<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-10989
VENCOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1055020
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3300 PROVIDIAN CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(502) 596-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK OUTSTANDING AT SEPTEMBER 30, 1996
--------------------------- ---------------------------------
<S> <C>
Common stock, $.25 par value 69,158,681 shares
</TABLE>
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1 of 18
<PAGE>
VENCOR, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations--for the quarter
and nine months ended September 30, 1996 and 1995.............. 3
Condensed Consolidated Balance Sheet--September 30, 1996 and
December 31, 1995.............................................. 4
Condensed Consolidated Statement of Cash Flows--for the nine
months ended
September 30, 1996 and 1995.................................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 18
</TABLE>
2
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues.......................... $650,551 $575,339 $1,911,442 $1,705,831
-------- -------- ---------- ----------
Salaries, wages and benefits...... 372,524 347,251 1,111,547 999,512
Supplies.......................... 54,409 47,868 160,170 138,266
Rent.............................. 19,681 20,225 57,950 59,575
Other operating expenses.......... 115,833 105,335 331,207 309,217
Depreciation and amortization..... 24,787 23,263 74,426 66,940
Interest expense.................. 11,884 15,169 36,505 47,798
Investment income................. (3,132) (3,304) (10,010) (10,032)
Non-recurring transactions........ - 103,868 - 109,423
-------- -------- ---------- ----------
595,986 659,675 1,761,795 1,720,699
-------- -------- ---------- ----------
Income (loss) from operations be-
fore income taxes................ 54,565 (84,336) 149,647 (14,868)
Provision for income taxes........ 21,007 (21,449) 57,614 5,760
-------- -------- ---------- ----------
Income (loss) from operations..... 33,558 (62,887) 92,033 (20,628)
Extraordinary loss on
extinguishment of debt, net of
income tax benefit............... - (19,196) - (21,987)
-------- -------- ---------- ----------
Net income (loss).............. 33,558 (82,083) 92,033 (42,615)
Preferred stock dividend require-
ments............................ - (1,692) - (5,280)
Gain on redemption of preferred
stock............................ - 10,176 - 10,176
-------- -------- ---------- ----------
Income (loss) available to com-
mon stockholders.............. $ 33,558 $(73,599) $ 92,033 $ (37,719)
======== ======== ========== ==========
Earnings (loss) per common and
common equivalent share:
Primary:
Income (loss) from operations... $ .48 $ (.91) $ 1.30 $ (.27)
Extraordinary loss on
extinguishment of debt......... - (.32) - (.37)
-------- -------- ---------- ----------
Net income (loss).............. $ .48 $ (1.23) $ 1.30 $ (.64)
======== ======== ========== ==========
Fully diluted:
Income (loss) from operations... $ .48 $ (.91) $ 1.30 $ (.27)
Extraordinary loss on
extinguishment of debt......... - (.32) - (.37)
-------- -------- ---------- ----------
Net income (loss).............. $ .48 $ (1.23) $ 1.30 $ (.64)
======== ======== ========== ==========
Shares used in computing earnings
(loss) per common
and common equivalent share:
Primary.......................... 70,028 60,011 70,800 59,139
Fully diluted.................... 70,028 60,011 70,800 59,139
</TABLE>
See accompanying notes.
3
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 143,984 $ 35,182
Accounts and notes receivable less allowance for
loss of
$20,066--September 30 and $16,785--December 31.... 392,426 360,147
Inventories........................................ 26,668 24,862
Income taxes....................................... 52,697 77,997
Other.............................................. 25,818 26,491
---------- ----------
641,593 524,679
Property and equipment, at cost..................... 1,645,622 1,552,293
Accumulated depreciation............................ (422,824) (362,199)
---------- ----------
1,222,798 1,190,094
Notes receivable less allowance for loss of
$12,168--September 30 and
$15,305--December 31............................... 23,343 78,090
Intangible assets less accumulated amortization of
$27,453--September 30
and $22,149--December 31........................... 51,293 42,580
Other............................................... 68,166 77,011
---------- ----------
$2,007,193 $1,912,454
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 114,454 $ 99,887
Salaries, wages and other compensation............. 95,437 99,937
Other accrued liabilities.......................... 63,063 75,617
Long-term debt due within one year................. 51,822 9,572
---------- ----------
324,776 285,013
Long-term debt...................................... 720,527 778,100
Deferred credits and other liabilities.............. 76,222 75,573
Minority interests in equity of consolidated enti-
ties............................................... 55,720 1,704
Stockholders' equity:
Common stock, $.25 par value; authorized 180,000
shares;
issued 72,552 shares--September 30 and 72,158
shares--December 31............................... 18,138 18,040
Capital in excess of par value..................... 691,566 684,377
Retained earnings.................................. 194,898 102,865
---------- ----------
904,602 805,282
Common treasury stock; 3,393 shares--September 30
and
2,025 shares--December 31......................... (74,654) (33,218)
---------- ----------
829,948 772,064
---------- ----------
$2,007,193 $1,912,454
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 92,033 $ (42,615)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 74,426 66,940
Deferred income taxes................................... 651 (20,030)
Extraordinary loss on extinguishment of debt............ - 35,058
Non-recurring transactions.............................. - 114,311
Other................................................... 8,809 13,867
Changes in operating assets and liabilities:
Accounts and notes receivable.......................... (40,364) (63,132)
Inventories and other assets........................... 2,020 (2,367)
Accounts payable....................................... 14,634 15,673
Other accrued liabilities.............................. 13,196 (3,144)
-------- ---------
Net cash provided by operating activities............. 165,405 114,561
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment....................... (85,437) (102,271)
Acquisition of healthcare businesses and previously
leased facilities....................................... (26,236) (45,257)
Sale of assets........................................... 9,103 674
Collection of notes receivable........................... 54,589 2,870
Net change in investments................................ (445) 160
Other.................................................... (1,590) (6,849)
-------- ---------
Net cash used in investing activities................. (50,016) (150,673)
-------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving lines of cred-
it...................................................... 1,000 68,750
Issuance of long-term debt............................... 7,865 656,421
Repayment of long-term debt.............................. (24,377) (610,029)
Payment of deferred financing costs...................... (1,816) -
Public offering of common stock.......................... 53,089 66,494
Other issuances of common stock.......................... 1,379 6,588
Repurchase of common stock............................... (43,681) -
Redemption of preferred stock............................ - (91,268)
Payment of dividends..................................... - (2,779)
Other.................................................... (46) (20,211)
-------- ---------
Net cash provided by (used in) financing activities... (6,587) 73,966
-------- ---------
Change in cash and cash equivalents....................... 108,802 37,854
Cash and cash equivalents at beginning of period.......... 35,182 39,018
-------- ---------
Cash and cash equivalents at end of period................ $143,984 $ 76,872
======== =========
Supplemental information:
Interest payments........................................ $ 38,692 $ 50,813
Income tax payments...................................... 23,553 61,878
</TABLE>
See accompanying notes.
5
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Vencor, Inc. ("Vencor") operates an integrated network of healthcare
services primarily focused on the needs of the elderly. At September 30, 1996,
Vencor operated 37 hospitals, 313 nursing centers, a contract services
business ("Vencare") which provides respiratory therapy, rehabilitation
therapy and subacute medical services primarily to nursing centers, 51 retail
and institutional pharmacy outlets and 22 independent and assisted living
communities with 3,022 units.
On September 28, 1995, Vencor consummated a merger with The Hillhaven
Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the
"Hillhaven Merger"). See Note 5.
Prior to its merger with Vencor, Hillhaven consummated a merger with
Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock-
for-stock transaction (the "Nationwide Merger"). See Note 6.
In the third quarter of 1996, Vencor completed an initial public offering
related to its independent and assisted living business through the issuance
of 5,750,000 common shares of Atria Communities, Inc. ("Atria") (the "IPO").
See Note 7.
NOTE 2--BASIS OF PRESENTATION
The Hillhaven and Nationwide Mergers have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying condensed consolidated
financial statements give retroactive effect to these transactions and include
the combined operations of Vencor, Hillhaven and Nationwide for all periods
presented.
In connection with the IPO, Vencor retained a controlling interest in Atria.
Accordingly, the accounts of Atria continue to be consolidated with those of
Vencor, and management has recorded minority interests in the earnings and
equity of Atria since consummation of the IPO.
The accompanying condensed consolidated financial statements do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally required in annual reports on Form 10-K.
Accordingly, these financial statements should be read in conjunction with the
audited consolidated financial statements of Vencor for the year ended
December 31, 1995 filed on Form 10-K with the Securities and Exchange
Commission.
The accompanying condensed consolidated financial statements have been
prepared in accordance with Vencor's customary accounting practices and have
not been audited. Management believes that the financial information included
herein reflects all adjustments necessary for a fair presentation of interim
results and, except as discussed in Note 8, all such adjustments are of a
normal and recurring nature.
NOTE 3--REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
6
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--REVENUES (CONTINUED)
A summary of revenues by payor type follows (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Medicare............................ $206,270 $158,149 $ 607,753 $ 500,559
Medicaid............................ 212,978 198,563 611,835 572,469
Private and other................... 243,080 221,207 723,034 636,578
-------- -------- ---------- ----------
662,328 577,919 1,942,622 1,709,606
Elimination......................... (11,777) (2,580) (31,180) (3,775)
-------- -------- ---------- ----------
$650,551 $575,339 $1,911,442 $1,705,831
======== ======== ========== ==========
</TABLE>
NOTE 4--EARNINGS PER SHARE
The computation of earnings per common and common equivalent share give
retroactive effect to the Hillhaven and Nationwide Mergers and is based upon
the weighted average number of common shares outstanding. In addition, the
1996 computations also include the dilutive effect of common stock equivalents
consisting primarily of stock options.
NOTE 5--HILLHAVEN MERGER
On September 27, 1995, the stockholders of both Vencor and Hillhaven
approved the Hillhaven Merger, effective on September 28, 1995. In connection
with the Hillhaven Merger, each share of Hillhaven common stock was converted
on a tax-free basis into 0.935 of a share of Vencor common stock, resulting in
the issuance of approximately 31,651,000 Vencor common shares.
The Hillhaven Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Hillhaven Merger and include the combined operations of Vencor
and Hillhaven for all periods presented. A summary of the results of
operations of the separate entities for the respective periods ended September
30, 1995 follows (dollars in thousands):
<TABLE>
<CAPTION>
NON-RECURRING
VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED
-------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Third quarter:
Revenues............... $150,139 $ 452,280 $(24,500) $(2,580) $ 575,339
Income (loss) from op-
erations.............. 11,605 15,383 (89,875) - (62,887)
Net income (loss)...... 10,750 (2,958) (89,875) - (82,083)
Nine months:
Revenues............... $411,233 $1,322,873 $(24,500) $(3,775) $1,705,831
Income (loss) from op-
erations.............. 31,566 41,367 (93,561) - (20,628)
Net income (loss)...... 30,711 20,235 (93,561) - (42,615)
</TABLE>
NOTE 6--NATIONWIDE MERGER
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. In connection therewith, 4,675,000 shares of common stock
(effected for the Hillhaven Merger exchange ratio) were issued in exchange for
all of the outstanding shares of Nationwide.
7
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--NATIONWIDE MERGER (CONTINUED)
The Nationwide Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Nationwide Merger and include the combined operations of
Hillhaven and Nationwide for all periods presented. A summary of the results
of operations of the separate entities for the six months ended June 30, 1995
follows (dollars in thousands):
<TABLE>
<CAPTION>
NON-RECURRING
HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $803,793 $66,800 $ - $870,593
Income (loss) from oper-
ations................. 23,837 2,147 (3,686) 22,298
Net income (loss)....... 23,459 (266) (3,686) 19,507
</TABLE>
NOTE 7--INITIAL PUBLIC OFFERING
In the third quarter of 1996, Vencor completed the IPO, the net proceeds
from which aggregated approximately $53.1 million. At September 30, 1996,
Vencor owned 10,000,000 shares, or 63.1%, of Atria common stock. Significant
agreements related to the IPO are discussed below.
Credit Facility
Concurrently with the consummation of the IPO, Atria entered into a bank
credit facility (the "Atria Credit Facility"), which will mature in four years
and may be extended at the option of the banks for an additional year. The
Atria Credit Facility aggregates up to $200 million, including a letter of
credit option not to exceed $70 million. Loans under the Atria Credit Facility
will bear interest, at Atria's option, at either (i) a base rate based on PNC
Bank's prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus
an additional percentage based on certain leverage ratios. The obligations
under the Atria Credit Facility are secured by substantially all of Atria's
property, the capital stock of Atria's present and future principal
subsidiaries and all intercompany indebtedness owed to Atria by its
subsidiaries. The Atria Credit Facility is conditioned upon, among other
things, Vencor's ownership of at least 30% of Atria's common stock.
Agreements with Atria
Atria and Vencor or its subsidiaries have entered into certain arrangements
which are intended to facilitate an orderly transition of Atria from a
division of Vencor to a separate publicly held entity which will be minimally
disruptive to both Atria and Vencor. In addition to various agreements related
to administrative support, shared services and real estate leases, significant
agreements with Atria include:
Guarantees--Vencor will guarantee for four years certain borrowings by
Atria under the Atria Credit Facility in amounts up to $100 million in the
first year following the IPO, declining to $75 million, $50 million and $25
million in each respective year thereafter.
Income Taxes--A tax sharing agreement provides for risk-sharing
arrangements in connection with various income tax related issues.
Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of
1933 of Atria common stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from
the completion of the IPO and are subject to certain conditions and
limitations, including the right of underwriters of an offering to limit
the number of shares owned by Vencor included in such registration.
8
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INITIAL PUBLIC OFFERING (CONTINUED)
Liabilities and Indemnifications--Atria has agreed to assume all
contractual liabilities relating to the assets transferred by Vencor to
Atria.
NOTE 8--NON-RECURRING TRANSACTIONS
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million primarily in connection with the Hillhaven Merger. The charges
included (i) $23.2 million of investment advisory and professional fees, (ii)
$53.8 million of employee benefit plan and severance costs, (iii) $26.9
million of losses associated with the planned disposition of certain nursing
center properties and (iv) $24.5 million of losses to reflect Vencor's change
in estimates of accrued revenues recorded in connection with certain prior-
year nursing center third-party reimbursement issues (recorded as a reduction
of revenues).
Operating results for the nine months ended September 30, 1995 include
pretax charges of $5.5 million recorded in the second quarter related to the
Nationwide Merger.
NOTE 9--STOCK REPURCHASE PROGRAM
In June 1996, the Board of Directors authorized the repurchase of up to
2,000,000 shares of Vencor common stock. During the third quarter of 1996,
Vencor repurchased 1,550,000 shares at an aggregate cost of approximately
$43.7 million.
Subsequent to September 30, 1996, Vencor repurchased an additional 301,600
shares at an aggregate cost of approximately $8.8 million.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT TRANSACTIONS
The Hillhaven Merger was consummated on September 28, 1995. At the time of
the Hillhaven Merger, Hillhaven operated 311 nursing centers, 56 retail and
institutional pharmacies and 23 independent and assisted living communities
with 3,122 units. Annualized revenues approximated $1.7 billion.
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. At the time of the Nationwide Merger, Nationwide operated 23
nursing centers containing 3,257 licensed beds and four independent and
assisted living communities with 442 units. Annualized revenues approximated
$125 million.
As discussed in the Notes to Condensed Consolidated Financial Statements,
the Hillhaven and Nationwide Mergers have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying condensed consolidated
financial statements and financial and operating data included herein give
retroactive effect to these transactions and include the combined operations
of Vencor, Hillhaven and Nationwide for all periods presented.
In the third quarter of 1996, Vencor retained approximately 63% of its
interest in Atria upon consummation of the IPO. For accounting purposes, the
accounts of Atria continue to be consolidated with those of Vencor and
management has recorded minority interests in the earnings and equity of Atria
since consummation of the IPO.
RESULTS OF OPERATIONS
Vencor operates an integrated network of healthcare services focused
primarily on the needs of the elderly through the operation of hospitals,
nursing centers and ancillary services businesses which include Vencare,
pharmacies, and independent and assisted living communities. A summary of
revenues follows (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------ % ---------------------- %
1996 1995 CHANGE 1996 1995 CHANGE
-------- -------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Hospitals............... $144,228 $119,705 20.5 $ 412,887 $ 337,036 22.5
-------- -------- ---------- ----------
Nursing centers:
Long-term care......... 273,389 265,951 2.8 790,714 779,717 1.4
Subacute care ......... 138,564 125,952 10.0 413,687 361,124 14.6
-------- -------- ---------- ----------
411,953 391,903 5.1 1,204,401 1,140,841 5.6
Non-recurring
transactions.......... - (24,500) - (24,500)
-------- -------- ---------- ----------
411,953 367,403 12.1 1,204,401 1,116,341 7.9
-------- -------- ---------- ----------
Ancillary services:
Vencare................ 50,414 37,860 33.2 156,716 93,720 67.2
Pharmacies............. 42,695 40,773 4.7 130,132 127,067 2.4
Independent and
assisted living
communities........... 13,038 12,178 7.1 38,486 35,442 8.6
-------- -------- ---------- ----------
106,147 90,811 16.9 325,334 256,229 27.0
-------- -------- ---------- ----------
Elimination............. (11,777) (2,580) (31,180) (3,775)
-------- -------- ---------- ----------
$650,551 $575,339 13.1 $1,911,442 $1,705,831 12.1
======== ======== ========== ==========
</TABLE>
Hospital revenue increases for the third quarter and nine months ended
September 30, 1996 resulted from the acquisition of facilities and growth in
same-store patient days. Hospital patient days rose 16% to 144,220 in
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
the third quarter of 1996 and 21% to 438,548 for the first nine months of 1996
from the respective periods a year ago.
As part of its integrated growth strategy, Vencor intends to expand its
subacute medical and rehabilitation services provided in its nursing centers
and reduce the percentage of patient days attributable to custodial patient
care. Patient days related to subacute care grew 14% to 478,448 in the third
quarter and 20% to 1,475,058 in the nine month period, while patient days
related to custodial care declined 2% in the third quarter to 2,693,457 and 3%
to 7,931,848 in the nine month period. Revenues related to custodial care
during both the third quarter and nine months ended September 30, 1996 were
adversely impacted by a decline in private pay patient days.
Growth in ancillary services revenues in both periods of 1996 was primarily
attributable to the expansion of the Vencare contract services business, which
provides respiratory and rehabilitation therapy services and subacute care
primarily to nursing centers.
Income from operations totaled $33.6 million and $92.0 million in the third
quarter and nine months ended September 30, 1996, compared to losses of $82.1
million and $42.6 million during the same periods of 1995. Excluding the
effect of non-recurring transactions, income from operations increased 24% in
the third quarter and 26% for the nine month period. The improvement in both
periods resulted primarily from (i) growth in hospital patient days, Vencare
contracts and nursing center subacute volumes and (ii) reductions in interest
expense resulting from refinancing activities and reductions of long-term
debt.
Upon consummation of the Hillhaven Merger, Vencor recorded certain pretax
charges aggregating $128.4 million related primarily to merger transaction
costs, employee benefit plans, consolidation and restructuring activities, and
changes in nursing center accounting estimates. The consolidation of
duplicative corporate and operational functions was substantially completed
during the third quarter of 1996, and management expects that dispositions of
certain nursing center properties will be concluded in 1997.
LIQUIDITY
Cash provided by operations totaled $165.4 million for the nine months ended
September 30, 1996 compared to $114.6 million for the same period of 1995. The
increase was attributable to growth in net income, reductions in income tax
payments and improved controls over collections of accounts receivable.
Net cash used in investing activities totaled $50.0 million and $150.7
million for the nine months ended September 30, 1996 and 1995, respectively.
Vencor's investing activities included capital expenditures related to the
development and acquisition of new facilities and expansion of existing
operations totaling $111.6 million and $147.6 million for the respective
periods. In addition, Vencor substantially reduced its notes receivable
portfolio in 1996 through the collection of $54.6 million.
Net cash used in financing activities totaled $6.6 million in the first nine
months of 1996, while net cash provided by financing activities totaled $74.0
million for the same period of 1995. Net cash used in financing activities in
1996 includes net reductions of long-term debt of $15.5 million, proceeds from
the Atria IPO of $53.1 million and the repurchase of 1,550,000 shares of
Vencor common stock at an aggregate cost of $43.7 million. Net cash provided
by financing activities in 1995 includes a net increase in long-term debt of
$115.1 million, proceeds of $66.5 million from the public offering of
2,200,000 shares of Vencor common stock, and payments of $91.3 million related
to the redemption of all outstanding preferred stock in connection with the
Hillhaven Merger.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY (CONTINUED)
Since the consummation of the Hillhaven Merger, Vencor has maintained a $1
billion bank credit facility (the "Vencor Credit Facility"). At September 30,
1996, available borrowings under the Vencor Credit Facility approximated $350
million. Following completion of the IPO, Atria consummated the Atria Credit
Facility in the aggregate amount of $200 million to finance its expansion and
development program. At September 30, 1996, amounts available under the Atria
Credit Facility approximated $135 million.
Working capital totaled $316.8 million at September 30, 1996 compared to
$239.7 million at December 31, 1995. Cash and cash equivalents at September
30, 1996 includes $65.3 million related to Atria, a substantial portion of
which will be used to finance Atria's expansion and development program, and
approximately $28.1 million of proceeds from notes receivable which were
collected on the last day of the quarter. Management believes that cash flows
from operations and amounts available under the bank credit agreements are
sufficient to meet future expected liquidity needs.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $85.4 million in the
first nine months of 1996 compared to $102.3 million for the same period of
1995. Planned capital expenditures in 1996 (excluding acquisitions) related to
the improvement and expansion of existing properties and construction of new
facilities are expected to approximate $140 million and include significant
expenditures related to the expansion of the independent and assisted living
business. Management believes that its capital expenditure program is adequate
to expand, improve and equip existing facilities. At September 30, 1996, the
estimated cost to complete and equip construction in progress approximated $60
million.
Vencor also expended $26.2 million and $45.3 million for acquisitions of new
facilities (and related healthcare businesses) and previously leased nursing
centers during the nine months ended September 30, 1996 and 1995,
respectively. Management intends to acquire additional hospitals, nursing
centers and related healthcare businesses in the future.
Capital expenditures were financed primarily through internally generated
funds and, in 1995, from the public offering of 2,200,000 shares of Vencor
common stock, the proceeds from which aggregated $66.5 million. Vencor intends
to finance a substantial portion of its capital expenditures with internally
generated funds, issuance of long-term debt and, with respect to Atria,
proceeds from the IPO. Sources of capital include available borrowings under
existing bank credit agreements, public or private debt and equity.
HEALTH CARE LEGISLATION
Congress is currently considering various proposals which could reduce
expenditures under certain government health and welfare programs, including
Medicare and Medicaid. Management cannot predict whether such proposals will
be adopted, or if adopted, what effect, if any, such proposals would have on
its business.
Medicare revenues as a percentage of total revenues were 31% and 29% for the
nine months ended September 30, 1996 and September 30, 1995, respectively,
while Medicaid percentages of revenues approximated 31% and 33% for the
respective periods.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against Vencor. Resolution of such litigation and other loss
contingencies is not expected to have a material adverse effect on Vencor's
liquidity, financial position or results of operations.
The Vencor Credit Facility and the Atria Credit Facility contain covenants
which, among other things, require maintenance of certain financial ratios and
limit amounts of additional debt, capital expenditures and purchases of common
stock. Vencor was in substantial compliance with all such covenants at
September 30, 1996.
In connection with the Atria Credit Facility, Vencor will guarantee for four
years certain borrowings by Atria in amounts up to $100 million in the first
year following the IPO, declining to $75 million, $50 million and $25 million
in each respective year thereafter.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 QUARTERS
----------------------------
FIRST SECOND THIRD NINE MONTHS
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $626,337 $634,554 $650,551 $1,911,442
-------- -------- -------- ----------
Salaries, wages and benefits........ 372,318 366,705 372,524 1,111,547
Supplies............................ 51,762 53,999 54,409 160,170
Rent................................ 19,167 19,102 19,681 57,950
Other operating expenses............ 104,501 110,873 115,833 331,207
Depreciation and amortization....... 24,793 24,846 24,787 74,426
Interest expense.................... 12,480 12,141 11,884 36,505
Investment income................... (3,578) (3,300) (3,132) (10,010)
-------- -------- -------- ----------
581,443 584,366 595,986 1,761,795
-------- -------- -------- ----------
Income from operations before income
taxes.............................. 44,894 50,188 54,565 149,647
Provision for income taxes.......... 17,284 19,323 21,007 57,614
-------- -------- -------- ----------
Net income...................... $ 27,610 $ 30,865 $ 33,558 $ 92,033
======== ======== ======== ==========
Earnings per common and common
equivalent share:
Primary............................ $ .39 $ .43 $ .48 $ 1.30
Fully diluted...................... $ .39 $ .43 $ .48 $ 1.30
Shares used in computing earnings
per common and common equivalent
share:
Primary............................ 71,455 71,373 70,028 70,800
Fully diluted...................... 71,455 71,373 70,028 70,800
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 QUARTERS
--------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................. $552,178 $578,314 $575,339 $618,125 $2,323,956
-------- -------- -------- -------- ----------
Salaries, wages and
benefits................. 321,806 330,455 347,251 360,506 1,360,018
Supplies.................. 43,516 46,882 47,868 50,488 188,754
Rent...................... 19,579 19,771 20,225 19,901 79,476
Other operating expenses.. 99,247 104,635 105,335 107,752 416,969
Depreciation and
amortization............. 21,170 22,507 23,263 22,538 89,478
Interest expense.......... 15,458 17,171 15,169 13,120 60,918
Investment income......... (3,180) (3,548) (3,304) (3,412) (13,444)
Non-recurring
transactions............. - 5,555 103,868 - 109,423
-------- -------- -------- -------- ----------
517,596 543,428 659,675 570,893 2,291,592
-------- -------- -------- -------- ----------
Income (loss) from
operations before
income taxes............. 34,582 34,886 (84,336) 47,232 32,364
Provision for income
taxes.................... 13,410 13,799 (21,449) 18,241 24,001
-------- -------- -------- -------- ----------
Income (loss) from
operations............... 21,172 21,087 (62,887) 28,991 8,363
Extraordinary loss on
extinguishment of debt,
net of income taxes...... (66) (2,725) (19,196) (1,265) (23,252)
-------- -------- -------- -------- ----------
Net income (loss)..... 21,106 18,362 (82,083) 27,726 (14,889)
Preferred stock dividend
requirements............. (1,793) (1,795) (1,692) - (5,280)
Gain on redemption of
preferred stock.......... - - 10,176 - 10,176
-------- -------- -------- -------- ----------
Income (loss)
available to common
stockholders......... $ 19,313 $ 16,567 $(73,599) $ 27,726 $ (9,993)
======== ======== ======== ======== ==========
Earnings (loss) per common
and common equivalent
share:
Primary:
Income (loss) from
operations............. $ .33 $ .32 $ (.91) $ .43 $ .21
Extraordinary loss on
extinguishment of
debt................... - (.05) (.32) (.02) (.37)
-------- -------- -------- -------- ----------
Net income (loss)..... $ .33 $ .27 $ (1.23) $ .41 $ (.16)
======== ======== ======== ======== ==========
Fully diluted:
Income (loss) from oper-
ations................. $ .31 $ .30 $ (.91) $ .41 $ .29
Extraordinary loss on
extinguishment of
debt................... - (.04) (.32) (.02) (.32)
-------- -------- -------- -------- ----------
Net income (loss)..... $ .31 $ .26 $ (1.23) $ .39 $ (.03)
======== ======== ======== ======== ==========
Shares used in computing
earnings (loss) per
common and common
equivalent share:
Primary.................. 58,981 60,673 60,011 68,270 62,318
Fully diluted............ 70,826 72,454 60,011 71,547 71,967
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1996 QUARTERS
-------------------------------
FIRST SECOND THIRD NINE MONTHS
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
REVENUES (IN THOUSANDS) (A):
Hospitals......................... $ 130,047 $ 138,612 $ 144,228 $ 412,887
--------- --------- --------- ----------
Nursing centers:
Long-term care................... 257,423 259,902 273,389 790,714
Subacute care.................... 138,324 136,799 138,564 413,687
--------- --------- --------- ----------
395,747 396,701 411,953 1,204,401
--------- --------- --------- ----------
Ancillary services:
Vencare ......................... 52,726 53,576 50,414 156,716
Pharmacies ...................... 43,447 43,990 42,695 130,132
Independent and assisted living
communities..................... 12,611 12,837 13,038 38,486
--------- --------- --------- ----------
108,784 110,403 106,147 325,334
--------- --------- --------- ----------
Elimination....................... (8,241) (11,162) (11,777) (31,180)
--------- --------- --------- ----------
$ 626,337 $ 634,554 $ 650,551 $1,911,442
========= ========= ========= ==========
HOSPITAL DATA:
End of period data:
Number of hospitals.............. 36 37 37
Number of licensed beds.......... 3,225 3,265 3,265
Revenue mix %:
Medicare......................... 57 60 58 59
Medicaid......................... 13 12 14 13
Private and other................ 30 28 28 28
Patient days:
Medicare......................... 94,087 95,680 90,224 279,991
Medicaid......................... 24,152 23,898 26,280 74,330
Private and other................ 27,776 28,735 27,716 84,227
--------- --------- --------- ----------
146,015 148,313 144,220 438,548
========= ========= ========= ==========
NURSING CENTER DATA:
End of period data:
Number of nursing centers........ 311 310 313
Number of licensed beds.......... 39,510 39,378 39,640
Revenue mix %:
Medicare......................... 30 30 29 30
Medicaid......................... 44 44 44 44
Private and other................ 26 26 27 26
Patient days:
Long-term care................... 2,624,013 2,614,378 2,693,457 7,931,848
Subacute care.................... 503,507 493,103 478,448 1,475,058
--------- --------- --------- ----------
3,127,520 3,107,481 3,171,905 9,406,906
========= ========= ========= ==========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare contracts...... 2,133 2,185 2,090
Number of pharmacy outlets....... 54 53 51
Number of Atria communities...... 22 22 22
Number of Atria units............ 3,022 3,022 3,022
</TABLE>
- --------
(a) Prior period revenues have been reclassified to conform with the third
quarter presentation.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 QUARTERS
----------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES (IN THOUSANDS)
(A):
Hospitals............... $ 101,145 $ 116,186 $ 119,705 $ 119,450 $ 456,486
---------- ---------- ---------- ---------- -----------
Nursing centers:
Long-term care ........ 257,124 256,642 265,951 274,203 1,053,920
Subacute care.......... 114,668 120,504 125,952 131,788 492,912
Non-recurring
transactions.......... - - (24,500) - (24,500)
---------- ---------- ---------- ---------- -----------
371,792 377,146 367,403 405,991 1,522,332
---------- ---------- ---------- ---------- -----------
Ancillary services:
Vencare ............... 24,599 31,261 37,860 44,114 137,834
Pharmacies ............ 43,620 42,674 40,773 41,700 168,767
Independent and
assisted living
communities........... 11,367 11,897 12,178 12,534 47,976
---------- ---------- ---------- ---------- -----------
79,586 85,832 90,811 98,348 354,577
---------- ---------- ---------- ---------- -----------
Elimination............. (345) (850) (2,580) (5,664) (9,439)
---------- ---------- ---------- ---------- -----------
$ 552,178 $ 578,314 $ 575,339 $ 618,125 $ 2,323,956
========== ========== ========== ========== ===========
HOSPITAL DATA:
End of period data:
Number of hospitals.... 34 36 35 36
Number of licensed
beds.................. 2,859 3,275 3,214 3,263
Revenue mix %:
Medicare............... 58 57 57 58 57
Medicaid............... 11 11 11 13 12
Private and other...... 31 32 32 29 31
Patient days:
Medicare............... 74,742 80,236 79,282 79,749 314,009
Medicaid............... 14,609 19,330 21,014 21,828 76,781
Private and other...... 23,814 25,120 24,179 25,709 98,822
---------- ---------- ---------- ---------- -----------
113,165 124,686 124,475 127,286 489,612
========== ========== ========== ========== ===========
NURSING CENTER DATA:
End of period data:
Number of nursing
centers............... 310 311 311 311
Number of licensed
beds.................. 39,418 39,509 39,513 39,480
Revenue mix %:
Medicare............... 28 29 24 29 28
Medicaid............... 44 44 48 45 45
Private and other...... 28 27 28 26 27
Patient days:
Long-term care......... 2,700,250 2,710,176 2,758,760 2,700,914 10,870,100
Subacute care.......... 402,261 412,250 419,499 465,490 1,699,500
---------- ---------- ---------- ---------- -----------
3,102,511 3,122,426 3,178,259 3,166,404 12,569,600
========== ========== ========== ========== ===========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare
contracts............. 1,093 1,703 1,917 2,008
Number of pharmacy
outlets............... 57 55 56 55
Number of Atria
communities........... 22 22 22 22
Number of Atria units.. 3,022 3,022 3,022 3,022
</TABLE>
- --------
(a) Revenues have been reclassified to conform with the 1996 presentation.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<S> <C>
11 Statement Re: Computation of earnings per common and common equivalent
share for the quarter and nine months ended September 30, 1996 and 1995.
27 Financial Data Schedule (included only in filings submitted under the
Electronic Data Gathering Analysis and Retrieval system).
</TABLE>
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: October 24, 1996 /s/ W. Bruce Lunsford
_____________________________________
W. Bruce Lunsford
Chairman of the Board, President and
Chief Executive Officer
Date: October 24, 1996 /s/ W. Earl Reed, III
_____________________________________
W. Earl Reed, III
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
18
<PAGE>
EXHIBIT 11
VENCOR, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
---------------- ----------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Earnings (loss):
Income (loss) from operations............. $33,558 $(62,887) $92,033 $(20,628)
Preferred stock dividend requirements..... - (1,692) - (5,280)
Gain on preferred stock redemption........ - 10,176 - 10,176
------- -------- ------- --------
Income (loss) available to common stock-
holders.................................. 33,558 (54,403) 92,033 (15,732)
Extraordinary loss on extinguishment of
debt, net of
income tax benefit....................... - (19,196) - (21,987)
------- -------- ------- --------
Net income (loss)...................... $33,558 $(73,599) $92,033 $(37,719)
======= ======== ======= ========
Shares used in the computation:
Weighted average common shares outstand-
ing...................................... 69,346 60,011 69,983 59,139
Dilutive effect of common stock equiva-
lents (a)................................ 682 - 817 -
------- -------- ------- --------
Shares used in computing earnings
(loss) per common
and common equivalent share........... 70,028 60,011 70,800 59,139
======= ======== ======= ========
Primary earnings (loss) per common and com-
mon equivalent share:
Income (loss) from operations............. $ .48 $ (.91) $ 1.30 $ (.27)
Extraordinary loss on extinguishment of
debt..................................... - (.32) - (.37)
------- -------- ------- --------
Net income (loss)...................... $ .48 $ (1.23) $ 1.30 $ (.64)
======= ======== ======= ========
FULLY DILUTED EARNINGS (LOSS) PER COMMON
AND COMMON
EQUIVALENT SHARE:
Earnings (loss):
Income (loss) available to common stock-
holders.................................. $33,558 $(54,403) $92,033 $(15,732)
Interest addback on convertible
securities, net of income taxes.......... - 2,102 - 6,937
------- -------- ------- --------
Adjusted income (loss) available to common
stockholders............................. 33,558 (52,301) 92,033 (8,795)
Extraordinary loss on extinguishment of
debt, net of
income tax benefit....................... - (19,196) - (21,987)
------- -------- ------- --------
Net income (loss)...................... $33,558 $(71,497) $92,033 $(30,782)
======= ======== ======= ========
Shares used in the computation:
Weighted average common shares outstand-
ing...................................... 69,346 60,011 69,983 59,139
Dilutive effect of common stock
equivalents and
other dilutive securities (a)............ 682 - 817 -
------- -------- ------- --------
Shares used in computing earnings
(loss) per common and common
equivalent share...................... 70,028 60,011 70,800 59,139
======= ======== ======= ========
Fully diluted earnings (loss) per common
and common equivalent share:
Income (loss) from operations............. $ .48 $ (.91) $ 1.30 $ (.27)
Extraordinary loss on extinguishment of
debt..................................... - (.32) - (.37)
------- -------- ------- --------
Net income (loss)...................... $ .48 $ (1.23) $ 1.30 $ (.64)
======= ======== ======= ========
</TABLE>
- --------
(a) Dilutive securities are excluded from the computation for net loss
reporting periods.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 143,984
<SECURITIES> 0
<RECEIVABLES> 392,426
<ALLOWANCES> (20,066)
<INVENTORY> 26,668
<CURRENT-ASSETS> 641,593
<PP&E> 1,645,622
<DEPRECIATION> (422,824)
<TOTAL-ASSETS> 2,007,193
<CURRENT-LIABILITIES> 324,776
<BONDS> 720,527
0
0
<COMMON> 18,138
<OTHER-SE> 811,810
<TOTAL-LIABILITY-AND-EQUITY> 2,007,193
<SALES> 0
<TOTAL-REVENUES> 1,911,442
<CGS> 0
<TOTAL-COSTS> 1,329,667
<OTHER-EXPENSES> 320,834
<LOSS-PROVISION> 10,373
<INTEREST-EXPENSE> 36,505
<INCOME-PRETAX> 149,647
<INCOME-TAX> 57,614
<INCOME-CONTINUING> 92,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,033
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
</TABLE>
