<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 MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-10989
VENTAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1055020
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3300 AEGON CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(502) 596-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
VENCOR, INC.
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT APRIL 30, 1998
---------------------------- -----------------------------
Common stock, $.25 par value 67,638,980 shares
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1 of 23
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Financial Statements:
Condensed Consolidated Statement of Income -- for the three
months ended March 31, 1998 and 1997.......................... 3
Condensed Consolidated Balance Sheet -- March 31, 1998 and
December 31, 1997............................................. 4
Condensed Consolidated Statement of Cash Flows -- for the three
months ended
March 31, 1998 and 1997....................................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 22
</TABLE>
2
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues................................................... $823,316 $680,696
-------- --------
Salaries, wages and benefits............................... 480,364 396,573
Supplies................................................... 76,052 66,033
Rent....................................................... 24,135 18,948
Other operating expenses................................... 127,258 109,786
Depreciation and amortization.............................. 35,470 24,372
Interest expense........................................... 37,195 10,660
Investment income.......................................... (1,180) (1,567)
Non-recurring transactions................................. 7,664 -
-------- --------
786,958 624,805
-------- --------
Income before income taxes................................. 36,358 55,891
Provision for income taxes................................. 17,477 21,909
-------- --------
Income from operations..................................... 18,881 33,982
Extraordinary loss on extinguishment of debt, net of income
tax benefit............................................... - (2,259)
-------- --------
Net income.............................................. $ 18,881 $ 31,723
======== ========
Earnings per common share:
Basic:
Income from operations................................... $ 0.28 $ 0.49
Extraordinary loss on extinguishment of debt............. - (0.03)
-------- --------
Net income.............................................. $ 0.28 $ 0.46
======== ========
Diluted:
Income from operations................................... $ 0.28 $ 0.48
Extraordinary loss on extinguishment of debt............. - (0.03)
-------- --------
Net income.............................................. $ 0.28 $ 0.45
======== ========
Shares used in computing earnings per common share:
Basic..................................................... 67,448 68,929
Diluted................................................... 67,857 70,207
</TABLE>
See accompanying notes.
3
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 51,165 $ 82,473
Accounts and notes receivable less allowance for loss
of
$68,428 -- March 31 and $63,551 -- December 31...... 633,775 619,068
Inventories.......................................... 27,683 27,605
Income taxes......................................... 77,921 73,413
Other................................................ 45,629 55,589
---------- ----------
836,173 858,148
Property and equipment, at cost....................... 2,089,991 1,996,030
Accumulated depreciation.............................. (518,895) (488,212)
---------- ----------
1,571,096 1,507,818
Goodwill less accumulated amortization of $22,744 --
March 31
and $18,886 -- December 31........................... 669,327 659,311
Investments in affiliates............................. 181,862 178,301
Other................................................. 129,779 131,161
---------- ----------
$3,388,237 $3,334,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 97,646 $ 106,019
Salaries, wages and other compensation............... 184,252 163,642
Other accrued liabilities............................ 125,828 115,933
Long-term debt due within one year................... 32,666 27,468
---------- ----------
440,392 413,062
Long-term debt........................................ 1,920,901 1,919,624
Deferred credits and other liabilities................ 93,649 94,653
Minority interests in equity of consolidated entities. 2,462 2,050
Stockholders' equity:
Common stock, $.25 par value; authorized 180,000
shares;
issued 73,551 shares -- March 31 and 73,470
shares -- December 31............................... 18,388 18,368
Capital in excess of par value....................... 770,505 766,078
Retained earnings.................................... 300,684 281,803
---------- ----------
1,089,577 1,066,249
Common treasury stock; 5,987 shares -- March 31 and
6,159 shares -- December 31......................... (158,744) (160,899)
---------- ----------
930,833 905,350
---------- ----------
$3,388,237 $3,334,739
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 18,881 $ 31,723
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 35,470 24,372
Provision for doubtful accounts......................... 7,194 3,615
Deferred income taxes................................... 430 -
Extraordinary loss on extinguishment of debt............ - 3,672
Non-recurring transactions.............................. 4,221 -
Other................................................... (952) 150
Changes in operating assets and liabilities:
Accounts and notes receivable.......................... (22,635) (40,913)
Inventories and other assets........................... 3,866 (6,200)
Accounts payable....................................... (8,090) 16,568
Income taxes........................................... 15,631 19,737
Other accrued liabilities.............................. 3,976 7,303
-------- ---------
Net cash provided by operating activities............. 57,992 60,027
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment....................... (78,732) (60,887)
Acquisition of TheraTx, Incorporated..................... - (336,458)
Acquisition of other healthcare businesses and previously
leased facilities....................................... (12,275) (9,652)
Sale of assets........................................... - 10,342
Collection of notes receivable........................... 802 420
Net change in investments................................ (262) (1,234)
Other.................................................... (1,526) (749)
-------- ---------
Net cash used in investing activities................. (91,993) (398,218)
-------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving lines of credit. 5,600 344,950
Issuance of long-term debt............................... - 868
Repayment of long-term debt.............................. (1,895) (5,079)
Payment of deferred financing costs...................... (1,115) (4,225)
Issuances of common stock................................ 103 604
Other.................................................... - (78)
-------- ---------
Net cash provided by financing activities............. 2,693 337,040
-------- ---------
Change in cash and cash equivalents....................... (31,308) (1,151)
Cash and cash equivalents at beginning of period.......... 82,473 112,466
-------- ---------
Cash and cash equivalents at end of period................ $ 51,165 $ 111,315
======== =========
Supplemental information:
Interest payments........................................ $ 53,307 $ 12,520
Income tax payments...................................... 1,896 1,210
</TABLE>
See accompanying notes.
5
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- REPORTING ENTITY
Ventas, Inc., formerly Vencor, Inc. (the "Company"), operates an integrated
network of healthcare services in 45 states primarily focused on the needs of
the elderly. At March 31, 1998, the Company operated 62 long-term acute care
hospitals (5,313 licensed beds), 305 nursing centers (39,960 licensed beds),
and a contract services business ("Vencare") which primarily provides
respiratory and rehabilitation therapies, medical services and pharmacy
management services under approximately 3,700 contracts to nursing centers and
other healthcare providers.
On April 30, 1998, the Company changed its name to Ventas, Inc. and
refinanced all of its long-term debt in anticipation of spinning off its
healthcare operations through the distribution of the common stock of a new
entity named Vencor, Inc. ("New Vencor") to stockholders of record as of April
27, 1998 (the "Reorganization Transactions"). The distribution was effected on
May 1, 1998. For financial reporting periods subsequent to the Reorganization
Transactions, the historical financial statements of the Company will be
assumed by New Vencor and the Company will not report any historical financial
information prior to May 1, 1998. Accordingly, the financial results included
herein will not be reflected in the future financial statements of the Company
after May 1, 1998. See Note 12.
On March 21, 1997, the Company completed the acquisition of TheraTx,
Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy
management services and operator of nursing centers (the "TheraTx Merger"),
pursuant to a cash tender offer. See Note 5.
On June 24, 1997, the Company acquired substantially all of the outstanding
common stock of Transitional Hospitals Corporation ("Transitional"), an
operator of 19 long-term acute care hospitals, pursuant to a cash tender
offer. The Company completed the merger of its wholly owned subsidiary with
and into Transitional on August 26, 1997 (the "Transitional Merger"). See Note
6.
NOTE 2 -- BASIS OF PRESENTATION
The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying condensed consolidated
financial statements include the operations of TheraTx and Transitional since
March 21, 1997 and June 24, 1997, respectively.
Beginning July 1, 1997, the accounts of the Company's publicly held assisted
and independent living affiliate, Atria Communities, Inc. ("Atria"), were
accounted for under the equity method. Prior thereto, such accounts were
consolidated with those of the Company and provisions related to minority
interests in the earnings and equity of Atria had been recorded since the
consummation of the initial public offering in 1996.
Beginning in 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130 ("SFAS 130"), "Reporting
Comprehensive Income", which establishes new rules for the reporting of
comprehensive income and its components. SFAS 130 requires, among other
things, unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported as changes in common
stockholders' equity, to be disclosed as other comprehensive income. The
adoption of SFAS 130 had no impact on the Company's net income or common
stockholders' equity for the three months ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", which will become effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
6
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 -- BASIS OF PRESENTATION (CONTINUED)
report certain information about operating segments, products and services,
the geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has not yet determined the effect, if any, of SFAS 131
on the consolidated financial statement disclosures.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities", which requires entities to expense start-up costs, including
organizational costs, as incurred. SOP 98-5 requires most entities to write
off as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. SOP 98-5 is effective for most
entities for fiscal years beginning after December 15, 1998. The Company plans
to adopt the provisions of SOP 98-5 in the first quarter of 1999. The amount
of such unamortized costs were $14.4 million at March 31, 1998.
The accompanying condensed consolidated financial statements do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally required in annual reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of Vencor, Inc. for the year ended December
31, 1997 filed with the Securities and Exchange Commission on Form 10-K.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Note 8, all such
adjustments are of a normal and recurring nature.
NOTE 3 -- REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of first quarter revenues by payor type follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Medicare.............................................. $298,837 $233,133
Medicaid.............................................. 208,406 199,506
Private and other..................................... 343,085 259,777
-------- --------
850,328 692,416
Elimination........................................... (27,012) (11,720)
-------- --------
$823,316 $680,696
======== ========
</TABLE>
NOTE 4 -- EARNINGS PER COMMON SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share", replacing the calculation of primary and fully diluted earnings per
common share with basic and diluted earnings per common share. The computation
of basic earnings per common share is based upon the weighted average number
of
7
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 -- EARNINGS PER COMMON SHARE (CONTINUED)
common shares outstanding, while the diluted computation also includes the
effect of common stock equivalents consisting primarily of stock options.
Earnings per common share for all prior periods have been restated to conform
to the requirements of SFAS 128. The impact of the restatement was not
significant.
A computation of earnings per common share for the three months ended March
31 follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Income from operations.................................. $18,881 $33,982
Extraordinary loss on extinguishment of debt............ - (2,259)
------- -------
Net income........................................... $18,881 $31,723
======= =======
Shares used in the computation:
Weighted average shares outstanding--basic computation. 67,448 68,929
Dilutive effect of employee stock options and other
dilutive securities................................... 409 1,278
------- -------
Adjusted weighted average shares outstanding--diluted
computation......................................... 67,857 70,207
======= =======
Earnings per common share:
Basic:
Income from operations................................ $ 0.28 $ 0.49
Extraordinary loss on extinguishment of debt.......... - (0.03)
------- -------
Net income........................................... $ 0.28 $ 0.46
======= =======
Diluted:
Income from operations................................ $ 0.28 $ 0.48
Extraordinary loss on extinguishment of debt.......... - (0.03)
------- -------
Net income........................................... $ 0.28 $ 0.45
======= =======
</TABLE>
NOTE 5 -- THERATX MERGER
On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger as of March 31, 1998
follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 633,793
Fair value of liabilities assumed.............................. (259,439)
---------
Net assets acquired.......................................... 374,354
Cash received from acquired entity............................. (14,915)
---------
Net cash paid................................................ $ 359,439
=========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $314.7 million.
8
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 -- TRANSITIONAL MERGER
On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which
the Company paid $16.00 per common share. The Company completed the merger of
its wholly owned subsidiary with and into Transitional on August 26, 1997. A
summary of the Transitional Merger as of March 31, 1998 follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired................................... $713,336
Fair value of liabilities assumed............................... (44,842)
--------
Net assets acquired........................................... 668,494
Cash received from acquired entity.............................. (52,874)
--------
Net cash paid................................................. $615,620
========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $349.1 million.
NOTE 7 -- PRO FORMA INFORMATION
The pro forma effect of the TheraTx Merger and the Transitional Merger
assuming that the transactions occurred on January 1, 1997 follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
<S> <C>
Revenues.................................................. $850,429
Income from operations.................................... 13,137
Net income................................................ 10,878
Earnings per common share:
Basic:
Income from operations.................................. $ 0.19
Net income.............................................. 0.16
Diluted:
Income from operations.................................. $ 0.19
Net income.............................................. 0.16
</TABLE>
Pro forma income from operations includes $29.7 million of costs incurred by
both TheraTx and Transitional in connection with the acquisitions. Pro forma
financial data have been derived by combining the financial results of the
Company and TheraTx (based upon a three month reporting period ending March
31) and Transitional (based upon a three month reporting period ending
February 28).
NOTE 8 -- NON-RECURRING TRANSACTIONS
During the first quarter of 1998, the Company incurred $7.7 million of
professional fees and administrative expenses related to the Company's
Reorganization Transactions. The Company expects to record additional costs
associated with the consummation of the Reorganization Transactions in the
second quarter of 1998.
NOTE 9 -- LONG-TERM DEBT
In connection with the TheraTx Merger, the Company refinanced a substantial
portion of its long-term debt. These transactions resulted in an after-tax
loss of $2.3 million in the first quarter of 1997.
9
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9 -- LONG-TERM DEBT (CONTINUED)
The Company entered into certain interest rate swap agreements in the fourth
quarter of 1995 to eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. The agreements expire in varying
amounts through April 1998 and provide for fixed rates at 5.7% plus 3/8% to 1
1/8%. In addition, the Company entered into interest rate swap agreements in
May 1997 on $300 million of floating rate debt. These agreements expire in
$100 million increments in May 1999, November 1999 and May 2000, and provide
for fixed rates at 6.4% plus 3/8% to 1 1/8%. The fair values of the swap
agreements are not recognized in the condensed consolidated financial
statements.
NOTE 10 -- LITIGATION
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition, the
Health Care Financing Administration ("HCFA") has imposed a fine of $10,000
per day, effective from March 30, 1998 and continuing until April 9, 1998 at
which time the facility was determined to have removed any "immediate
jeopardy" to patients. A fine of $50 per day became effective on April 10,
1998 and will continue until the facility has achieved substantial compliance.
If substantial compliance is not achieved by October 9, 1998, the facility's
Medicare and Medicaid provider agreements could be terminated. The Company
instituted a plan of correction at the Tampa nursing center to respond to the
findings of AHCA and HCFA. AHCA also has changed the rating of the nursing
center's license to conditional. The Company has appealed these regulatory
sanctions. The Company believes that it has submitted an acceptable plan of
correction which will terminate the running of per day fines and avoid the
termination of the Tampa nursing center's provider agreements. The Company is
awaiting decisions from HCFA and AHCA and no assurance can be given that the
plan will be accepted.
The Florida Attorney General's office and the Tampa Prosecuting Attorney's
office have indicated to the Company that they are conducting independent
civil and criminal investigations into the circumstances surrounding the Tampa
resident discharges. The Company is cooperating fully with the ongoing
investigations.
In addition to its action with the nursing center in Tampa, Florida, the
HCFA Administrator of the Medicare and Medicaid programs recently indicated
that the Company's facilities in other states also are being monitored. The
Company has not received notice that any other state has instituted an
investigation into any similar issues at another Company facility. However,
there can be no assurances that HCFA or other regulators in other
jurisdictions will not initiate investigations relating to this matter or
other circumstances, and there can be no assurance that the results of any
such investigations would not have a material adverse effect on the Company.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide. The complaint alleges
various breaches of contract, and statutory and regulatory violations
including violations of Federal and state RICO statutes. The plaintiffs seek
class certification, unspecified damages, attorneys' fees and costs. The
Company intends to defend vigorously this action.
10
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- LITIGATION (CONTINUED)
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company, namely W. Bruce
Lunsford, W. Earl Reed, III, Michael R. Barr, Thomas T. Ladt, Jill L. Force
and James H. Gillenwater, Jr. The complaint alleges that the Company and
certain executive officers of the Company during a specified time frame
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by,
among other things, issuing to the investing public a series of false and
misleading statements concerning the Company's current operations and the
inherent value of the Company's common stock. The complaint further alleges
that as a result of these purported false and misleading statements concerning
the Company's revenues and successful acquisitions, the price of the Company's
common stock was artificially inflated. In particular, the complaint alleges
that the Company issued false and misleading financial statements during the
first, second and third calendar quarters of 1997 which misrepresented and
understated the impact that changes in Medicare reimbursement policies would
have on the Company's core services and profitability. The complaint further
alleges that the Company issued a series of materially false statements
concerning the purportedly successful integration of its recent acquisitions
and prospective earnings per share for 1997 and 1998 which the Company knew
lacked any reasonable basis and were not being achieved. The suit seeks
damages in an amount to be proven at trial, pre-judgment and post-judgment
interest, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the plaintiff has an effective remedy. The Company
believes that the allegations in the complaint are without merit and intends
to defend vigorously this action.
On June 19, 1997, a class action lawsuit was filed in the United States
District Court for the District of Nevada on behalf of a class consisting of
all persons who sold shares of Transitional common stock during the period
from February 26, 1997 through May 4, 1997, inclusive. The complaint alleges
that Transitional purchased shares of its common stock from members of the
investing public after it had received a written offer to acquire all of
Transitional's common stock and without making the required disclosure that
such an offer had been made. The complaint further alleges that defendants
disclosed that there were "expressions of interest" in acquiring Transitional
when, in fact, at that time, the negotiations had reached an advanced stage
with actual firm offers at substantial premiums to the trading price of
Transitional's stock having been made which were actively being considered by
Transitional's Board of Directors. The complaint asserts claims pursuant to
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and common law principles of negligent misrepresentation and names as
defendants Transitional as well as certain former senior executives and
directors of Transitional. The plaintiff seeks class certification,
unspecified damages, attorneys' fees and costs. The Company has filed a motion
to dismiss and is awaiting the court's decision. The Company is vigorously
defending this action.
The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice intervened in the suit which was brought
under the Federal Civil False Claims Act. AXR provided portable X-ray services
to nursing facilities (including those operated by the Company) and other
healthcare providers. The Company acquired an interest in AXR when The
Hillhaven Corporation was merged into the Company in September 1995 and
purchased the remaining interest in AXR in February 1996. The suit alleges
that AXR submitted false claims to the Medicare and Medicaid programs. In
conjunction with the qui tam action, the United States Attorney's Office for
the Eastern District of Arkansas also is conducting a criminal investigation
into the allegations contained in the qui tam complaint. The suit seeks
damages in an amount of not less than $1,000,000, treble damages and civil
penalties. The Company is cooperating fully in the investigation.
11
<PAGE>
VENTAS, INC.
(FORMERLY VENCOR, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- LITIGATION (CONTINUED)
On June 6, 1997, Transitional announced that it had been advised that it is
a target of a Federal grand jury investigation being conducted by the United
States Attorney's Office for the District of Massachusetts (the "USAO")
arising from activities of Transitional's formerly owned dialysis business.
The investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon
Corporation and Transitional. Transitional spun off its dialysis business, now
called Vivra Incorporated, on September 1, 1989. In January 1998, the Company
was informed that no criminal charges would be filed against the Company. The
Company has been informed that the USAO intends to file a civil action against
Transitional relating to the partnership's former business. If such a suit is
filed, the Company will vigorously defend the action.
NOTE 11 -- ATRIA MERGER
On April 20, 1998, Atria announced that it entered into a definitive merger
agreement with Kapson Senior Quarters Corp. ("Kapson"), an affiliate of Lazard
Freres Real Estate Investors LLC, under which Kapson will acquire Atria. Under
the terms of the merger agreement, a subsidiary of Kapson will merge into
Atria and the public stockholders of Atria will receive $20.25 per share in
cash. The Company, which currently owns 10 million shares of Atria common
stock, will also receive $20.25 per share in cash for approximately 88% of its
Atria common stock (valued at approximately $177.5 million). The Company will
retain its remaining shares and will beneficially own 10% of Atria following
the merger. In consideration of its continuing investment, the Company will
retain a seat on Atria's Board of Directors and is entitled to certain
registration rights with respect to its retained shares of Atria common stock.
The merger is subject to customary conditions, including approval of Atria's
stockholders and certain regulatory approvals. Proceeds from the transaction
will be used to reduce long-term debt.
NOTE 12 -- REORGANIZATION TRANSACTIONS
On April 30, 1998, the Company completed its internal reorganization and the
refinancing of all of its long-term debt necessary to complete the spin-off of
its healthcare operations through the distribution of the common stock of New
Vencor. The previously announced distribution of one share of New Vencor
common stock for each share of the Company's common stock was made on May 1,
1998. The Company retained substantially all of its real property, buildings
and other improvements (primarily long-term hospitals and nursing centers),
and leases these facilities to New Vencor. In connection with the
Reorganization Transactions, the Company was renamed Ventas, Inc.
Following the Reorganization Transactions, the Company will operate as a
self-administered, self-managed realty company. The Company expects that it
will be taxed as a real estate investment trust for Federal income tax
purposes commencing on January 1, 1999. The Company's properties include 46
long-term acute care hospitals and 218 nursing centers in 36 states. The
Company's primary source of revenue will be the annual base rent payments
under the leases with New Vencor.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND INFORMATION
The following discussion describes the Company's business as it was
conducted prior to the Reorganization Transactions. See "Reorganization
Transactions."
The Company is one of the nation's largest providers of healthcare services
focused primarily on the needs of the elderly. At March 31, 1998, the Company
operated 62 long-term acute care hospitals (5,313 licensed beds), 305 nursing
centers (39,960 licensed beds) and Vencare contract services which provided
respiratory and rehabilitation therapies, medical services and pharmacy
management services under approximately 3,700 contracts to nursing centers and
other healthcare providers.
In July 1997, Atria completed a secondary equity offering which reduced the
Company's ownership percentage to less than 50%. Accordingly, the Company's
investment in Atria beginning July 1, 1997 has been accounted for under the
equity method.
On March 21, 1997, the TheraTx Merger was completed. TheraTx primarily
provided rehabilitation and respiratory therapy management services and
operated 26 nursing centers with annualized revenues approximating $425
million. See Note 5 of the Notes to Condensed Consolidated Financial
Statements.
On June 24, 1997, the Company acquired a controlling interest in
Transitional and, on August 26, 1997, completed the Transitional Merger.
Transitional primarily operated 19 long-term acute care hospitals with
annualized revenues approximating $350 million. See Note 6 of the Notes to
Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
A summary of revenues follows (dollars in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER
------------------ %
1998 1997 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Hospitals...................................... $246,365 $154,900 59.0
Nursing centers................................ 434,190 404,253 7.4
Vencare........................................ 169,773 119,046 42.6
Atria.......................................... - 14,217
-------- --------
850,328 692,416 22.8
Elimination.................................... (27,012) (11,720)
-------- --------
$823,316 $680,696 21.0
======== ========
</TABLE>
Hospital revenue increases in the first quarter of 1998 resulted primarily
from the Transitional Merger and an increase in patient days and improved
patient mix. Revenues attributable to the Transitional Merger were $69.6
million. Hospital patient days rose 55% to 248,249 from 159,853 in the same
period last year. Non-Medicaid patient days (for which payment rates are
generally higher than Medicaid) increased 59% to 219,714 in the first quarter
of 1998, while Medicaid patient days increased 31% to 28,535.
Excluding the effect of sales and acquisitions, nursing center revenues
increased 3% over the first quarter of 1997. Revenue growth was adversely
impacted by a 2% decline in private patient days in the first quarter 1998. In
an effort to attract increased volumes of Medicare and private pay patients,
the Company began implementing a plan in 1996 to expend approximately $200
million by the end of 1998 to improve existing facilities and expand the range
of services provided to accommodate higher acuity patients.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Vencare revenues include $60.3 million related to contract rehabilitation
therapy and certain other ancillary service businesses acquired as part of the
TheraTx Merger. Vencare ancillary service contracts in effect at March 31,
1998 totaled 3,738 compared to 4,946 at March 31, 1997. During 1997, the
Company terminated approximately 700 contracts which did not meet certain
growth criteria and eliminated approximately 670 contracts by combining
previously separate pharmacy, enteral and infusion therapy contracts. These
transactions did not materially impact Vencare operating results. Pharmacy
revenues (included in Vencare operations) declined 3% to $40.1 million in the
first quarter of 1998 from $41.5 million in the same period last year.
In 1997, the Company initiated the marketing of its Vencare full-service
ancillary services contracts to provide a full range of services to nursing
centers not operated by the Company. The change in the Company's marketing
strategy for selling ancillary services was developed in response to the
anticipated prospective payment system established under the Balanced Budget
Act of 1997 (the "Budget Act"). The Company believes that by bundling services
through one provider, nursing centers can provide quality patient care more
efficiently with the added benefit of centralized patient medical records.
Under the new prospective payment system, ancillary services provided by
nursing centers will be subject to fixed payments. In this new environment,
the Company believes that its full-service ancillary services contracts will
enhance the ability of nursing center operators to manage effectively the
costs of providing quality patient care.
First quarter 1998 income from operations totaled $18.9 million ($0.28 per
diluted share), down 44% from $34.0 million ($0.48 per diluted share) for the
same period in 1997. During the first quarter of 1998, the Company incurred
non-recurring charges of $7.7 million net of tax, or $0.11 per diluted share,
for professional and administrative expenses related to the Reorganization
Transactions. The Company expects to record additional costs associated with
the consummation of the Reorganization Transactions in the second quarter of
1998.
Excluding non-recurring charges, the decline in operating income was
attributable to growth in costs, primarily information systems, related to
anticipated changes in the Company's nursing center and Vencare businesses
resulting from the provisions of the Budget Act. Management believes that
these cost increases will continue for the remainder of 1998.
During the first quarter of 1997, the Company recorded an after-tax loss of
$2.3 million ($0.03 per share) in connection with the refinancing of the bank
credit agreements of both the Company and TheraTx.
LIQUIDITY
Cash provided by operations totaled $58.0 million for the first quarter of
1998 compared to $60.0 million for the same period of 1997. Days of revenues
in accounts receivable decreased to 66 at March 31, 1998 compared to 67 at
December 31, 1997.
Working capital totaled $395.8 million at March 31, 1998 compared to $445.1
million at December 31, 1997. At March 31, 1998, available borrowings under
the Company's $2.0 billion credit facility (the "Credit Facility")
approximated $817 million. Management believes that cash flows from operations
and amounts available under the Credit Facility are sufficient to meet the
Company's future expected liquidity needs.
At March 31, 1998, the Company's ratio of debt to debt and equity
approximated 68%. Management intends to reduce the Company's future leverage
through, among other things, the sale of Atria common stock. See Note 11 of
the Notes to Condensed Consolidated Financial Statements.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $78.7 million for the
first quarter of 1998 compared to $60.9 million for the same period of 1997.
Planned capital expenditures in 1998 (excluding acquisitions) are expected to
approximate $250 million to $300 million and include significant expenditures
related to nursing center improvements, construction of additional nursing
centers, information systems and administrative facilities. Management
believes that its capital expenditure program is adequate to expand, improve
and equip existing facilities. At March 31, 1998, the estimated cost to
complete and equip construction in progress approximated $158 million.
In March 1997, the Company expended approximately $359.4 million in
connection with the TheraTx Merger. This acquisition was financed primarily
through the issuance of long-term debt. See Note 5 of the Notes to Condensed
Consolidated Financial Statements for a discussion of the acquisition.
The Company also expended $12.3 million and $9.7 million for acquisitions of
new facilities (and related healthcare businesses) and previously leased
nursing centers during the first quarters of 1998 and 1997, respectively.
Subject to certain limitations related to management's plans to reduce long-
term debt discussed above, the Company may acquire additional hospitals,
nursing centers and ancillary service businesses in the future.
Capital expenditures were financed primarily through internally generated
funds and, in 1997, from the issuance of long-term debt. The Company intends
to finance a substantial portion of its future capital expenditures with
internally generated funds and long-term debt. Sources of capital include
available borrowings under the Credit Facility, public or private debt and
equity.
HEALTHCARE LEGISLATION
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contains extensive changes to the Medicare
and Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
over the next five years. Under the Budget Act, annual growth rates for
Medicare will be reduced from over 10% to approximately 7.5% for the next five
years based on specific program baseline projections from the last five years.
Virtually all spending reductions will come from providers and changes in
program components. The Budget Act will affect reimbursement systems for each
of the Company's operating units.
The Budget Act will reduce payments to many of the Company's facilities,
including, but not limited to, payments made to the Company's hospitals, by
reducing incentive payments pursuant to the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"), allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a
prospective payment system ("PPS") hospital. The reductions in allowable costs
for capital expenditures became effective October 1, 1997. The reductions in
the TEFRA incentive payments and allowable costs for bad debts are expected to
be effective beginning on September 1, 1998 with respect to the Company's
hospitals. The reductions for payments for services to patients transferred
from a PPS hospital are expected to be effective October 1, 1998. The Budget
Act also requires the establishment of a prospective payment system for
nursing centers for cost reporting periods beginning on or after July 1, 1998.
During the first three years, the per diem rates for nursing centers will be
based on a blend of facility-specific costs and Federal costs. Thereafter, the
per diem rates will be based solely on Federal costs. The rates for such
services were published on May 5, 1998 and will become effective for cost
reporting periods beginning on or after July 1, 1998. The payment received
under the new prospective payment system will cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy,
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HEALTHCARE LEGISLATION (CONTINUED)
occupational therapy, speech therapy and certain covered drugs. There can be
no assurance that payments under governmental and private third-party payor
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. In addition, there can be no assurance that
facilities leased by the Company, or the provision of services and supplies by
the Company, will meet the requirements for participation in such programs.
The Company could be adversely affected by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. The Budget Act also requires an
adjustment to the prospective payment system for home health services for cost
reporting periods beginning on or after October 1, 1997. The new system will
adjust per visit limits and establish per beneficiary annual spending limits.
A prospective payment system for home health services will be established by
October 1, 1999.
Management believes that the Budget Act will adversely impact its hospital
business by reducing the payments previously described. Based on information
currently available, management believes that the new prospective payment
system will benefit nursing center operations because (i) management believes
that the average acuity levels of its patients will exceed the national
average (which should result in increased payments per patient day) and (ii)
because the Company expects to benefit from its ability to reduce the cost of
providing ancillary services to patient in its facilities. The new Medicare
prospective payment rates and related patient acuity measures were published
by HCFA on May 5, 1998. At this time, management has begun its evaluation of
the prospective payment rates and related patient acuity measures but has not
reached a conclusion as to their impact on nursing center operations. As the
nursing center industry adapts to the cost containment measures inherent in
the new prospective payment system, management believes that the volume of
ancillary services provided per patient day to nursing center patients could
decline. In addition, as a result of these changes, many nursing centers may
elect to provide ancillary services to their patients through internal staff
and will no longer contract with outside parties for ancillary services. For
these reasons and others, since the enactment of the Budget Act, sales of new
contracts have declined and may continue to decline subject to the Company's
success in implementing its Vencare comprehensive, full-service contracts
sales strategy. The Company is developing, and will be actively implementing,
strategies and operational modifications to address changes in the Federal
reimbursement system.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised existing limits for
physical and respiratory therapy services. The limits are based on a blend of
data from wage rates for hospitals and nursing centers, and include salary,
fringe benefit and expense factors. Rates are defined by specific geographic
market areas, based upon a modified version of the hospital wage index. The
new limits are effective for services provided on or after April 1, 1998 and
are expected to impact negatively Vencare operating results in 1998. The
Company will continue to charge client nursing centers in accordance with the
revised guidelines until such nursing centers transition to the new
prospective payment system. Under the new prospective payment system for
nursing centers, the reimbursement for these services provided to nursing
center patients will be a component of the total reimbursement allowed per
nursing center patient and the salary equivalency guidelines will no longer be
applicable. Most of the Company's client nursing centers are expected to
transition to the new prospective payment system on or before January 1, 1999.
There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and
to make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in Medicaid reimbursement
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HEALTHCARE LEGISLATION (CONTINUED)
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
Medicare revenues as a percentage of total revenues were 35% and 34% for the
three months ended March 31, 1998 and 1997, respectively, while Medicaid
percentages of revenues approximated 25% and 29% for the respective periods.
REORGANIZATION TRANSACTIONS
On April 30, 1998, the Company completed its internal reorganization and the
refinancing of all of its long-term debt necessary to complete the spin-off of
its healthcare operations through the distribution of the common stock of New
Vencor. The previously announced distribution of one share of New Vencor
common stock for each share of the Company's common stock was made on May 1,
1998. The Company retained substantially all of its real property, buildings
and other improvements (primarily long-term hospitals and nursing centers),
and leases these facilities to New Vencor. In connection with the
Reorganization Transactions, the Company was renamed Ventas, Inc.
Following the Reorganization Transactions, the Company will operate as a
self-administered, self-managed realty company. The Company expects that it
will be taxed as a real estate investment trust for Federal income tax
purposes commencing on January 1, 1999. The Company's properties include 46
long-term acute care hospitals and 218 nursing centers in 36 states. The
Company's primary source of revenue will be the annual base rent payments
under the leases with New Vencor.
OTHER INFORMATION
On April 20, 1998, Atria announced that it entered into a definitive merger
agreement with Kapson, under which Kapson will acquire Atria. Under the terms
of the merger agreement, a subsidiary of Kapson will merge into Atria and the
public stockholders of Atria will receive $20.25 per share in cash. The
Company, which currently owns 10 million shares of Atria common stock, will
also receive $20.25 per share in cash for approximately 88% of its Atria
common stock (valued at approximately $177.5 million). The Company will retain
its remaining shares and will beneficially own 10% of Atria following the
merger. In consideration of its continuing investment, the Company will retain
a seat on Atria's Board of Directors and is entitled to certain registration
rights with respect to its retained shares of Atria common stock. The merger
is subject to customary conditions, including approval of Atria's stockholders
and certain regulatory approvals. Proceeds from the transaction will be used
to reduce long-term debt.
The Company has initiated a program to prepare its information systems,
clinical equipment and facilities for the year 2000. An external professional
organization has been engaged to assist in the management and implementation
of this program. Management is currently implementing a plan to replace
substantially all of the Company's financial information systems before the
year 2000, the costs of which have not been determined. Most of these costs
will be capitalized and amortized over a three to five year period. Required
modifications to the Company's proprietary VenTouch(TM) and Therasys(TM)
clinical information systems are minimal and will
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INFORMATION (CONTINUED)
generally be accomplished through the use of existing internal resources.
Clinical equipment in the Company's facilities will generally be replaced or
modified as needed through the use of external professional resources.
Incremental costs to complete the necessary changes to clinical equipment
could approximate $10 million to $20 million over the next two years.
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Resolution of litigation and other loss
contingencies is not expected to have a material adverse effect on the
Company's liquidity, financial position or results of operations. See Note 10
of the Notes to Condensed Consolidated Financial Statements.
The Credit Facility contains customary covenants which require, among other
things, maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. The Company was in compliance
with all such covenants at March 31, 1998.
As discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements, on December 31, 1997, the Company was required to change the
method of computing earnings per common share on a retroactive basis. The
change in calculation method did not have a material impact on previously
reported earnings per common share.
Disclosures set forth in this Item 2 include forward-looking statements. The
Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance. Numerous factors exist
which, in some cases have affected, and in the future could cause results to
differ materially from these expectations. These statements involve risks and
uncertainties concerning the implementation and interpretation of the
healthcare reform legislation and other factors as detailed from time to time
in the Company's filings with the Securities and Exchange Commission.
18
<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>
1997 QUARTERS FIRST
-------------------------------------- QUARTER
FIRST SECOND THIRD FOURTH YEAR 1998
-------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $680,696 $778,295 $844,740 $812,273 $3,116,004 $823,316
-------- -------- -------- -------- ---------- --------
Salaries, wages and benefits..... 396,573 449,806 479,962 461,712 1,788,053 480,364
Supplies......................... 66,033 77,328 81,148 78,631 303,140 76,052
Rent............................. 18,948 21,783 23,954 24,789 89,474 24,135
Other operating expenses......... 109,786 118,935 131,977 129,629 490,327 127,258
Depreciation and amortization.... 24,372 29,479 33,385 36,629 123,865 35,470
Interest expense................. 10,660 20,674 34,773 36,629 102,736 37,195
Investment income................ (1,567) (1,746) (1,759) (985) (6,057) (1,180)
Non-recurring transactions....... - - - - - 7,664
-------- -------- -------- -------- ---------- --------
624,805 716,259 783,440 767,034 2,891,538 786,958
-------- -------- -------- -------- ---------- --------
Income before income taxes....... 55,891 62,036 61,300 45,239 224,466 36,358
Provision for income taxes....... 21,909 25,026 24,398 18,005 89,338 17,477
-------- -------- -------- -------- ---------- --------
Income from operations........... 33,982 37,010 36,902 27,234 135,128 18,881
Extraordinary loss on extinguish-
ment of debt, net of income tax
benefit......................... (2,259) (1,590) (346) - (4,195) -
-------- -------- -------- -------- ---------- --------
Net income.................... $ 31,723 $ 35,420 $ 36,556 $ 27,234 $ 130,933 $ 18,881
======== ======== ======== ======== ========== ========
Earnings per common share:
Basic:
Income from operations......... $ 0.49 $ 0.53 $ 0.53 $ 0.40 $ 1.96 $ 0.28
Extraordinary loss on
extinguishment of debt........ (0.03) (0.02) - - (0.06) -
-------- -------- -------- -------- ---------- --------
Net income.................... $ 0.46 $ 0.51 $ 0.53 $ 0.40 $ 1.90 $ 0.28
======== ======== ======== ======== ========== ========
Diluted:
Income from operations......... $ 0.48 $ 0.52 $ 0.52 $ 0.40 $ 1.92 $ 0.28
Extraordinary loss on
extinguishment of debt........ (0.03) (0.02) (0.01) - (0.06) -
-------- -------- -------- -------- ---------- --------
Net income.................... $ 0.45 $ 0.50 $ 0.51 $ 0.40 $ 1.86 $ 0.28
======== ======== ======== ======== ========== ========
Shares used in computing earnings
per common share:
Basic........................... 68,929 69,194 69,519 68,048 68,938 67,448
Diluted......................... 70,207 71,016 71,266 68,613 70,359 67,857
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTERS FIRST
------------------------------------------ QUARTER
FIRST SECOND THIRD FOURTH YEAR 1998
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES (IN THOUSANDS):
Hospitals............... $ 154,900 $ 165,794 $ 233,993 $ 231,142 $ 785,829 $ 246,365
Nursing centers......... 404,253 432,325 445,943 439,895 1,722,416 434,190
Vencare................. 119,046 182,016 183,187 158,222 642,471 169,773
Atria................... 14,217 16,982 - - 31,199 -
--------- --------- --------- --------- ---------- ---------
692,416 797,117 863,123 829,259 3,181,915 850,328
Elimination............. (11,720) (18,822) (18,383) (16,986) (65,911) (27,012)
--------- --------- --------- --------- ---------- ---------
$ 680,696 $ 778,295 $ 844,740 $ 812,273 $3,116,004 $ 823,316
========= ========= ========= ========= ========== =========
HOSPITAL DATA:
End of period data:
Number of hospitals.... 38 58 60 60 62
Number of licensed
beds.................. 3,325 5,107 5,302 5,273 5,313
Revenue mix %:
Medicare............... 64 61 65 62 63 60
Medicaid............... 10 9 8 7 8 8
Private and other...... 26 30 27 31 29 32
Patient days:
Medicare............... 106,646 107,799 152,640 153,059 520,144 173,967
Medicaid............... 21,705 23,170 24,339 27,276 96,490 28,535
Private and other...... 31,502 32,358 42,265 45,051 151,176 45,747
--------- --------- --------- --------- ---------- ---------
159,853 163,327 219,244 225,386 767,810 248,249
========= ========= ========= ========= ========== =========
NURSING CENTER DATA:
End of period data:
Number of nursing cen-
ters.................. 314 311 310 309 305
Number of licensed
beds.................. 40,942 40,869 40,608 40,383 39,960
Revenue mix %:
Medicare............... 32 32 33 31 32 34
Medicaid............... 43 42 42 44 43 41
Private and other...... 25 26 25 25 25 25
Patient days:
Medicare............... 406,642 417,336 400,798 385,694 1,610,470 408,002
Medicaid............... 1,962,287 2,039,999 2,078,236 2,071,981 8,152,503 1,949,544
Private and other...... 663,575 734,593 729,289 731,808 2,859,265 692,932
--------- --------- --------- --------- ---------- ---------
3,032,504 3,191,928 3,208,323 3,189,483 12,622,238 3,050,478
========= ========= ========= ========= ========== =========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare sin-
gle service contracts. 4,946 4,524 4,160 3,846 3,639
Number of Vencare full
service contracts..... - - - 31 99
--------- --------- --------- --------- ---------
4,946 4,524 4,160 3,877 3,738
========= ========= ========= ========= =========
</TABLE>
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, AHCA imposed a fine of $270,000 for related regulatory violations.
In addition, HCFA has imposed a fine of $10,000 per day, effective from March
30, 1998 and continuing until April 9, 1998 at which time the facility was
determined to have removed any "immediate jeopardy" to patients. A fine of $50
per day became effective on April 10, 1998 and will continue until the
facility has achieved substantial compliance. If substantial compliance is not
achieved by October 9, 1998, the facility's Medicare and Medicaid provider
agreements could be terminated. The Company instituted a plan of correction at
the Tampa nursing center to respond to the findings of AHCA and HCFA. AHCA
also has changed the rating of the nursing center's license to conditional.
The Company has appealed these regulatory sanctions. The Company believes that
it has submitted an acceptable plan of correction which will terminate the
running of per day fines and avoid the termination of the Tampa nursing
center's provider agreements. The Company is awaiting decisions from HCFA and
AHCA and no assurance can be given that the plan will be accepted.
The Florida Attorney General's office and the Tampa Prosecuting Attorney's
office have indicated to the Company that they are conducting independent
civil and criminal investigations into the circumstances surrounding the Tampa
resident discharges. The Company is cooperating fully with the ongoing
investigations.
In addition to its action with the nursing center in Tampa, Florida, the
HCFA Administrator of the Medicare and Medicaid programs recently indicated
that the Company's facilities in other states also are being monitored. The
Company has not received notice that any other state has instituted an
investigation into any similar issues at another Company facility. However,
there can be no assurances that HCFA or other regulators in other
jurisdictions will not initiate investigations relating to this matter or
other circumstances, and there can be no assurance that the results of any
such investigations would not have a material adverse effect on the Company.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide. The complaint alleges
various breaches of contract, and statutory and regulatory violations
including violations of Federal and state RICO statutes. The plaintiffs seek
class certification, unspecified damages, attorneys' fees and costs. The
Company intends to defend vigorously this action.
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business.
The Company believes that all such claims and actions currently pending
against it either are adequately covered by insurance or would not have a
material adverse effect on the Company if decided in a manner unfavorable to
the Company. In addition, the Company is subject regularly to inquiries,
investigations and audits by Federal and state agencies that oversee various
healthcare regulations and laws.
21
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Third Amended and Restated Bylaws of the Company. Exhibit 3.2 to
the Company's Form 10-K for the year ended December 31, 1997
(Comm. File No. 1-10989) is hereby incorporated by reference.
27 Financial Data Schedule (included only in filings submitted under
the Electronic Data Gathering, Analysis and Retrieval system).
27.1 Amended Financial Data Schedule (included only in filings
submitted under the Electronic Data Gathering, Analysis and
Retrieval system).
(B) REPORTS ON FORM 8-K:
The Company filed on February 3, 1998 a Current Report on Form 8-K dated
February 1, 1998 announcing the Company's intention to separate into two
public companies by a distribution to stockholders of the common stock of a
newly created operating company and that it had filed a preliminary proxy
statement in connection with the proposed distribution.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENTAS, INC.
Date: May 14, 1998 /s/ W. BRUCE LUNSFORD
- ------------------ ---------------------------------
W. Bruce Lunsford
Chairman of the Board
and Chief Executive Officer
Date: May 14, 1998 /s/ THOMAS T. LADT
- ------------------ ---------------------------------
Thomas T. Ladt
President and Chief Operating
Officer*
* The Company does not currently employ an officer designated as its principal
financial or chief accounting officer. In the interim, Mr. Ladt's overall
responsibilities include the functions of the principal financial officer on
behalf of the Company.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENTAS, INC.'S
(FORMERLY VENCOR, INC.) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 51,165
<SECURITIES> 0
<RECEIVABLES> 633,775
<ALLOWANCES> (68,428)
<INVENTORY> 27,683
<CURRENT-ASSETS> 836,173
<PP&E> 2,089,991
<DEPRECIATION> (518,895)
<TOTAL-ASSETS> 3,388,237
<CURRENT-LIABILITIES> 440,392
<BONDS> 1,920,901
0
0
<COMMON> 18,388
<OTHER-SE> 912,445
<TOTAL-LIABILITY-AND-EQUITY> 3,388,237
<SALES> 0
<TOTAL-REVENUES> 823,316
<CGS> 0
<TOTAL-COSTS> 580,551
<OTHER-EXPENSES> 120,064
<LOSS-PROVISION> 7,194
<INTEREST-EXPENSE> 37,195
<INCOME-PRETAX> 36,358
<INCOME-TAX> 17,477
<INCOME-CONTINUING> 18,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,881
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS AMENDED SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 111,315
<SECURITIES> 0
<RECEIVABLES> 584,253
<ALLOWANCES> (40,218)
<INVENTORY> 32,848
<CURRENT-ASSETS> 841,009
<PP&E> 1,792,342
<DEPRECIATION> (438,460)
<TOTAL-ASSETS> 2,660,706
<CURRENT-LIABILITIES> 413,319
<BONDS> 1,286,843
0
0
<COMMON> 18,182
<OTHER-SE> 815,301
<TOTAL-LIABILITY-AND-EQUITY> 2,660,706
<SALES> 0
<TOTAL-REVENUES> 680,696
<CGS> 0
<TOTAL-COSTS> 481,554
<OTHER-EXPENSES> 106,171
<LOSS-PROVISION> 3,615
<INTEREST-EXPENSE> 10,660
<INCOME-PRETAX> 55,891
<INCOME-TAX> 21,909
<INCOME-CONTINUING> 33,982
<DISCONTINUED> 0
<EXTRAORDINARY> (2,259)
<CHANGES> 0
<NET-INCOME> 31,723
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
</TABLE>
