charge client nursing centers in accordance with the revised guidelines until such nursing centers transition to the new prospective payment system. Under the new prospective payment system for nursing centers, the reimbursement for these services provided to nursing center patients will be a component of the total reimbursement allowed per nursing center patient and the salary equivalency guidelines will no longer be applicable. Most of the Company's client nursing centers are expected to transition to the new prospective payment system on or before January 1, 1999. 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. 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 and changes in Medicaid reimbursement 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) HEALTHCARE LEGISLATION (CONTINUED) system applicable to the Company's hospitals. There are also a number of legislative proposals including cost caps and the establishment of Medicaid prospective payment systems for nursing centers. Moreover, by repealing the Boren Amendment, the Budget Act eases existing impediments on the states' ability to reduce their Medicaid reimbursement levels. There can be no assurance that the Budget Act, new salary equivalency rates, 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 financial condition, results of operations or liquidity. Medicare revenues as a percentage of total revenues were 35% and 34% for the three months ended March 31, 1998 and 1997, respectively, while Medicaid percentages of revenues approximated 25% and 29% for the respective periods. REORGANIZATION TRANSACTIONS On April 30, 1998, the Company completed its internal reorganization and the refinancing of all of its long-term debt necessary to complete the spin-off of its healthcare operations through the distribution of the common stock of New Vencor. The previously announced distribution of one share of New Vencor common stock for each share of the Company's common stock was made on May 1, 1998. The Company retained substantially all of its real property, buildings and other improvements (primarily long-term hospitals and nursing centers), and leases these facilities to New Vencor. In connection with the Reorganization Transactions, the Company was renamed Ventas, Inc. Following the Reorganization Transactions, the Company will operate as a self-administered, self-managed realty company. The Company expects that it will be taxed as a real estate investment trust for Federal income tax purposes commencing on January 1, 1999. The Company's properties include 46 long-term acute care hospitals and 218 nursing centers in 36 states. The Company's primary source of revenue will be the annual base rent payments under the leases with New Vencor. OTHER INFORMATION On April 20, 1998, Atria announced that it entered into a definitive merger agreement with Kapson, under which Kapson will acquire Atria. Under the terms of the merger agreement, a subsidiary of Kapson will merge into Atria and the public stockholders of Atria will receive $20.25 per share in cash. The Company, which currently owns 10 million shares of Atria common stock, will also receive $20.25 per share in cash for approximately 88% of its Atria common stock (valued at approximately $177.5 million). The Company will retain its remaining shares and will beneficially own 10% of Atria following the merger. In consideration of its continuing investment, the Company will retain a seat on Atria's Board of Directors and is entitled to certain registration rights with respect to its retained shares of Atria common stock. The merger is subject to customary conditions, including approval of Atria's stockholders and certain regulatory approvals. Proceeds from the transaction will be used to reduce long-term debt. The Company has initiated a program to prepare its information systems, clinical equipment and facilities for the year 2000. An external professional organization has been engaged to assist in the management and implementation of this program. Management is currently implementing a plan to replace substantially all of the Company's financial information systems before the year 2000, the costs of which have not been determined. Most of these costs will be capitalized and amortized over a three to five year period. Required modifications to the Company's proprietary VenTouch(TM) and Therasys(TM) clinical information systems are minimal and will 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER INFORMATION (CONTINUED) generally be accomplished through the use of existing internal resources. Clinical equipment in the Company's facilities will generally be replaced or modified as needed through the use of external professional resources. Incremental costs to complete the necessary changes to clinical equipment could approximate $10 million to $20 million over the next two years. Various lawsuits and claims arising in the ordinary course of business are pending against the Company. Resolution of litigation and other loss contingencies is not expected to have a material adverse effect on the Company's liquidity, financial position or results of operations. See Note 10 of the Notes to Condensed Consolidated Financial Statements. The Credit Facility contains customary covenants which require, among other things, maintenance of certain financial ratios and limit amounts of additional debt and repurchases of common stock. The Company was in compliance with all such covenants at March 31, 1998. As discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements, on December 31, 1997, the Company was required to change the method of computing earnings per common share on a retroactive basis. The change in calculation method did not have a material impact on previously reported earnings per common share. Disclosures set forth in this Item 2 include forward-looking statements. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. Numerous factors exist which, in some cases have affected, and in the future could cause results to differ materially from these expectations. These statements involve risks and uncertainties concerning the implementation and interpretation of the healthcare reform legislation and other factors as detailed from time to time in the Company's filings with the Securities and Exchange Commission. 18
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> 1997 QUARTERS FIRST -------------------------------------- QUARTER FIRST SECOND THIRD FOURTH YEAR 1998 -------- -------- -------- -------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> Revenues......................... $680,696 $778,295 $844,740 $812,273 $3,116,004 $823,316 -------- -------- -------- -------- ---------- -------- Salaries, wages and benefits..... 396,573 449,806 479,962 461,712 1,788,053 480,364 Supplies......................... 66,033 77,328 81,148 78,631 303,140 76,052 Rent............................. 18,948 21,783 23,954 24,789 89,474 24,135 Other operating expenses......... 109,786 118,935 131,977 129,629 490,327 127,258 Depreciation and amortization.... 24,372 29,479 33,385 36,629 123,865 35,470 Interest expense................. 10,660 20,674 34,773 36,629 102,736 37,195 Investment income................ (1,567) (1,746) (1,759) (985) (6,057) (1,180) Non-recurring transactions....... - - - - - 7,664 -------- -------- -------- -------- ---------- -------- 624,805 716,259 783,440 767,034 2,891,538 786,958 -------- -------- -------- -------- ---------- -------- Income before income taxes....... 55,891 62,036 61,300 45,239 224,466 36,358 Provision for income taxes....... 21,909 25,026 24,398 18,005 89,338 17,477 -------- -------- -------- -------- ---------- -------- Income from operations........... 33,982 37,010 36,902 27,234 135,128 18,881 Extraordinary loss on extinguish- ment of debt, net of income tax benefit......................... (2,259) (1,590) (346) - (4,195) - -------- -------- -------- -------- ---------- -------- Net income.................... $ 31,723 $ 35,420 $ 36,556 $ 27,234 $ 130,933 $ 18,881 ======== ======== ======== ======== ========== ======== Earnings per common share: Basic: Income from operations......... $ 0.49 $ 0.53 $ 0.53 $ 0.40 $ 1.96 $ 0.28 Extraordinary loss on extinguishment of debt........ (0.03) (0.02) - - (0.06) - -------- -------- -------- -------- ---------- -------- Net income.................... $ 0.46 $ 0.51 $ 0.53 $ 0.40 $ 1.90 $ 0.28 ======== ======== ======== ======== ========== ======== Diluted: Income from operations......... $ 0.48 $ 0.52 $ 0.52 $ 0.40 $ 1.92 $ 0.28 Extraordinary loss on extinguishment of debt........ (0.03) (0.02) (0.01) - (0.06) - -------- -------- -------- -------- ---------- -------- Net income.................... $ 0.45 $ 0.50 $ 0.51 $ 0.40 $ 1.86 $ 0.28 ======== ======== ======== ======== ========== ======== Shares used in computing earnings per common share: Basic........................... 68,929 69,194 69,519 68,048 68,938 67,448 Diluted......................... 70,207 71,016 71,266 68,613 70,359 67,857 </TABLE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING DATA (UNAUDITED) <TABLE> <CAPTION> 1997 QUARTERS FIRST ------------------------------------------ QUARTER FIRST SECOND THIRD FOURTH YEAR 1998 --------- --------- --------- --------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> REVENUES (IN THOUSANDS): Hospitals............... $ 154,900 $ 165,794 $ 233,993 $ 231,142 $ 785,829 $ 246,365 Nursing centers......... 404,253 432,325 445,943 439,895 1,722,416 434,190 Vencare................. 119,046 182,016 183,187 158,222 642,471 169,773 Atria................... 14,217 16,982 - - 31,199 - --------- --------- --------- --------- ---------- --------- 692,416 797,117 863,123 829,259 3,181,915 850,328 Elimination............. (11,720) (18,822) (18,383) (16,986) (65,911) (27,012) --------- --------- --------- --------- ---------- --------- $ 680,696 $ 778,295 $ 844,740 $ 812,273 $3,116,004 $ 823,316 ========= ========= ========= ========= ========== ========= HOSPITAL DATA: End of period data: Number of hospitals.... 38 58 60 60 62 Number of licensed beds.................. 3,325 5,107 5,302 5,273 5,313 Revenue mix %: Medicare............... 64 61 65 62 63 60 Medicaid............... 10 9 8 7 8 8 Private and other...... 26 30 27 31 29 32 Patient days: Medicare............... 106,646 107,799 152,640 153,059 520,144 173,967 Medicaid............... 21,705 23,170 24,339 27,276 96,490 28,535 Private and other...... 31,502 32,358 42,265 45,051 151,176 45,747 --------- --------- --------- --------- ---------- --------- 159,853 163,327 219,244 225,386 767,810 248,249 ========= ========= ========= ========= ========== ========= NURSING CENTER DATA: End of period data: Number of nursing cen- ters.................. 314 311 310 309 305 Number of licensed beds.................. 40,942 40,869 40,608 40,383 39,960 Revenue mix %: Medicare............... 32 32 33 31 32 34 Medicaid............... 43 42 42 44 43 41 Private and other...... 25 26 25 25 25 25 Patient days: Medicare............... 406,642 417,336 400,798 385,694 1,610,470 408,002 Medicaid............... 1,962,287 2,039,999 2,078,236 2,071,981 8,152,503 1,949,544 Private and other...... 663,575 734,593 729,289 731,808 2,859,265 692,932 --------- --------- --------- --------- ---------- --------- 3,032,504 3,191,928 3,208,323 3,189,483 12,622,238 3,050,478 ========= ========= ========= ========= ========== ========= ANCILLARY SERVICES DATA: End of period data: Number of Vencare sin- gle service contracts. 4,946 4,524 4,160 3,846 3,639 Number of Vencare full service contracts..... - - - 31 99 --------- --------- --------- --------- --------- 4,946 4,524 4,160 3,877 3,738 ========= ========= ========= ========= ========= </TABLE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida, issued a temporary injunction order against the Company's nursing center in Tampa, Florida which ordered the nursing center to cease notifying and requiring the discharge of any resident. The Company discontinued requiring the discharge of any resident from its Tampa nursing center on April 7, 1998. Following the conduct of a complaint survey at the facility, AHCA imposed a fine of $270,000 for related regulatory violations. In addition, HCFA has imposed a fine of $10,000 per day, effective from March 30, 1998 and continuing until April 9, 1998 at which time the facility was determined to have removed any "immediate jeopardy" to patients. A fine of $50 per day became effective on April 10, 1998 and will continue until the facility has achieved substantial compliance. If substantial compliance is not achieved by October 9, 1998, the facility's Medicare and Medicaid provider agreements could be terminated. The Company instituted a plan of correction at the Tampa nursing center to respond to the findings of AHCA and HCFA. AHCA also has changed the rating of the nursing center's license to conditional. The Company has appealed these regulatory sanctions. The Company believes that it has submitted an acceptable plan of correction which will terminate the running of per day fines and avoid the termination of the Tampa nursing center's provider agreements. The Company is awaiting decisions from HCFA and AHCA and no assurance can be given that the plan will be accepted. The Florida Attorney General's office and the Tampa Prosecuting Attorney's office have indicated to the Company that they are conducting independent civil and criminal investigations into the circumstances surrounding the Tampa resident discharges. The Company is cooperating fully with the ongoing investigations. In addition to its action with the nursing center in Tampa, Florida, the HCFA Administrator of the Medicare and Medicaid programs recently indicated that the Company's facilities in other states also are being monitored. The Company has not received notice that any other state has instituted an investigation into any similar issues at another Company facility. However, there can be no assurances that HCFA or other regulators in other jurisdictions will not initiate investigations relating to this matter or other circumstances, and there can be no assurance that the results of any such investigations would not have a material adverse effect on the Company. On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v. Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States District Court for the Middle District of Florida on behalf of a purported class consisting of certain residents of the Tampa nursing center and other residents in the Company's nursing centers nationwide. The complaint alleges various breaches of contract, and statutory and regulatory violations including violations of Federal and state RICO statutes. The plaintiffs seek class certification, unspecified damages, attorneys' fees and costs. The Company intends to defend vigorously this action. As is typical in the healthcare industry, the Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company believes that all such claims and actions currently pending against it either are adequately covered by insurance or would not have a material adverse effect on the Company if decided in a manner unfavorable to the Company. In addition, the Company is subject regularly to inquiries, investigations and audits by Federal and state agencies that oversee various healthcare regulations and laws. 21
PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 3.1 Third Amended and Restated Bylaws of the Company. Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference. 27 Financial Data Schedule (included only in filings submitted under the Electronic Data Gathering, Analysis and Retrieval system). 27.1 Amended Financial Data Schedule (included only in filings submitted under the Electronic Data Gathering, Analysis and Retrieval system). (B) REPORTS ON FORM 8-K: The Company filed on February 3, 1998 a Current Report on Form 8-K dated February 1, 1998 announcing the Company's intention to separate into two public companies by a distribution to stockholders of the common stock of a newly created operating company and that it had filed a preliminary proxy statement in connection with the proposed distribution. 22
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. VENTAS, INC. Date: May 14, 1998 /s/ W. BRUCE LUNSFORD - ------------------ --------------------------------- W. Bruce Lunsford Chairman of the Board and Chief Executive Officer Date: May 14, 1998 /s/ THOMAS T. LADT - ------------------ --------------------------------- Thomas T. Ladt President and Chief Operating Officer* * The Company does not currently employ an officer designated as its principal financial or chief accounting officer. In the interim, Mr. Ladt's overall responsibilities include the functions of the principal financial officer on behalf of the Company. 23