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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
Commission File Number: 1-10989
____________________
VENCOR, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 61-1055020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3300 Providian Center 40202
400 West Market Street (Zip Code)
Louisville, KY
(Address of principal executive offices)
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(502) 569-7300
(Registrant's telephone number, including area code)
____________________
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<S> <C> <C>
Title of Each Class Name of Each Exchange
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on Which Registered
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Securities registered pursuant to Section 12(b) of the Act Common Stock, par value New York Stock Exchange
$.25 per share
6% Convertible New York Stock Exchange
Subordinated Notes Due
2002
Securities registered pursuant to Section 12(g) of the Act None
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____________________
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 periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. [X]
As of March 21, 1995, there were 27,856,497 shares of the Registrant's Common
Stock, $.25 par value, outstanding. The aggregate market value of the shares
of Registrant held by non-affiliates of the Registrant, based on the closing
price of such stock on the New York Stock Exchange on March 21, 1995, was
approximately $811,654,800. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Part III is incorporated by reference from the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 9, 1995. Portions of Parts II and IV are incorporated by reference from
the Registrant's Annual Report to Stockholders for the year ended December 31,
1994.
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TABLE OF CONTENTS
INTRODUCTION
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PART I
Item 1. Business
Item 2. Properties
PART II
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 8. Financial Statements and Supplementary Data
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
</TABLE>
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INTRODUCTION
This report on Form 10-K/A (Amendment No. 1) is being filed with the
Securities and Exchange Commission (the "Commission") to amend Items 1, 2, 6,
7, 8, and 14 of the Annual Report on Form 10-K of Vencor, Inc. (the "Company")
for the year ended December 31, 1994.
The above-referenced items appear in their entirety in this report and
have been amended in response to the Commission's review of the Company's 1994
Form 10-K filing.
The consent of Ernst & Young is included in this report as Exhibit 23.
PART I
ITEM 1. BUSINESS
GENERAL
The Company operates a network of health care services for patients
who suffer from cardiopulmonary disorders. The foundation of the Company's
network is a nationwide chain of long-term intensive care hospitals. The
Company's hospitals treat medically complex, chronically ill patients who
generally are dependent upon ventilators or other life-support devices. The
Company's Vencare contract services division treats lower acuity patients at
nursing homes and hospitals owned by third parties. Through its subsidiary,
Ventech Systems, Inc. ("Ventech"), the Company is developing ProTouch, a
comprehensive paperless clinical information system designed to increase the
operating efficiencies of the Company's hospitals as well as other health care
facilities.
Since its inception in 1985, the Company has created the nation's
largest network of long-term intensive care hospitals. As of December 31,
1994, the Company owned, leased or managed 32 intensive care hospitals, one
general acute care hospital and one long-term hospital unit located in 15
states with a total of 2,511 licensed beds. As of December 31, 1994, the
Company's Vencare division had contracts to provide respiratory care services
and supplies to 600 nursing facilities and subacute care services to 30 nursing
facilities and hospitals located in 22 states.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987. The Company changed its name to Vencor, Incorporated in 1989, and to
Vencor, Inc. in 1993.
Management believes that specialized care for all levels of the
cardiopulmonary continuum is an emerging segment of the health care industry.
Major factors contributing to the growth in demand for the Company's services
for chronically ill patients include the following:
Increased Patient Population. Improved medical care and advancements
in medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital care.
The incidence of chronic respiratory problems increases with age, particularly
in connection with certain degenerative conditions. As the average age of the
United States population increases, the Company believes there will be an
increase in the need for long-
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term hospital and other levels of respiratory care. Typically more than 70% of
the Company's hospital patients are over 65 years of age.
Medically Displaced Patients. The Company's hospital patients
require a high level of monitoring and specialized care, yet may not require
the continued services of an ICU. Due to their severe medical conditions, the
Company's hospital patients generally cannot receive adequate treatment on a
general floor of a general acute care hospital and cannot qualify for admission
to a skilled nursing facility or rehabilitation hospital. The Company's
expansion into respiratory care and contract subacute services enables it to
treat those patients whose recovery permits their discharge from the hospital
setting.
Economically Displaced Patients. Historically, reimbursement policies
and practices designed to control health care costs have made it difficult to
place medically complex, chronically ill patients in an appropriate health care
setting. Under the Medicare program, general acute care hospitals are
reimbursed under the prospective payment system ("PPS"), a fixed payment system
which provides an economic incentive to general acute care hospitals to
minimize the length of patient stay. As a result, these hospitals generally
receive less than full cost for providing care to long-stay patients.
Furthermore, PPS does not provide for reimbursement more frequently than once
every 60 days, placing an additional economic burden on a general acute care
hospital providing long-term care. The Company's long-term hospitals, however,
are exempt from PPS and thus receive reimbursement on a more favorable basis
for providing long-term hospital care to Medicare patients. Commercial
reimbursement sources, such as insurance companies and health maintenance
organizations, many of which pay based on established hospital charges,
typically seek the most economical source of care available. The Company
believes that its emphasis on long-term hospital care allows it to provide high
quality care to chronic patients on a cost-effective basis. In addition, the
Company's Vencare services allow the Company to provide its cardiopulmonary
services to lower acuity patients in less costly alternate sites.
The Company's success in treating acutely ill patients with chronic
respiratory disorders has enabled it to expand the scope of its services
outside of the hospital setting. The Company is developing a system for
providing care at all levels of the cardiopulmonary continuum through its
network of respiratory therapy and subacute contract services.
VENCOR STRATEGY
The health care system of the United States has entered a period of
significant change. Factors affecting the health care system include cost
containment, the expansion of managed care, improved medical technology and an
increased focus on measurable medical outcomes. The Company believes that
these factors will lead to more patient-focused care in lower cost alternate
sites by providers who are able to demonstrate high quality, cost-effective
care. Accordingly, one of the Company's objectives is to create full-service
integrated networks for the care of cardiopulmonary patients. Through the
creation of these networks, the Company intends to position itself to provide
cardiopulmonary care in multiple sites of service, which may include hospitals,
skilled nursing facilities and patient homes. By providing a full range of
cardiopulmonary care for patients of varying levels of acuity, the Company
believes that it will be positioned to provide its services under reimbursement
methodologies such as capitation and case rates. In addition, the Company is
exploring ways in which it can transfer its expertise in the efficient delivery
of cardiopulmonary care to other health care businesses, including affiliation
with, or acquisition of, other health care businesses. The Company's strategy
for creating full-service integrated networks for cardiopulmonary care is as
follows:
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Focus on Long-Term Care Continuum. The Company intends to continue
expanding its hospital operations as the core of its cardiopulmonary network.
The Company expects to purchase or lease from 10 to 12 additional long-term
hospitals over the next two to three years. The Company generally seeks
hospitals located in major metropolitan areas with fewer than 100 beds. The
Company conducts market research prior to entering new markets, which research
may address: (i) the need for placement of ventilator-dependent patients or
other classes of chronic patients; (ii) the existing physician referral
patterns; (iii) the presence of competitors; (iv) the payor mix; and (v) the
political and regulatory climate.
To date in 1995, the Company has acquired one additional hospital and
purchased one hospital previously managed by the Company. Although the Company
is continually considering opportunities for future growth and is actively
negotiating to acquire additional hospitals, as of March 22, 1995, the Company
had not entered into any agreement regarding future acquisitions, except
agreements to acquire two hospitals. The agreement to acquire one of the
hospitals is subject to significant contingencies.
Expand Vencare Contract Services. In 1993, the Company initiated its
program of providing respiratory therapy and subacute care services in skilled
nursing and hospital facilities owned by third parties. These services are a
direct extension of the Company's expertise in the care of cardiopulmonary
patients. Vencare services are provided pursuant to contracts with skilled
nursing facilities and hospitals. Vencare enables the Company to provide its
cardiopulmonary services to lower acuity, subacute patients in less costly
alternate sites and facilitates patient referrals between its hospitals and
affiliated skilled nursing facilities as medical conditions warrant. The
Company expects to enter into 100 to 200 additional Vencare service contracts
during each of the next two to three years.
Implement Ventech Patient Information System. The Company has
recently begun implementation of its proprietary ProTouch clinical information
system. This system will allow clinicians and managers to have simultaneous,
multi-site access to patient information. The Company believes that this
capability will be critical to its ability to operate successfully in a managed
care environment by enabling the Company to document cost-effective clinical
outcomes. ProTouch is also designed to enable the Company to reduce labor and
overhead costs in its facilities. The Company expects to have ProTouch
installed in all of its existing hospitals by the end of 1995. The Company has
installed ProTouch at four unaffiliated hospitals and expects to market
ProTouch to other health care providers. ProTouch is a registered trademark of
the Company.
HOSPITAL OPERATIONS
The Company's hospitals primarily provide long-term acute hospital
care to medically complex, chronically ill patients. The Company's hospitals
have the capability to treat patients who suffer from multiple systemic
failures or conditions such as neurological disorders, head injuries, brain
stem and spinal cord trauma, cerebral vascular accidents, chemical brain
injuries, central nervous system disorders, developmental anomalies and
cardiopulmonary disorders. Chronic patients are often dependent on technology
for continued life support, such as mechanical ventilators, total parenteral
nutrition, respiration or cardiac monitors and dialysis machines. Generally,
approximately 70% of the Company's chronic patients are ventilator-dependent
for some period of time during their hospitalization. The Company's patients
suffer from conditions which require a high level of monitoring and specialized
care, yet may not necessitate the continued services of an intensive care unit.
Due to their severe medical conditions, the
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Company's hospital patients generally are not clinically appropriate for
admission to a skilled nursing facility or rehabilitation hospital. The
medical condition of most of the Company's patients is periodically or
chronically unstable. By combining general acute care services with the
ability to care for chronic patients, the Company believes that its long-term
hospitals provide its patients with high quality, cost-effective care. During
1994, the average length of stay for chronic patients in the Company's
long-term hospitals was approximately 60 days. Although the Company's patients
range in age from pediatric to geriatric, typically more than 70% of the
Company's chronic patients are over 65 years of age.
SERVICES PROVIDED BY COMPANY HOSPITALS
Chronic. The Company has devised a comprehensive program of care for
its chronic patients that draws upon the talents of inter-disciplinary teams,
including licensed pulmonary specialists. The teams evaluate chronic patients
upon admission to determine a treatment plan with an appropriate level and
intensity of care for the patients. Where appropriate, the treatment programs
may involve the services of several disciplines, such as pulmonary and physical
therapy. Individual attention to patients who have the cognitive and physical
abilities to respond to therapy is emphasized. Patients who successfully
complete treatment programs are discharged to skilled nursing facilities,
rehabilitation hospitals or home care settings.
General Acute Care. The Company operates one general acute care
hospital in LaGrange, Indiana. Certain of the Company's long-term hospitals
also provide general acute care and outpatient services in support of their
long-term care services. Certain of the Company's hospitals maintain subacute
units. General acute care and outpatient services may include inpatient
services, diagnostic services, emergency services, CT scanning, one-day
surgery, hospice services, laboratory, X-ray, respiratory therapy, cardiology
and physical therapy. The Company may expand its general acute care and
outpatient services as its long-term hospitals mature.
HOSPITAL PATIENT ADMISSION
Substantially all of the chronic patient admissions to the Company's
hospitals are transfers from other health care providers. Patients are
referred from general acute care hospitals, rehabilitation hospitals, skilled
nursing facilities and home care settings. Approximately 85% of the Company's
admissions are directly from the intensive care units of general acute care
hospitals. Referral sources include discharge planners, case managers of
managed care plans, social workers, physicians, third party administrators,
health maintenance organizations ("HMOs") and insurance companies.
The Company has area case managers who educate health care
professionals from other hospitals as to the unique nature of the services
provided by the Company's long-term hospitals. The area case managers develop
an annual admission plan for each hospital, with assistance from the hospital's
administrator. To identify specific service opportunities, the admission plan
for each hospital is based on a variety of factors, including population
characteristics, physician characteristics and incidence of disability
statistics. The admission plans involve ongoing education of local physicians,
utilization review and case management personnel, HMOs, acute care hospitals
and preferred provider organizations ("PPOs"). The Company anticipates that it
will direct increased efforts toward insurance company case managers, who are
responsible for controlling patient costs. All referral information generated
by the Company is centralized at the Company's corporate headquarters on an
automated patient admission data base. A clinical and financial assessment of
the patient is conducted prior to admission. The Corporate or Regional
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Referral Office then determines if the patient is appropriate for admission and
the decision is transmitted to the appropriate hospital.
PROFESSIONAL STAFF
Each of the Company's hospitals is staffed with a multi-disciplinary
team of health care professionals, including nurses, therapists and physicians.
A professional nursing staff trained to care for the long-term acute patient is
on duty 24 hours each day in the Company's hospitals. Other professional staff
includes respiratory therapists, physical therapists, occupational therapists
and registered dietitians.
The physicians at the Company's hospitals generally are not employees
of the Company and may also be members of the medical staff of other hospitals.
Each of the Company's hospitals has a fully credentialled, multi-specialty
medical staff to meet the needs of the patients. Each patient is visited at
least once a day by a staff physician. Typically, the Company does not enter
into exclusive contracts with physicians to provide services to its hospital
patients. The Company's hospitals and physicians enter into service contracts
providing for pulmonary, radiology, pathology, infection control and
anesthesiology services, most of which are cancellable on no more than 90 days'
notice.
The Company believes that its future success will depend in large part
upon its continued ability to hire and retain qualified personnel. The Company
seeks the highest quality of professional staff within each market.
Competition for the recruitment of personnel in the health care industry is
intense, particularly with respect to nurses.
CENTRALIZED MANAGEMENT AND OPERATIONS
A hospital administrator supervises and is responsible for the
day-to-day operations at each of the Company's hospitals. An on-site
controller monitors the financial matters of each hospital. In addition, each
hospital employs an assistant administrator to oversee the clinical operations
of the hospital and a quality assurance manager to direct an integrated quality
assurance program. The Company's corporate office provides services in the
areas of system design and development, training, human resource management,
reimbursement expertise, legal advice, technical accounting support, purchasing
and facilities management. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
hospital. The Company has standardized operating procedures and monitors its
hospitals to assure consistency of operations. The Company sets operational
goals and monitors actual results.
MANAGEMENT INFORMATION AND CONTROL SYSTEM
The financial information for each Company hospital is centralized at
the corporate headquarters through its management information and control
system. The Company uses a customized hospital financial reporting system
which enables it to monitor, on a daily basis, certain key financial data at
each hospital such as payor mix, admissions and discharges, cash collections,
net revenues and staffing. This system includes software that is specifically
written to accommodate the long-term services provided by the Company's
hospitals. In addition, the financial reporting system provides monthly budget
analysis, financial comparisons to prior periods and comparisons among the
Company's hospitals.
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In 1993, the Company organized a subsidiary, Ventech Systems, Inc.
Through Ventech Systems, Inc., the Company intends to install an electronic
patient medical record system in all of its hospitals. See "Ventech Systems,
Inc."
QUALITY ASSESSMENT AND IMPROVEMENT
The Company maintains a strategic outcomes program which includes a
centralized pre-admission evaluation program and concurrent review for 100% of
its patient population against utilization and quality screens, as well as
quality of life outcomes data collection and patient and family satisfaction
surveys. In addition, each hospital has an integrated quality assessment and
improvement program administered by a quality review manager which encompasses
utilization review, quality improvement, infection control and risk management.
The objective of these programs is to ensure that patients are appropriately
admitted to the Company's hospitals and that quality health care is rendered to
them in a cost-effective manner.
The Company has implemented a program whereby its hospitals will be
reviewed annually by internal quality auditors for compliance with standards of
the Joint Commission on Accreditation of Health Care Organizations ("JCAHO").
The purposes of this internal review process are to: (1) ensure ongoing
compliance with industry recognized standards for hospitals, (2) assist
management in analyzing each hospital's strengths and weaknesses and (3)
provide consulting and educational opportunities for each hospital to identify
opportunities to improve care.
VENCARE CONTRACT SERVICES
In 1993, the Company initiated its Vencare contract services program.
Through its Vencare division, the Company has expanded the scope of its
cardiopulmonary care by providing subacute and respiratory care services and
supplies to skilled nursing facilities and hospitals. For the year ended
December 31, 1994, net revenues from Vencare contract services represented 9.7%
of the Company's net revenues.
Respiratory Care Services. The Company provides respiratory care
services to nursing home patients pursuant to contracts between the Company and
the nursing home. The services are provided by respiratory therapists based at
the Company's hospitals. These respiratory therapists perform a wide variety
of procedures, including oxygen therapy, bronchial hygiene, nebulizer and
aerosol treatments, tracheostomy care, ventilator management and patient
respiratory education. Pulse oximeters and arterial blood gas machines are
used to evaluate a patient's condition, as well as the effectiveness of
treatment. The Company also provides respiratory equipment and supplies to
nursing homes.
The Company bills the nursing homes for services rendered and the
nursing home, in turn, bills the appropriate provider. Respiratory therapy and
supplies are covered under the Medicare program and reimbursed as an ancillary
service when the service is provided by hospital-based respiratory therapists.
Many commercial insurers and managed care providers are seeking hospital
discharge options for lower acuity respiratory patients. Management believes
that the Company's pricing and successful clinical outcomes make its
respiratory care program attractive to commercial insurers and managed care
providers.
On December 30, 1994, the Company acquired certain assets of Curacare,
Inc., a subsidiary of American Shared Hospital Services. Pursuant to this
acquisition, Vencare began managing eight cardiopulmonary departments for
hospitals located in six states.
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At December 31, 1994, the Company had entered into contracts to
provide respiratory care services and supplies to 600 nursing homes.
Subacute Services. As of December 31, 1994, the Company had entered
into contracts to provide subacute care services to 30 nursing homes and
hospitals owned by third parties. These services, which are also an extension
of the cardiopulmonary services provided by the Company's hospitals, may
include ventilator management, tracheostomy care, continuation of airway
restoration programs, enteral and parenteral nutritional support, IV therapy
for hydration and medication administration, progressive wound care, chronic
chest tube management, laboratory, radiology, pharmacy and dialysis services,
customized rehabilitation services and program marketing. Subacute patients
generally require assisted ventilation achieved through mechanical ventilation.
Expansion of Vencare Contract Services. The Company intends to expand
the scope of its contract subacute and respiratory care operations. The
Company expects to enter into 100 to 200 additional Vencare service contracts
during each of the next two to three years. The Company is also continuing to
explore and develop opportunities for related health care businesses.
On January 26, 1995, the Company acquired, through its Vencare
subsidiary, Hospice Homecare, Inc., a privately-held company based in
Cincinnati, Ohio. Hospice Homecare, Inc. provides hospice services to nursing
home patients, as well as hospitals and residences in the Columbus and
Cincinnati markets.
VENTECH SYSTEMS, INC.
In 1993, the Company formed Ventech to develop the ProTouch electronic
patient medical record system. ProTouch is a software application which allows
nurses, physicians and other clinicians to manage patient information. The
system serves as a central repository of patient clinical data and as a
retrieval tool for organizing that data.
Among the features of ProTouch are on-line access and update of an
electronic patient chart, on-line trend analysis using electronic flowsheets
and graphs, and remote access for authorized users. The system is designed to
decrease administrative time, reduce paper and support the delivery of quality
care.
The Company expects to have ProTouch installed in all of its existing
hospitals by the end of 1995. The Company has installed ProTouch at four
unaffiliated hospitals and intends to market ProTouch to other health care
providers in the future.
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SELECTED OPERATING INFORMATION
The following table sets forth certain operating information for the
Company's hospitals.
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YEAR ENDED DECEMBER 31,
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1992 1993 1994
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Hospitals in operation 18 26 33
Hospitals closed for renovation 4 3 1
Number of licensed beds 1,717 2,198 2,511
Patient days 223,483 293,367 403,623
Average daily census 620 875 1,123
Occupancy percentage 43% 44% 49%
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As used in the above table, the term "licensed beds" refers to the
maximum number of beds permitted in the hospital under its license regardless
of whether the beds are actually available for patient care. "Patient days"
refers to the total number of days of patient care provided by the Company's
hospitals for the periods indicated. "Average daily census" is computed by
dividing each hospital's patient days by the number of calendar days the
respective hospital is in operation. "Occupancy percentage" is computed by
dividing average daily census by the number of licensed beds, adjusted for the
length of time each facility was in operation during each respective period.
The number of licensed beds approximates the number of beds in service.
The Company initiated its contract services business in 1993. The
following table sets forth information concerning the growth of this business:
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DECEMBER 31,
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1993 1994
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Number of respiratory therapy and supply contracts (at period end) . . . . . . . .128 600
Number of subacute care contracts (at period end). . . . . . . . . . . . . . . . . 0 30
Percentage of net revenues from contract services. . . . . . . . . . . . . . . . .1.2% 9.7%
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SOURCES OF NET REVENUES
The Company receives payment from third-party payors, including
government reimbursement programs such as Medicare and Medicaid and
non-government sources such as commercial insurance companies, HMOs, PPOs and
contracted providers. Payments from government programs are generally based
upon cost and payments from non-government payors are generally based upon
charges. Patients covered by non-government payors are generally more
profitable to the Company than those covered by government programs. The
following table sets forth the approximate percentages of the Company's net
revenues derived from non-government and government payors for the periods
indicated.
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YEAR ENDED DECEMBER 31,
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1992 1993 1994
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Non-government net revenues . . . . . . . . . . . . . . . . . 46% 38% 39%
Government net revenues. . . . . . . . . . . . . . . . . . . . 52% 60% 60%
Other revenues . . . . . . . . . . . . . . . . . . . . . . . 2% 2% 1%
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The foregoing information should not necessarily be considered
indicative of the future mix of revenue sources for the Company's hospitals.
COMPETITION
As of December 31, 1994, the hospitals owned, leased or managed by the
Company were located in 30 geographic markets in 15 states. In each geographic
market, there are general acute care hospitals which provide services
comparable to those offered by the Company's hospitals. In addition, as of
January 25, 1995, there were 151 hospitals in the United States certified by
Medicare as general, long-term hospitals, some of which provide similar
cardiopulmonary services to those provided by the Company's hospitals. Many of
these general, short-term and general, long-term care hospitals are larger and
more established than the Company's hospitals. Certain hospitals that compete
with the Company's hospitals are operated by not-for-profit, non-taxpaying or
governmental agencies, which can finance capital expenditures on a tax-exempt
basis, and which receive funds and charitable contributions unavailable to the
Company's hospitals. Cost-containment efforts by federal and state governments
and other third-party payors designed to encourage more efficient utilization
of hospital services have resulted in lower hospital occupancy in recent years.
As a result of these efforts, a number of acute care hospitals have converted
to specialized care facilities. Some hospitals are developing step-down units
which attempt to serve the needs of patients who require care at a level
between that provided by an intensive care unit and a general, medical/surgical
floor. This trend is expected to continue due to the current oversupply of
acute care hospital beds and the increasing consolidation and affiliation of
free-standing hospitals into larger systems. As a result, the Company may
experience increased competition from existing hospitals and converted
facilities.
Competition for patients covered by non-government reimbursement
sources is intense. The primary competitive factors in the long-term intensive
care business include quality of services, charges for services and
responsiveness to the needs of patients, families, payors and physicians.
Other companies have entered the long-term intensive care market with licensed
hospitals that compete with the Company's hospitals.
Some skilled nursing facilities, while not licensed as hospitals, have
developed units which provide a greater intensity of care than the care
typically provided by a skilled nursing facility. Although some of these
skilled nursing facilities have marketed their services to the ventilator care
market on the basis of cost, the condition of patients in these skilled nursing
facility units is less acute than the condition of patients cared for in the
Company's hospitals. The Company provides respiratory care services to certain
nursing homes and subacute care services to certain nursing homes and other
hospitals. See "Vencare Contract Services."
The competitive position of any hospital, including the Company's
hospitals, is also affected by the ability of its management to negotiate
contracts with purchasers of group health care services, including private
employers, PPOs and HMOs. Such organizations attempt to obtain discounts from
established hospital charges. The importance of obtaining contracts with PPOs,
HMOs and other organizations which finance health care, and its effect on a
hospital's
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competitive position, vary from market to market, depending on the number and
market strength of such organizations.
The Company also competes with other health care companies for
hospital and other health care acquisitions. Although the respiratory therapy
and subacute services markets are fragmented, significant competition also
exists for the Company's contract respiratory therapy and subacute services.
The primary competitive factors for the contract services business are quality
of services, charges for services and responsiveness to the needs of patients,
families and the facilities in which the services are provided. Certain
hospitals are establishing and managing their own step-down and subacute
facilities. Other hospital companies have entered the contract services market
through affiliation agreements and management contracts.
REGULATION
The health care industry is subject to regulation by a number of
government and private agencies. Regulatory activities affect the Company's
business activities by controlling its growth, requiring licensure and
certification for its hospitals, regulating the use of its properties, and
controlling reimbursement to the Company for services provided.
Certificates of Need and State Licensing. Certificate of need ("CON")
regulations control the development and expansion of health care services and
facilities in certain states. CON laws generally provide that approval must be
obtained from the designated state health planning agency prior to the
expansion of existing facilities, construction of new facilities, addition of
beds, acquisition of major items of equipment or introduction of certain new
services. The stated objective of the CON process is to promote quality health
care at the lowest possible cost and avoid unnecessary duplication of services,
equipment and facilities. Recently, some states (including Florida and
Tennessee) have amended their CON regulations to require CON approval prior to
the conversion of a hospital from general, short-term to general, long-term
status. Of the 15 states in which the Company's hospitals were located as of
December 31, 1994, Florida, Georgia, Illinois, Massachusetts, Michigan,
Missouri, North Carolina, Pennsylvania and Tennessee have CON programs. The
Company was not required to obtain a CON in connection with previous
acquisitions, with the exception of Vencor Hospital - St. Louis, due to the
relatively low renovation costs and the absence of the need for additional
licensed beds or change in services. CONs may be required in connection with
the Company's future expansion. There can be no assurance that the Company
will be able to obtain the CONs necessary for any or all future projects. If
the Company is unable to obtain the requisite CONs, its growth and business
could be adversely affected.
State licensing of hospitals is a prerequisite to the operation of
each hospital and to participation in government programs. Once a hospital
becomes licensed and operational, it must continue to comply with federal,
state and local licensing requirements in addition to local building and
life-safety codes. All of the Company's hospitals in operation have obtained
the necessary licenses to conduct business.
Medicare and Medicaid. Medicare is a federal program that provides
certain hospital and medical insurance benefits to persons age 65 and over and
certain disabled persons. Medicaid is a medical assistance program
administered by each state pursuant to which hospital benefits are available to
certain indigent patients. Within the Medicare and Medicaid statutory
framework, there are substantial areas subject to administrative rulings,
interpretations and discretion which may affect payments made under Medicare
and Medicaid. A substantial portion of the Company's
10
<PAGE> 13
revenues is derived from patients covered by Medicare and Medicaid. See
"Sources of Net Revenues."
In order to receive Medicare reimbursement, each hospital must meet
the applicable conditions of participation set forth by the Department of
Health and Human Services ("HHS") relating to the type of hospital, its
equipment, personnel and standard of medical care, as well as comply with state
and local laws and regulations. The Company has developed a management system
to ensure compliance with the various standards and requirements. Each of the
Company's hospitals employs a person who is responsible for an on-going quality
assessment and improvement program. Hospitals undergo periodic on-site
Medicare certification surveys. The Medicare survey is limited if the hospital
is accredited by JCAHO. All the Company's operating hospitals are certified as
Medicare providers. As of December 31, 1994, 32 of the Company's hospitals
were also certified by their respective state Medicaid programs. Applications
are pending for Medicaid certification with respect to the Company's other
hospitals. A loss of certification could adversely affect a hospital's ability
to receive payments from Medicare and Medicaid.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct
and indirect cost of the services provided to beneficiaries. The Social
Security Amendments of 1983 implemented the prospective payment system ("PPS")
as a way of controlling costs. Under PPS, Medicare inpatient costs are
reimbursed based upon a fixed payment amount per discharge using diagnosis
related groups ("DRGs"). The DRG payment under PPS is based upon the national
average cost of treating a Medicare patient's condition. Although the average
length of stay varies for each DRG, the average stay for all Medicare patients
subject to PPS is approximately six days. An additional outlier payment is
made for patients with unusually long lengths of stay or higher treatment
costs. Outlier payments are only designed to cover marginal costs.
Additionally, PPS payments can only be made once every 60 days. Thus, PPS
creates an economic incentive for general, short-term hospitals to discharge
chronic Medicare patients as soon as clinically possible. Hospitals that are
certified by Medicare as general, long-term hospitals are excluded from PPS.
Management believes the incentive for short-term hospitals to discharge chronic
medical patients as soon as clinically possible creates a substantial referral
source for the Company's general long-term hospitals.
The Social Security Amendments of 1983 exempted psychiatric,
rehabilitation, cancer, children's and general, long-term hospitals from PPS.
A general, long-term hospital is defined as a hospital which has an average
length of stay of greater than 25 days. Inpatient operating costs for general,
long-term hospitals are reimbursed under the cost-based reimbursement system,
subject to a computed target rate ("Target") per discharge for inpatient
operating costs established by the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"). Until October 1991, Medicare operating costs per discharge in
excess of the Target were not reimbursed. Effective October 1, 1991, Medicare
operating costs in excess of the Target are reimbursed at the rate of 50% of
the excess up to 10% of the Target. Hospitals whose operating costs are lower
than the Target are reimbursed their actual costs plus an incentive. The
incentive is equal to 50% of the difference between the actual operating costs
and the Target. The incentive is limited to 5% of the Target. New hospitals
can apply for an exemption from the TEFRA Target provisions. For hospitals
certified prior to October 1, 1992, the exemption was optional and, if granted,
lasted for three full years. For certifications after October 1, 1992, the
exemption is automatic and is effective for two full years. As of December 31,
1994, 19 of the Company's hospitals were subject to TEFRA Target provisions.
The Company's other hospitals were not subject to TEFRA because they had
qualified for the new hospital exemptions described above. During 1995, seven
more of the Company's hospitals will become subject to TEFRA Target provisions.
The TEFRA limits have
11
<PAGE> 14
not had a material adverse effect on the Company's results of operations. The
Company does not expect that the TEFRA limits will have a material effect on
the Company's results of operations over the next two to three years.
Medicare and Medicaid reimbursements are generally determined from
annual cost reports filed by the Company. These cost reports are subject to
audit by Medicare and Medicaid. The Company has established reserves for
possible adjustments at levels which management believes to be adequate to
cover any adjustments resulting from audits of these cost reports. To date,
adjustments of the Company's cost reports have not had an adverse effect on the
Company's financial position.
Federal regulations provide that admission to and utilization of
hospitals by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments upon
admission or retrospectively for services provided to a patient. Such review
is subject to administrative and judicial appeal. Each of the Company's
hospitals employs a quality assessment and improvement manager, who is a
clinical professional, to administer the hospital's integrated quality
assurance and improvement program, including its utilization review program.
To date, PRO denials have not had an adverse effect on the Company's financial
position.
Medicare and Medicaid antifraud and abuse amendments codified under
Section 1128B(b) of the Social Security Act (the "Antifraud Amendments")
prohibit certain business practices and relationships that might affect the
provision and cost of health care services reimbursable under Medicare and
Medicaid. Sanctions for violating the Antifraud Amendments include criminal
and civil penalties and exclusion from the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, HHS and the Office of the Inspector General ("OIG") specified certain
"safe harbors" which describe conduct and business relationships permissible
under the Antifraud Amendments. These "safe harbor" regulations may result in
more aggressive enforcement of the Antifraud Amendments by HHS and the OIG.
Section 1877 of the Social Security Act (commonly known as "Stark I")
states that a physician who has a financial relationship with a clinical
laboratory is generally prohibited from referring patients to that laboratory.
The Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to greatly expand the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (the "Stark Provisions"), a
"financial relationship" is defined as an ownership interest or a compensation
arrangement. If such a financial relationship exists, the entity is generally
prohibited from claiming payment for such services under the Medicare or
Medicaid programs. Compensation arrangements are generally exempted from the
Stark Provisions if, among other things, the compensation to be paid is set in
advance, does not exceed fair market value and is not determined in a manner
that takes into account the volume or value of any referrals or other business
generated between the parties.
The Company believes that its contractual arrangements and the
operations of its hospitals do not violate the Antifraud Amendments or the
Stark Provisions. Nevertheless, because of the breadth of these statutory
provisions and the likelihood that financial relationships between providers
will be subject to increased scrutiny as health care reform efforts continue on
federal and state levels, there can be no assurance that the Company's
arrangements with its providers will not be challenged.
12
<PAGE> 15
Health Care Reform. In recent years, an increasing number of
legislative proposals have been introduced or proposed in Congress and in some
state legislatures which would effect major changes in the health care system.
In October 1993, the Clinton Administration submitted comprehensive health care
reform legislation to Congress designed to provide, among other things, for
universal access to health care. Neither the Clinton Administration's plan nor
other health care reform legislation was enacted by Congress.
A number of legislative proposals have contained a moratorium on the
designation of additional long-term hospitals for Medicare reimbursement
purposes. However, the Company cannot predict the form of health care reform
legislation which may be proposed in Congress or in state legislatures in the
future and whether and in what form such legislation will be adopted.
Accordingly, the Company is unable to assess the effect of any such legislation
on its business. There can be no assurance that any such legislation will not
have a material adverse impact on the Company's future growth, net revenues and
net income.
Gramm-Rudman. The Company's Medicare revenues may be adversely
affected by the Balanced Budget and Emergency Deficit Control Act of 1985, as
amended ("Gramm-Rudman"). Under Gramm-Rudman, if the Office of Management and
Budget and the Congressional Budget Office determine that the federal deficit
will exceed certain specified levels for a federal fiscal year through 1995,
sufficient reductions in federal spending must be made to remove the excess
deficit. One-half of these reductions must be made in non-defense programs.
Although Medicaid funding is exempt from reductions under Gramm-Rudman, the
Medicare program is not. If reductions are made in the Medicare program, each
payment to providers that is paid on a reasonable cost basis may be reduced.
Payment reductions under Gramm-Rudman in federal fiscal years through 1995
could have an adverse effect on the Company's net revenues and earnings.
However, because the actual amount of the reduction for any fiscal year may
vary according to the federal deficit, the financial impact of Gramm-Rudman on
the Company cannot be predicted.
JCAHO Accreditation. Hospitals receive accreditation from JCAHO, a
nationwide commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of medical staffs
of hospitals. Generally, hospitals and certain other health care facilities
are required to have been in operation at least six months in order to be
eligible for accreditation by JCAHO. After conducting on-site surveys, JCAHO
awards accreditation for up to three years to hospitals found to be in
substantial compliance with JCAHO standards. Accredited hospitals are
periodically resurveyed, including, at the option of JCAHO, upon a major change
in facilities or organization and after merger or consolidation. As of
December 31, 1994, 29 of the Company's hospitals were accredited by JCAHO. The
Company intends to apply for JCAHO accreditation for its other hospitals within
the next year. The Company intends to seek and obtain JCAHO accreditation for
any additional hospitals it may purchase or lease and convert into long-term
hospitals. The Company does not believe that failure to obtain JCAHO
accreditation at any hospital would have a material adverse effect on the
Company.
State Regulatory Environment. The Company currently owns or leases
four hospitals and manages a chronic hospital unit in Florida, a state which
regulates hospital rates. These operations contribute a significant portion of
the Company's net revenues and net income. Accordingly, the Company's net
revenues and net income could be materially adversely affected by Florida rate
setting laws or other cost containment efforts. The Company currently operates
six hospitals in Texas and five hospitals in California which contribute a
significant portion of the Company's net revenues and net income. Although
Texas and California do not currently regulate hospital rates, the adoption of
such legislation or other cost containment measures in these or
13
<PAGE> 16
other states could have a material adverse effect on the Company's net revenues
and net income. The Company is unable to predict whether and in what form such
legislation will be adopted. The Company's net revenues and net income could
be adversely affected by other state rate setting laws. Certain other states
in which the Company operates hospitals require hospitals to disclose specified
financial information. In evaluating markets for expansion, the Company will
consider the regulatory environment, including but not limited to, any mandated
rate setting.
EMPLOYEES
As of December 31, 1994, the Company had approximately 4,040 full-time
and 2,915 part-time employees. The Company believes its relations with its
employees are good.
LIABILITY INSURANCE
The Company maintains professional malpractice liability insurance and
general liability insurance in amounts of $1,000,000 per claim and $3,000,000
per annual aggregation of claims for each of its hospitals except the hospitals
located in Indiana and Pennsylvania. The Company maintains professional
malpractice liability insurance for the Indiana and Pennsylvania hospitals in
an amount which covers maximum permissible liability under applicable state
law. The Company also maintains $50,000,000 umbrella coverage. The Company
believes that its insurance is adequate in amount and coverage. There can be
no assurance that in the future such insurance will be available at a
reasonable price or that the Company will be able to maintain adequate levels
of malpractice insurance coverage.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the
hospitals owned, leased or managed by the Company as of December 31, 1994:
<TABLE>
<CAPTION>
Number of Leased from
State Hospitals Licensed Beds Owned Third Parties Managed
----- --------- ------------- ---- ------------- -------
<S> <C> <C> <C> <C> <C>
Arizona 3 159 2 1 -
California 6 545 5 1 -
Colorado 1 68 1 - -
Florida 5 278 3 1 1
Georgia 1 72 - 1 -
Illinois 2 154 2 - -
Indiana 2 121 2 - -
Massachusetts 1 65 1 - -
Michigan 1 160 1 - -
Missouri 2 227 2 - -
North Carolina 1 124 1 - -
Oklahoma 1 59 1 - -
Pennsylvania 1 63 - - 1
Tennessee 1 49 1 - -
Texas 6 367 5 1 -
-- ----- -- -- --
Total 34 2,511 27 5 2
== ===== == == ==
</TABLE>
14
<PAGE> 17
The Company expects to expend approximately $30,000,000 to renovate
and improve newly acquired and existing hospitals during 1995. The Company
believes that its hospitals are adequate for the Company's future needs in such
locations.
PART II
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year Ended December 31
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues
Patient revenues $396,766 $276,587 $210,721 $132,404 $77,194
Other revenues 3,252 5,648 3,969 2,897 2,650
-------------------------------------------------------------------
Net revenues 400,018 282,235 214,690 135,301 79,844
Expenses
Hospital operating expenses 298,077 212,925 166,327 106,850 66,268
Corporate general and
administrative expenses 22,213 11,845 10,276 7,390 5,119
Depreciation and
amortization 20,390 12,705 7,402 3,248 1,494
Interest 6,787 6,375 2,129 725 1,373
-------------------------------------------------------------------
Total expenses 347,467 243,850 186,134 118,213 74,254
-------------------------------------------------------------------
Income before income taxes 52,551 38,385 28,556 17,088 5,590
Income taxes 21,135 15,461 11,128 7,002 2,274
-------------------------------------------------------------------
Net income $ 31,416 $ 22,924 $ 17,428 $ 10,086 $ 3,316
===================================================================
Net income per share
Primary $ 1.20 $ 0.85 $ 0.63 $ 0.42 $ 0.19
Fully diluted $ 1.13 $ 0.85 $ 0.63 $ 0.42 $ 0.19
Shares used in per share calculation
Primary 25,994 27,072 27,507 24,047 17,348
Fully diluted 30,417 27,072 27,507 24,047 17,348
<CAPTION>
Year Ended December 31
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 76,907 $ 61,670 $ 54,546 $ 72,826 $20,265
Total assets 390,372 294,265 294,229 148,234 56,123
Long-term debt, less current
portion 141,899 116,370 116,830 866 12,761
Shareholders' equity 183,727 131,096 144,801 126,047 30,191
</TABLE>
Note: The above historical results are not necessarily indicative of future
operating results. All of the information should be read in conjunction with
the audited financial statements contained elsewhere herein, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's net revenues are derived primarily from services
provided to patients, both at the Company's intensive care hospitals and other
facilities at which the Company provides services on a contract basis. As of
December 31, 1994, the Company owned 26 intensive care hospitals, leased five
intensive care hospitals and managed one intensive care hospital. The Company
also owned one general acute care hospital and managed one long-term care unit
in a general acute care hospital. These facilities had a total of 2,511
licensed beds. The following table shows the number of hospitals in operation
at the dates indicated:
<TABLE>
<CAPTION>
December 31
1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hospitals in operation 33 26 18 14
Hospitals closed for renovation 1 3 4 3
Number of beds 2,511 2,198 1,717 1,250
Patient days 403,623 293,367 223,483 150,564
Average daily census 1,123 875 620 459
</TABLE>
The Company initiated its contract services business in 1993. The following
table sets forth information concerning the growth of this business:
<TABLE>
<CAPTION>
December 31
1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of respiratory therapy and supply contracts
(at period end) 600 128
Number of subacute care contracts (at period end) 30 0
Percentage of net revenues from contract services 9.7% 1.2%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net income is affected by changes in sources of revenue.
Rates paid by private insurers, including those which provide Medicare
supplemental insurance, are based on established charges and are generally
higher than Medicare reimbursement rates.
Depending on the rate at which the Company acquires new hospital
facilities, start-up losses could have an adverse effect on the earnings of the
Company during the start-up periods of newly acquired facilities. Historically,
the net revenues from newly acquired long-term hospitals have increased
gradually as the long-term hospitals mature due to increases in patient census
and a more favorable payor mix. It has been the Company's experience that the
period required for long-term hospitals to mature is generally 18 to 24 months.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentages of net revenues represented by certain items reflected in the
Company's statements of operations.
<TABLE>
<CAPTION>
Year to Year
Increase/(Decrease)
-------------------
1993 1992
Year Ended December 31 to to
1994 1993 1992 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Patient revenues 99.2% 98.0% 98.2% 43.5% 31.3%
Other revenues 0.8 2.0 1.8 (42.4) 42.3
-----------------------------------------------------------------
Total net revenues 100.0 100.0 100.0 41.7 31.5
-----------------------------------------------------------------
Hospital operating expenses 74.5 75.4 77.5 40.0 28.0
Corporate general and
administrative 5.6 4.2 4.8 87.5 15.3
Depreciation and amortization 5.1 4.5 3.4 60.5 71.6
Interest 1.7 2.3 1.0 6.5 199.4
-----------------------------------------------------------------
Total expenses 86.9 86.4 86.7 42.5 31.0
-----------------------------------------------------------------
Income before income taxes 13.1 13.6 13.3 36.9 34.4
Income taxes 5.3 5.5 5.2 36.7 38.9
-----------------------------------------------------------------
Net income 7.8% 8.1% 8.1% 37.0 31.5
=================================================================
</TABLE>
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
Net revenues increased 31.5% from $214,690,000 to $282,235,000 in
1993, and 41.7% to $400,018,000 in 1994. Net revenues from hospitals increased
31.3%, from $210,721,000 to $276,587,000 in 1993, and 43.5% to $396,766,000 in
1994.
Of the approximately $65,866,000 increase in net patient revenues in
1993, 37.7% was attributable to net revenues from new hospitals that were
opened during 1993, and 62.3% was attributable principally to higher patient
census at the hospitals that were in operation at the beginning of 1993. Of the
$41,022,000 increase in net patient revenues at the Company's hospitals that
were in operation for all of 1993, $7,002,000 or 17.1% was attributable to an
increase in the number of patients covered by non-government payors.
Of the approximately $120,179,000 increase in net patient revenues in
1994, 7.2% was attributable to hospitals that were opened in 1994, 61.2% was
attributable to higher patient census and improved payor mix at hospitals that
were in operation at the beginning of 1994, and 29.5% was attributable to
expansion of the Company's Vencare contract services.
Net patient revenues from non-government sources (e.g., commercial
insurance companies, HMOs, PPOs, contract services) increased 10.5% from
$98,013,000 to $108,286,000 in 1993, and 43.0% to $154,858,000 in 1994. The
percentage of the Company's net patient
17
<PAGE> 20
revenues derived from non-government sources decreased from 46% to 38% in 1993
and increased to 39% in 1994. The decrease in 1993 was due in large part to the
significant number of the Company's hospitals which were in the start-up phase,
and a high percentage of those hospitals being located in California, where the
average cost per patient day was higher than the Company average, and to the
increase in Medicare patient days.
Net patient revenues from the Company's Vencare program, which
provides contract subacute and other respiratory care services, increased to
$38,907,000, or 9.7% of net revenues for the year ended December 31, 1994
compared to $3,409,000, or 1.2% of net revenues for the year ended December 31,
1993.
Other revenues increased from $3,969,000 to $5,648,000 in 1993 and
decreased to $3,252,000 in 1994. The increase in other revenues in 1993 was
related primarily to investment income from the proceeds of the Company's
convertible note offering in September 1992. The decrease in other revenues in
1994 was primarily due to the decrease in remaining proceeds from that
offering. At December 31, 1992, 1993 and 1994, the Company's total cash,
investments, and investments available for acquisitions and general corporate
purposes was $110,920,000, $31,591,000 and $3,055,000, respectively.
Hospital operating expenses increased 28.0% from $166,327,000 in 1992
to $212,925,000 in 1993 and 40.0% to $298,077,000 in 1994. The increase in 1993
was primarily due to the addition of new hospital facilities and increased
patient census. The increase in 1994 was primarily due to new hospital
facilities, increased patient census, and the costs related to the Company's
Vencare program. The number of hospitals in operation increased 44.4% from 18
in 1992 to 26 in 1993 and increased 26.9% to 33 in 1994. Patient days
increased 31.3% from 223,483 in 1992 to 293,367 in 1993 and 37.6% to 403,623 in
1994. As a percentage of net revenues, these expenses decreased from 77.5% to
75.4% and 74.5% in 1992, 1993 and 1994, respectively.
The Company's most significant hospital operating expenses are those
attributable to salaries, wages and benefits. Hospital salaries, wages and
benefits increased 30.4% from $97,381,000 in 1992 to $126,967,000 in 1993 and
increased 45.8% to $185,128,000 in 1994. Such expenses as a percentage of net
revenues are relatively higher at newly developed long-term hospitals which
require a basic complement of staff on the day the hospital opens, regardless
of patient census. The Company's experience to date indicates that this
percentage decreases as a hospital matures. Supplies expenses, including costs
for food, utilities and purchased contractual services, such as pharmacy and
laboratory services, vary with changes in patient census and inflation.
Corporate general and administrative expenses increased 15.3% from
$10,276,000 in 1992 to $11,845,000 in 1993 and 87.5% to $22,213,000 in 1994.
For 1992, 1993 and 1994, these expenses were 4.8%, 4.2% and 5.6% of net
revenues, respectively. The increase from 1993 to 1994 was primarily
attributable to the development and installation of the Company's ProTouch
clinical information system.
Depreciation and amortization increased 71.6% from $7,402,000 in 1992
to $12,705,000 in 1993 and 60.5% to $20,390,000 in 1994, as the Company
purchased and renovated additional hospital facilities. In addition, the
Company recorded amortization expense relating to intangible and other assets.
18
<PAGE> 21
Interest expense increased 199.4% from $2,129,000 in 1992 to
$6,375,000 in 1993 and increased 6.5% to $6,787,000 in 1994. Interest expense
in 1993 and 1994 increased primarily due to the issuance of $115,000,000 in 6%
convertible notes in September 1992. At December 31, 1992, 1993 and 1994, the
Company's outstanding aggregate borrowings were $117,410,000, $117,040,000, and
$142,803,000, respectively.
QUARTERLY RESULTS
The Company's quarterly results of operations have fluctuated due to
the addition of new hospitals and the expansion of the Company's Vencare
contract services. The following table presents unaudited quarterly operating
results for the eight fiscal quarters beginning January 1, 1993 and ended
December 31, 1994. The Company believes all necessary adjustments have been
included in the amounts stated below to present fairly the following selected
quarterly information when read in conjunction with the financial statements
included elsewhere herein. The information includes all normal recurring
adjustments the Company considers necessary for a fair presentation thereof, in
accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
In Thousands
1994 1993
--------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Patient revenues $86,305 $97,436 $103,087 $109,938 $61,209 $65,759 $70,874 $78,745
Other revenues 658 1,098 396 1,100 1,340 1,188 1,548 1,572
--------------------------------------------------------------------------------------------
Total net revenues 86,963 98,534 103,483 111,038 62,549 66,947 72,422 80,317
Hospital operating
expenses 66,532 73,574 77,206 80,765 47,538 51,021 54,229 60,137
Corporate general
and administrative 4,697 5,686 4,908 6,922 2,747 2,588 2,927 3,583
Depreciation and
amortization 4,088 5,443 5,537 5,322 2,931 3,016 3,197 3,561
Interest 1,773 1,700 1,875 1,439 1,775 1,427 1,542 1,631
--------------------------------------------------------------------------------------------
Total expenses 77,090 86,403 89,526 94,448 54,991 58,052 61,895 68,912
--------------------------------------------------------------------------------------------
Income before
income taxes 9,873 12,131 13,957 16,590 7,558 8,895 10,527 11,405
Income taxes 3,953 4,849 5,627 6,706 3,023 3,558 4,286 4,594
--------------------------------------------------------------------------------------------
Net income $ 5,920 $ 7,282 $ 8,330 $ 9,884 $ 4,535 $ 5,337 $ 6,241 $ 6,811
=============================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased from $25,866,000
in 1992 to $30,202,000 in 1993 and to $30,848,000 in 1994.
Net cash used in investing activities was $167,208,000 in 1992
compared to net cash provided by investing activities of $5,934,000 in 1993.
Net cash used in investing activities was $69,767,000 in 1994. Net cash used
in investing activities in 1992 included the acquisition of five hospital
facilities, as well as renovation costs of newly acquired and existing hospital
facilities.
19
<PAGE> 22
The Company also invested $90 million from its September 1992 convertible note
offering. The Company used approximately $75 million of these investments in
1993 to acquire seven new hospital facilities, as well as fund facility
renovation costs. Net cash used in investing activities in 1994 included the
acquisition of five hospital facilities, as well as renovation costs. A
portion of the 1994 renovation cost was funded by the remainder of the 1992
convertible note offering which amounted to $14.9 million.
Net cash provided from financing activities was $115,515,000 in 1992
compared to net cash used in financing activities of $37,721,000 in 1993. Net
cash provided by financing activities was $25,963,000 in 1994. Net cash
provided by financing activities in 1992 was primarily the result of the
issuance of $115 million of convertible notes in September 1992. Net cash used
in financing activities in 1993 includes the purchase of the Company's stock at
a cost of $37,455,000. Net cash provided by financing activities in 1994
relates primarily to borrowings under the Company's revolving credit agreement.
Historically, the Company has financed its growth and operations
principally through the issuance of equity and debt securities, bank borrowings
and cash flow from operations.
The Company uses capital for the acquisition and renovation of new
hospital facilities, property and equipment additions and the acquisition of
businesses. During the year ended December 31, 1994, the Company used capital
of approximately $100,000,000 for these purposes. The Company expects to expend
similar amounts of capital for these purposes in 1995. The Company expects to
finance all capital expenditures with internally generated and borrowed funds.
Available sources of capital include public or private debt, unused bank
revolving credits and equity. At December 31, 1994, there were projects under
construction which had an estimated additional cost to complete of
approximately $15,000,000.
In February 1994, the Company's revolving credit agreement was amended
to increase the principal amount available from $50,000,000 to $100,000,000. In
January 1995, the Company's revolving credit agreement was amended to increase
the principal amount available from $100,000,000 to $200,000,000. At December
31, 1994, the Company had an outstanding balance of $26,000,000 under this line
of credit.
Working capital was $76,907,000 and $61,670,000 as of December 31,
1994 and December 31, 1993, respectively. Cash, cash equivalents and
short-term investments totaled $3,055,000 and $16,630,000 at December 31, 1994
and December 31, 1993, respectively.
The Company intends to continue to expand its operations by purchasing
or leasing approximately 10 to 12 additional hospitals over the next two to
three years and converting them into intensive care hospitals. The Company also
expects to enter into 100 to 200 additional respiratory and subacute care
services contracts during each of the next two to three years. The Company is
continuing to explore and develop opportunities for related healthcare
businesses. The Company expects to finance its liquidity, capital expenditure
and expansion programs using the proceeds of its February 1995 equity offering,
as well as funds generated from internal operations, funds available under the
revolving credit agreement (recently increased to $200 million) or additional
borrowings.
20
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in the Index to
Consolidated Financial Statements on Page F-1 of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
1. and 2. List of Financial Statements and Financial Statements Schedules.
The accompanying Index to Consolidated Financial Statements on Page F-1 of this Annual
Report on Form 10-K/A (Amendment No. 1) is provided in response to this Item.
3.1 * Certificate of Incorporation of the Company, as amended. Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-51372) is hereby
incorporated by reference.
3.2 * Certificate of Ownership and Merger (amending the Company's Certificate of
Incorporation in connection with its corporate name change). Exhibit 2.1 to
the Company's Current Report on Form 8-K dated September 10, 1993 (Comm. File
No. 1-10989) is hereby incorporated by reference.
3.3 * Amended and Restated Bylaws of the Company. Exhibit 4.2 to the Company's Current
Report on Form 8-K dated July 21, 1993 (Comm. File No. 1-10989) is hereby
incorporated by reference.
4.1 * Specimen Common Stock Certificate. Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (Reg. No. 33-71910) is hereby incorporated by reference.
4.2 * Indenture relating to the Company's 6% Convertible Subordinated Notes Due 2002
(including form of Note). Exhibit 4(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992 (Comm. File No. 1-10989) is
hereby incorporated by reference.
4.3 * Article IV of the Certificate of Incorporation of the Company is included in
Exhibit 3.1.
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C>
4.4 * Fourth Amended and Restated Loan Agreement dated as of January 20, 1995 by and
between National City Bank, Kentucky, NBD Bank, PNC Bank, Kentucky, Inc., Bank
One Columbus, N.A., Nationsbank of Georgia, First Union National Bank of North
Carolina, Mellon Bank, N.A., Wachovia Bank of Georgia, N.A., and the Company.
4.5 * Other Debt Instruments - Copies of debt instruments for which the related debt is
less than 10% of total assets will be furnished to the Commission upon
request.
10.1 ** Vencor, Incorporated Retirement Savings Plan as amended and restated as of January
1, 1989. Exhibit 10.13 to the Company's Registration Statement on Form S-1
(Reg. No. 33-36703) is hereby incorporated by reference.
10.2 ** Amendment No. 1 to the Vencor, Incorporated Retirement Savings Plan dated December
7, 1990. Exhibit 4.4 to the Company's Registration Statement on Form S-8
(Reg. No. 33-38188) is hereby incorporated by reference.
10.3 ** Amendment No. 2 to the Vencor, Incorporated Retirement Savings Plan dated May 15,
1991. Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Reg.
No. 33-43097) is hereby incorporated by reference.
10.4 ** Amendment No. 3 to the Vencor, Incorporated Retirement Savings Plan dated November
26, 1991. Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.5 ** Amendment No. 4 to the Vencor, Incorporated Retirement Savings Plan dated January
15, 1992. Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.6 ** Amendment No. 5 to the Vencor, Incorporated Retirement Savings Plan dated January
15, 1992. Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.7 ** Amendment No. 6 to the Vencor, Incorporated Retirement Savings Plan dated December
22, 1992. Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.8 ** Vencor, Incorporated Retirement Savings Plan Trust Agreement dated July 10, 1990
by and between the Company and First Kentucky Trust Company, Trustee. Exhibit
10.14 to the Company's Registration Statement on Form S-1 (Reg. No. 33-36703)
is hereby incorporated by reference.
</TABLE>
22
<PAGE> 25
<TABLE>
<S> <C>
10.9 ** Directors and Officers Insurance and Company Reimbursement Policy. Exhibit 10.18
to the Company's Registration Statement on Form S-1 (Reg. No. 33-43097) is
hereby incorporated by reference.
10.10 ** 1987 Non-Employee Directors Stock Option Plan. Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-30212) is hereby incorporated
by reference.
10.11 ** 1987 Incentive Compensation Program. Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-30212) is hereby incorporated by reference.
10.12 ** Amendment to the Vencor, Inc. 1987 Incentive Compensation Program dated May 15,
1991. Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Reg.
No. 33-40949) is hereby incorporated by reference.
10.13 ** Amendments to the Vencor, Inc. 1987 Incentive Compensation Program dated May 18,
1994.
10.14 ** Amendment to the Vencor, Inc. 1987 Incentive Compensation Program dated February
15, 1995.
10.15 ** Vencor, Inc. Employee Benefit Trust Agreement dated December 27, 1990 by and
between the Company and First Kentucky Trust Company. Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-39017) is hereby
incorporated by reference.
11 * Statement Regarding Computation of Earnings Per Share.
13.1 * Annual Report to Stockholders (for the fiscal year ended December 31, 1994). This
Annual Report shall not be deemed to be filed with the Commission except to
the extent that information is specifically incorporated herein by reference.
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
21 * Subsidiaries of the Company:
(a) VCI Specialty Services, Inc., a Delaware corporation.
(b) Vencor Hospitals South, Inc., a Delaware corporation, d/b/a Vencor Hospital -
Tampa, Vencor Hospital - Ft. Lauderdale, Vencor Hospital - Coral Gables and
Vencor Hospital - North Florida.
(c) Vencor Hospitals California, Inc., a Delaware corporation, d/b/a Vencor
Hospital - Los Angeles, Vencor Hospital - Sacramento, Vencor Hospital -
Orange County, Vencor Hospital - San Leandro, Vencor Hospital - San Diego and
Vencor Hospital - Ontario.
(d) Vencor Investments, Inc., a Delaware corporation.
(e) Ventech Systems, Inc., a Delaware corporation.
(f) Vencor Hospitals Texas, Ltd., d/b/a Vencor Hospital - Dallas, Vencor Hospital
- San Antonio, Vencor Hospital - South Texas, Vencor Hospital - Houston,
Vencor Hospital - Fort Worth South and Vencor Hospital - Fort Worth West.
(g) Vencor Hospitals East, Inc., a Delaware corporation, d/b/a Vencor Hospital -
Greensboro.
(h) Candle Subacute Services, Inc., a California corporation.
(i) Vencor Properties, Inc., a Delaware corporation.
(j) Vencor Hospitals Illinois, Inc., a Delaware corporation.
(k) Vencor Kentucky, Inc., a Delaware corporation.
(l) Hahnemann Hospital, Inc., a Delaware corporation, d/b/a Vencor Hospital -
Boston.
(m) Vencare, Inc., a Delaware corporation.
(n) Hospice Homecare, Inc., a Kentucky corporation.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (included only in filings under the Electronic Data
Gathering, Analysis, and Retrieval System).
</TABLE>
__________
* Previously filed.
** Compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K During Last Quarter of Fiscal Year.
During the last quarter of the fiscal year ended December 31, 1994,
the Company filed no Reports on Form 8-K.
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 11, 1995 VENCOR, INC.
By: /s/ W. Earl Reed, III
-------------------------------------------
W. Earl Reed, III
Vice President, Finance and Development
(Principal Financial and Accounting Officer)
and Director
25
<PAGE> 28
VENCOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended December 31,
1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets, December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-8
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Vencor, Inc.
We have audited the accompanying consolidated balance sheets of
Vencor, Inc. as of December 31, 1994 and 1993 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Vencor, Inc. at December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
January 30, 1995
Louisville, Kentucky
F-2
<PAGE> 30
VENCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Amounts) Year ended December 31
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Patient revenues $396,766 $276,587 $210,721
Other revenues 3,252 5,648 3,969
---------------------------------------------
400,018 282,235 214,690
Expenses:
Hospital operating expenses:
Salaries, wages and benefits 185,128 126,967 97,381
Supplies 46,354 32,822 26,212
Other operating expenses 66,595 53,136 42,734
---------------------------------------------
Total hospital operating expenses 298,077 212,925 166,327
Corporate general and administrative:
Salaries, wages and benefits 12,208 5,525 4,752
Other operating expenses 10,005 6,320 5,524
---------------------------------------------
Total corporate general and administrative
22,213 11,845 10,276
Depreciation and amortization 20,390 12,705 7,402
Interest 6,787 6,375 2,129
---------------------------------------------
Total expenses 347,467 243,850 186,134
---------------------------------------------
Income before income taxes 52,551 38,385 28,556
Income taxes 21,135 15,461 11,128
---------------------------------------------
Net income $ 31,416 $ 22,924 $ 17,428
=============================================
Net income per common share:
Primary $ 1.20 $ .85 $ .63
=============================================
Fully diluted $ 1.13 $ .85 $ .63
=============================================
Shares used in per share calculation:
Primary 25,994 27,072 27,507
=============================================
Fully diluted 30,417 27,072 27,507
=============================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 31
VENCOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Amounts) December 31
1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,055 $ 16,011
Investments 619
Accounts receivable, less allowance for doubtful accounts
of $1,478 in 1994 and $926 in 1993 98,246 56,581
Inventories 4,751 3,357
Other current assets 19,572 19,184
----------------------------
Total current assets 125,624 95,752
Property and equipment:
Land and land improvements 16,285 11,495
Buildings 104,610 69,782
Leasehold improvements 8,550 7,696
Fixed and moveable equipment 107,789 74,898
Capitalized leases 3,725 2,254
----------------------------
240,959 166,125
Less accumulated depreciation and amortization 40,074 21,333
----------------------------
200,885 144,792
Construction in progress 38,935 24,256
----------------------------
Net property and equipment 239,820 169,048
Assets available for acquisitions and general corporate
purposes 14,961
Other assets 24,928 14,504
----------------------------
Total assets $390,372 $294,265
============================
</TABLE>
See accompanying notes.
F-4
<PAGE> 32
VENCOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,536 $ 12,908
Accrued compensation and benefits 19,353 13,820
Income taxes payable 7,199 4,959
Accrued interest 1,725 1,725
Current portion of long-term debt 904 670
-------------------------
Total current liabilities 48,717 34,082
Deferred credits and other liabilities 16,029 12,717
Long-term debt; net of current portion 141,899 116,370
Shareholders' equity
Preferred Stock, par value $1.00 per share; authorized
1,000 in 1994 and 1993; none issued
Common stock, par value $.25 per share; authorized
60,000 in 1994 and 1993; 27,739 issued in 1994 and
27,699 in 1993 6,934 6,926
Paid-in capital 116,806 105,682
Retained earnings 87,617 56,201
-------------------------
211,357 168,809
Less cost of Common stock held in treasury (2,174 shares in
1994 and 2,993 shares in 1993) 27,630 37,713
-------------------------
Total shareholders' equity 183,727 131,096
-------------------------
Total liabilities and shareholders' equity $ 390,372 $ 294,265
=========================
</TABLE>
See accompanying notes.
F-5
<PAGE> 33
VENCOR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Common Stock in
Common Stock Treasury
-------------------- Paid-In Retained -----------------
Shares Amount Capital Earnings Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 27,459 $6,865 $103,942 $15,849 909 $ (609)
Net income for 1992 17,428
Stock issued upon exercise
of options 68 17 64 (248) 165
Stock issued in connection
with stock awards 17 4 1,048 (40) 28
------------------------------------------------------------------------------
Balance at December 31,1992 27,544 6,886 105,054 33,277 621 (416)
Net income for 1993 22,924
Stock issued upon exercise of
options 142 36 148
Stock issued in connection
with stock awards 13 4 480 (16) 158
Stock repurchased 2,388 (37,455)
------------------------------------------------------------------------------
Balance at December 31,1993 27,699 6,926 105,682 56,201 2,993 (37,713)
Net income for 1994 31,416
Stock issued upon exercise of
options 40 8 559
Stock issued in connection
with stock awards 1,476 (121) 1,518
Stock issued in connection
with acquisition of 9,089 (698) 8,565
facilities
------------------------------------------------------------------------------
Balance at December 31,1994 27,739 $ 6,934 $116,806 $87,617 2,174 $(27,630)
==============================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 34
VENCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands) Year ended December 31
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 31,416 $ 22,924 $ 17,428
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,390 12,705 7,402
Deferred rent and other liabilities 1,840 1,232 623
Deferred income taxes 297 2,073 (2,398)
Other 3,953 536 1,392
Changes in operating assets and liabilities:
Accounts receivable (41,638) (10,102) (7,750)
Other current assets 46 (4,444) (37)
Accounts payable 6,427 756 3,304
Accrued compensation and benefits 5,533 2,486 3,795
Income taxes payable 2,584 2,247 142
Other (211) 1,965
--------------------------------------
Net cash provided by operating activities 30,848 30,202 25,866
INVESTING ACTIVITIES
Assets whose use is limited for self-insurance claims (2,443) (1,456) (3,848)
Property and equipment additions (51,293) (40,899) (30,443)
Acquisition of facilities and other (32,375) (25,083) (32,687)
Change in assets available for acquisitions and
general corporate purposes 14,961 75,251 (90,212)
Change in short-term investments 619 2,493 (3,112)
Other assets 764 (4,372) (6,906)
--------------------------------------
Net cash (used in) provided by investing activities (69,767) 5,934 (167,208)
FINANCING ACTIVITIES
Payments on long-term debt (670) (541) (395)
Increase in long-term debt 26,433 115,636
Repurchase of common stock (37,455)
Common and treasury stock transactions 200 184 247
Other 91 27
--------------------------------------
Net cash provided by (used in) financing activities 25,963 (37,721) 115,515
--------------------------------------
Decrease in cash and cash equivalents (12,956) (1,585) (25,827)
Cash and cash equivalents at beginning of year 16,011 17,596 43,423
--------------------------------------
Cash and cash equivalents at end of year $ 3,055 $ 16,011 $ 17,596
======================================
SUPPLEMENTAL INFORMATION
Common stock issued in acquisition of facilities and
other $ 17,654
Debt assumed in acquisition of hospital facilities $ 960
Cash paid during the year for:
Interest, net of amounts capitalized 6,787 $ 6,586 285
Income taxes 17,129 11,191 13,461
</TABLE>
See accompanying notes.
F-7
<PAGE> 35
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include all subsidiaries.
Intercompany transactions have been eliminated.
Certain reclassifications in the consolidated statements of operations
in 1992 and 1993 were made to conform to the 1994 presentation.
NET REVENUES AND THIRD-PARTY REIMBURSEMENT
The Company's net revenues are reported net of contractual allowances
and are based upon amounts receivable from Medicare and other third parties.
Net revenues are derived primarily from services provided to patients, both at
the Company's hospitals and other facilities at which the Company provides
services on a contract basis.
The Company provides services to patients covered by government
programs (e.g., Medicare and Medicaid). Total net revenues from these programs
were 60%, 60% and 52% of Company net revenues in 1994, 1993 and 1992,
respectively. Government programs generally reimburse the Company based upon
cost, as defined, and such reimbursement is determined from annual cost reports
filed by the Company. Such cost reports are subject to audit by the respective
programs. Adjustments resulting from program audits of the Company's cost
reports have not been material.
CHARITY CARE
The Company provides care to patients who meet certain criteria under
its charity care policy without charge or at amounts less than its established
rates. Because the Company does not pursue collection of amounts determined to
qualify as charity care, they are not reported as revenue. Charity care
provided (based on established rates) was $13,262,000 in 1994, $14,489,000 in
1993 and $11,681,000 in 1992.
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts due from government programs
and non-government payors (e.g., HMOs, PPOs, commercial insurance companies,
nursing homes and other hospitals). Management believes there are no credit
risks associated with receivables from government programs. Non-government
receivables are from various payors which are subject to differing economic
conditions. Such non-government receivables do not represent any concentrated
risks to the Company. Management continually monitors and adjusts the reserves
associated with accounts receivable.
F-8
<PAGE> 36
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories consist principally of pharmaceuticals and supplies and
are stated at the lower of cost (first-in, first-out method) or market.
OTHER CURRENT ASSETS
At December 31, other current assets consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income taxes $ 6,282 $ 5,314
Assets whose use is limited to funding for employee health insurance,
workers' compensation and medical malpractice 7,539 6,644
Prepaid expenses and other 5,751 7,226
----------------------
$ 19,572 $ 19,184
======================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Provisions for
depreciation and amortization are computed using the straight-line method over
the expected useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements 20 - 40 years
Equipment and capitalized leases 5 - 15 years
</TABLE>
OTHER ASSETS
At December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangible assets, less accumulated amortization of $2,032 in 1994
(none in 1993) $12,544 $2,212
Assets whose use is limited for workers' compensation and medical
malpractice claims 3,365 1,817
Deferred income tax charges 3,219 1,343
Other 5,800 9,132
--------------------
$24,928 $14,504
====================
</TABLE>
Intangible assets, which primarily represent costs in excess of the
fair value of identifiable net assets of purchased businesses, are amortized
using the straight-line method over periods ranging from three to 10 years.
F-9
<PAGE> 37
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED CREDITS AND OTHER LIABILITIES
As of December 31, deferred credits and other liabilities consisted of
the following:
<TABLE>
<CAPTION>
(In Thousands)
1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax credits $10,756 $9,048
Deferred rent payable 1,628 1,284
Other 3,645 2,385
----------------------------
$16,029 $12,717
============================
</TABLE>
EARNINGS PER COMMON SHARE
The Company issued additional shares in connection with 3-for-2 and
5-for-4 stock splits in the form of stock dividends in October 1994 and January
1992, respectively. Retroactive recognition has been given for all stock
options, share and per share amounts in the accompanying financial statements
and notes.
Primary earnings per common share are based upon the weighted average
number of common shares outstanding adjusted for the dilutive effect of common
stock equivalents consisting of stock options calculated using the treasury
stock method.
Fully diluted earnings per share assumed the conversion of the
Company's 6% convertible subordinated notes. The interest expense related to
the 6% convertible subordinated notes, net of income taxes, was added to net
income. Conversion of the Company's 6% convertible subordinated notes would
have had an antidilutive effect in 1993 and 1992 and, therefore, was not
assumed.
RETIREMENT PLAN
The Company has a defined contribution retirement plan with a Section
401(k) savings plan feature that provides for benefits to eligible participants
based on a percentage of salaries. The Company's contributions to the plan were
$1,648,000 in 1994, $1,210,000 in 1993 and $794,000 in 1992.
F-10
<PAGE> 38
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT AND OTHER OBLIGATIONS
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Amounts)
1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
6% Convertible subordinated notes, due 2002, convertible
into common stock at $26.00 per share $115,000 $115,000
Note payable-revolving line of credit 26,000
Capitalized lease obligations and other 1,803 2,040
----------------------------
142,803 117,040
Less current portion 904 670
----------------------------
$141,899 $116,370
============================
</TABLE>
The convertible subordinated notes are redeemable, in whole or in
part, at the option of the Company at any time on or after October 15, 1995, at
declining premiums (104.2% - October 15, 1995 through September 30, 1996,
reducing to 100.6% - October 1, 2001 through September 30, 2002) prior to their
maturity date, along with accrued and unpaid interest. The note holders may
require the Company to repurchase the notes, in whole or in part, at 100% of
the principal amount plus accrued interest, under certain circumstances
involving a change of control of the Company. The notes are subordinated to all
existing or future senior liabilities of the Company.
In February 1994, the Company entered into a restated and amended loan
agreement with a bank group to increase the principal amount available to the
Company under its revolving credit facility to $100 million. The line of
credit may be extended annually through May 1996. Should the line not be
extended, it may be converted, at the Company's option, to a term loan payable
over a four-year period commencing in May 1995. Interest is payable at a
variable rate as defined by the agreement. The financing agreement contains
certain covenants which, among other things, require the Company to maintain a
minimum net worth and certain financial ratios. Borrowings outstanding under
the line of credit are unsecured. At December 31, 1994, borrowings of
$26,000,000 were outstanding under the revolving line of credit. The interest
rate on the obligation at December 31, 1994 is 6.75% (average interest rate for
the year was 5.80%).
Scheduled maturities of debt (excluding the line of credit) for the
next five years are: 1995 - $904,000, 1996 - $593,000 and 1997 - $306,000 (none
in 1998 and 1999).
The Company follows the policy of capitalizing interest during
construction. Capitalized interest was $918,000 in 1994, $690,000 in 1993 and
$112,000 in 1992.
At December 31, 1994, the Company leased five hospitals under various
operating leases. The leases contain cancellation clauses, the latest of which
is 2008. Some of the leases contain escalation clauses providing for increases
based upon the Consumer Price Index or renewable periods. The lease periods
range from three to 20 years, including renewal options, subject to the
Company's cancellation rights.
F-11
<PAGE> 39
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rental expense aggregated approximately $16,757,000 in 1994,
$14,930,000 in 1993 and $12,924,000 in 1992. Future minimum payments under the
aforementioned operating lease with terms in excess of one year are:
<TABLE>
<CAPTION>
(In Thousands)
Year Ended December 31
- -----------------------------------------------------------------
<S> <C>
1995 $9,071
1996 6,602
1997 4,266
1998 3,571
1999 2,418
Thereafter 13,007
-------
$38,935
=======
</TABLE>
3. SHAREHOLDERS' EQUITY
On February 24, 1993, the Company's Board of Directors authorized the
repurchase, at management's discretion, of up to 3,000,000 shares of the
Company's common stock and up to $10,000,000 of the Company's 6% convertible
subordinated notes due 2002 in the open market or through privately negotiated
transactions. During 1993, 400,350 shares were purchased at a cost of
$5,412,000. No shares were repurchased during the year ended December 31, 1994.
No notes had been repurchased as of December 31, 1994. On November 8, 1993, the
Company purchased 1,987,533 shares of its common stock for $32,043,000 pursuant
to a self tender offer.
On July 20, 1993, the Company's Board of Directors adopted a
Shareholder Rights Plan and designated 300,000 shares of the Company's
preferred stock as Series A Participating Preferred Stock. Under the Plan,
shareholders received one right (0.667 rights as adjusted for the Company's
3-for-2 stock split effected October 25, 1994) for each outstanding share of
common stock. The rights were distributed to shareholders of record as of
August 1, 1993 and accompany common stock shares issued after August 1, 1993.
The rights become exercisable only after an entity acquires 15% or
more of the outstanding common stock of the Company or commences or announces
an intention to commence a tender offer for 15% or more of the same. Each right
would entitle the holder to purchase from the Company one one-hundredth of a
share of Series A Participating Preferred Stock at an exercise price of $73.33.
After an entity acquires 15% or more of the outstanding common stock, each
right would then entitle its holder to purchase, at the exercise price, the
number of shares or other securities of the Company (or, in certain situations,
an acquiring entity) having a market value of twice the rights exercise price
(i.e., at a 50% discount). The Company may redeem the rights for $0.0067 each
under certain circumstances, or exchange each right for one share of common
stock at any time after the rights become exercisable. The rights will expire
on July 19, 2003, unless redeemed or exchanged earlier by the Company. The
rights will be represented by existing common stock certificates until they
become exercisable.
F-12
<PAGE> 40
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has granted options under its 1987 Incentive Compensation
Program and its 1987 Stock Option Plan for Non-Employee Directors to purchase
common stock at fair market value. Options are exercisable in 25% installments
over a four-year period commencing one year after the option date and expire 10
years after the option date.
A summary of outstanding stock options follows:
<TABLE>
<CAPTION>
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year 1,341,891 1,213,511 1,314,141
Granted 324,190 287,288 239,250
Canceled or expired (42,000) (15,938) (24,467)
Exercised (39,759) (142,970) (315,413)
---------------------------------------------------------
Outstanding at end of year 1,584,322 1,341,891 1,213,511
=========================================================
Exercisable stock options at end of year 913,373 709,335 639,600
=========================================================
Shares reserved for issuance under stock
option plans 850,546 57,933 396,342
=========================================================
Options granted:
Option price $19.92 - $22.75 $14.17 - $24.25 $17.09 - $24.13
Options exercised:
Option price $0.53 - $22.09 $0.53 - $16.80 $0.53 - $4.97
</TABLE>
4. INCOME TAXES
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, Accounting for Income Taxes. The
cumulative effect of adopting Statement No. 109 was not significant.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets at
December 31 are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $10,459 $9,037
Other 297 11
---------------------
Total deferred tax liabilities 10,756 9,048
Deferred tax assets:
Doubtful accounts 2,820 2,597
Accrued vacation 1,206 981
Malpractice 1,091 1,041
Workers' compensation 1,771 1,051
Other 2,613 1,248
---------------------
Total deferred tax assets 9,501 6,918
---------------------
Net deferred tax liabilities $ 1,255 $2,130
=====================
</TABLE>
F-13
<PAGE> 41
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In Thousands) Year ended December 31
1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $17,641 $10,566 $11,242
State 3,197 2,822 2,284
--------------------------------------
20,838 13,388 13,526
Deferred 297 2,073 (2,398)
--------------------------------------
$21,135 $15,461 $11,128
======================================
</TABLE>
Reconciliation of the federal statutory rate to the effective income tax rate
follows:
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate $18,393 35 $13,470 35 $9,709 34
State income taxes, net 2,078 4 1,834 5 1,508 5
Other 664 1 157 (89)
-------------------------------------------------------------------------
Income tax expense $21,135 40 $15,461 40 $11,128 39
=========================================================================
</TABLE>
F-14
<PAGE> 42
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CONTINGENCIES
The Company insures for medical malpractice losses through claims-made
policies, and provides an estimated reserve for deductibles for outstanding
claims and incurred but not reported claims (IBNR). In the opinion of
management, insurance coverage and estimated reserves for outstanding and IBNR
claims are adequate to cover significant losses, if any. Should the
claims-made policies not be renewed or replaced with equivalent insurance,
claims based on occurrences during their terms but reported subsequently will
be uninsured. The Company intends to continue to carry such insurance.
6. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A tabulation of the unaudited quarterly results of operations for the
years ended December 31 follows:
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1994
- -----------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $86,963 $98,534 $103,483 $111,038 $400,018
Net income 5,920 7,282 8,330 9,884 31,416
Earnings per share:
Primary .23 .28 .32 .38 1.20
Fully diluted .23 .26 .30 .35 1.13
1993
- -----------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------
Net revenues $62,549 $66,947 $72,422 $80,317 $282,235
Net income 4,535 5,337 6,241 6,811 22,924
Earnings per share:
Primary .17 .19 .23 .26 .85
Fully diluted .17 .19 .23 .26 .85
</TABLE>
F-15
<PAGE> 43
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,055 $ 3,055 $16,011 $16,011
Investments - current and noncurrent portion:
Assets whose use is limited for self-insurance
claims, acquisitions and general corporate
purposes 10,904 10,889 23,422 23,422
Other 619 622
Note receivable 2,650 2,650
Debt:
6% Convertible subordinated notes due 2002 115,000 129,950 115,000 113,850
</TABLE>
The fair value of financial instruments is based principally on quoted
market prices. Cash and cash equivalents and investments (principally money
market funds and U.S. government obligations) approximate their fair value.
8. SUBSEQUENT EVENTS
In the first quarter of 1995, the Company issued an additional
2,200,000 shares of common stock through a public offering. The Company
intends to use a portion of the net proceeds to repay the Company's existing
indebtedness under its line of credit.
In January 1995, the Company's revolving credit agreement was amended
to increase the principal amount available from $100 million to $200 million.
F-16
<PAGE> 1
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38188) pertaining to the Vencor, Inc. Retirement Savings Plan;
in the Registration Statement (Form S-8 No. 33-34191) pertaining to the Vencor,
Inc. 1987 Incentive Compensation Program; in the Registration Statement (Form
S-8 No. 33-40949) pertaining to the Vencor, Inc. 1987 Incentive Compensation
Program-additional shares; in the Registration Statement (Form S-8 No. 33-
34192) pertaining to the Vencor, Inc. 1987 Stock Option Plan for Nonemployee
Directors; in the Registration Statement (Form S-8 No. 33-66774) pertaining to
the Vencor, Inc. Nonemployee Directors Deferred Compensation Plan; in the
Registration Statement (Form S-8 No. 33-81988) pertaining to the Vencor, Inc.
1987 Incentive Compensation Program- additional shares; in the Registration
Statement (Form S-3 No. 33-51372) pertaining to the Conversion of 6%
Convertible Subordinated Notes due 2002; and in the Registration Statement
(Form S-3 No. 33-71910) pertaining to shares to be issued in connection with
acquisitions, of our report dated January 30, 1995 with respect to the
consolidated financial statements of Vencor, Inc. in Form 10-K/A (Amendment No.
1) for the year ended December 31, 1994.
ERNST & YOUNG LLP
Louisville, Kentucky
August 8, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,055
<SECURITIES> 0
<RECEIVABLES> 99,724
<ALLOWANCES> 1,478
<INVENTORY> 4,751
<CURRENT-ASSETS> 125,624
<PP&E> 279,894
<DEPRECIATION> 40,074
<TOTAL-ASSETS> 390,372
<CURRENT-LIABILITIES> 48,717
<BONDS> 141,899
<COMMON> 6,934
0
0
<OTHER-SE> 176,793
<TOTAL-LIABILITY-AND-EQUITY> 390,372
<SALES> 396,766
<TOTAL-REVENUES> 400,018
<CGS> 0
<TOTAL-COSTS> 298,077
<OTHER-EXPENSES> 49,390
<LOSS-PROVISION> 358
<INTEREST-EXPENSE> 6,787
<INCOME-PRETAX> 52,551
<INCOME-TAX> 21,135
<INCOME-CONTINUING> 31,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,416
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.13
</TABLE>
