--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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: 001-14057
KINDRED HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1323993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
680 South Fourth Street
Louisville, KY 40202-2412
(Address of principal executive offices) (Zip Code)
(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 by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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 July 31, 2001
--------------------- ----------------------------
Common stock, $0.25 par value 15,600,000 shares
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1 of 42
KINDRED HEALTHCARE, INC.
FORM 10-Q/A
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations:
Reorganized Company -- for the three months ended June 30, 2001
Predecessor Company -- for the three months ended June 30, 2000 (restated) and
March 31, 2001 and the six months ended June 30, 2000 (restated).................... 3
Condensed Consolidated Balance Sheets:
Reorganized Company -- June 30, 2001
Predecessor Company -- December 31, 2000 (restated)................................... 4
Condensed Consolidated Statement of Cash Flows:
Reorganized Company -- for the three months ended June 30, 2001
Predecessor Company -- for the three months ended June 30, 2000 (restated) and
March 31, 2001 and the six months ended June 30, 2000 (restated).................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 41
2
KINDRED HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Reorganized |
Company | Predecessor Company
------------ | ------------------------------------
Three months | Three months Three months Six months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
------------ | ------------ ------------ ----------
| (Restated--see (Restated)
| Note 2)
Revenues.................... $770,764 | $713,424 $752,409 $1,428,880
-------- | -------- -------- ----------
Salaries, wages and |
benefits................... 432,182 | 392,383 427,649 797,696
Supplies.................... 96,043 | 94,619 94,319 188,017
Rent........................ 64,580 | 76,788 76,995 153,008
Other operating expenses.... 127,655 | 122,770 126,701 245,359
Depreciation and |
amortization............... 15,886 | 18,168 18,645 36,070
Interest expense............ 8,463 | 14,663 14,000 30,902
Investment income........... (3,438) | (1,012) (1,919) (2,218)
-------- | -------- -------- ----------
741,371 | 718,379 756,390 1,448,834
-------- | -------- -------- ----------
Income (loss) before |
reorganization items and |
income taxes............... 29,393 | (4,955) (3,981) (19,954)
Reorganization items........ - | 2,530 (53,666) 5,595
-------- | -------- -------- ----------
Income (loss) before income |
taxes...................... 29,393 | (7,485) 49,685 (25,549)
Provision for income taxes.. 12,904 | 500 500 1,000
-------- | -------- -------- ----------
Income (loss) from |
operations before |
extraordinary items...... 16,489 | (7,985) 49,185 (26,549)
Extraordinary gain on |
extinguishment of debt..... 1,396 | - 422,791 -
-------- | -------- -------- ----------
Net income (loss)......... 17,885 | (7,985) 471,976 (26,549)
Preferred stock dividend |
requirements............... - | (262) (261) (523)
-------- | -------- -------- ----------
Income (loss) available to |
common stockholders...... $ 17,885 | $ (8,247) $471,715 $ (27,072)
======== | ======== ======== ==========
Earnings (loss) per common |
share: |
Basic: |
Income (loss) from |
operations before |
extraordinary items...... $ 1.09 | $ (0.12) $ 0.69 $ (0.39)
Extraordinary gain on |
extinguishment of debt... 0.09 | - 6.02 -
-------- | -------- -------- ----------
Net income (loss)........ $ 1.18 | $ (0.12) $ 6.71 $ (0.39)
======== | ======== ======== ==========
Diluted: |
Income (loss) from |
operations before |
extraordinary items...... $ 1.00 | $ (0.12) $ 0.69 $ (0.39)
Extraordinary gain on |
extinguishment of debt... 0.08 | - 5.90 -
-------- | -------- -------- ----------
Net income (loss)........ $ 1.08 | $ (0.12) $ 6.59 $ (0.39)
======== | ======== ======== ==========
Shares used in computing |
earnings (loss) per |
common share: |
Basic...................... 15,090 | 70,147 70,261 70,194
Diluted.................... 16,533 | 70,147 71,656 70,194
See accompanying notes.
3
KINDRED HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
Reorganized | Predecessor
Company | Company
----------- | ------------
June 30, | December 31,
2001 | 2000
----------- | ------------
| (Restated)
ASSETS |
Current assets: |
Cash and cash equivalents................................ $ 102,823 | $ 184,642
Cash-restricted (see Note 12)............................ 55,442 | 10,674
Insurance subsidiary investments......................... 98,810 | 62,453
Accounts receivable less allowance for loss.............. 414,942 | 322,483
Inventories.............................................. 29,685 | 29,707
Other.................................................... 60,607 | 85,893
---------- | ----------
762,309 | 695,852
|
Property and equipment.................................... 456,126 | 693,586
Accumulated depreciation.................................. (13,596) | (300,881)
---------- | ----------
442,530 | 392,705
Reorganized value in excess of amounts allocable to |
identifiable assets...................................... 155,984 | -
Goodwill.................................................. - | 159,277
Other..................................................... 73,951 | 86,580
---------- | ----------
$1,434,774 | $1,334,414
========== | ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
Current liabilities: |
Accounts payable......................................... $ 90,896 | $ 115,468
Salaries, wages and other compensation................... 192,026 | 184,860
Due to third-party payors................................ 39,969 | 44,561
Other accrued liabilities................................ 170,779 | 81,452
Income taxes............................................. 30,796 | 2,350
Long-term debt due within one year....................... 498 | -
---------- | ----------
524,964 | 428,691
|
Long-term debt............................................ 302,038 | -
Professional liability risks.............................. 113,829 | 101,209
Deferred credits and other liabilities.................... 31,407 | 14,132
Liabilities subject to compromise......................... - | 1,260,373
|
Series A preferred stock (subject to compromise at |
December 31, 2000)....................................... - | 1,743
|
Contingencies |
|
Stockholders' equity (deficit): |
Reorganized Company common stock, $0.25 par value; |
authorized 39,000 shares; |
issued 15,600 shares -- June 30......................... 3,900 | -
Predecessor Company common stock, $0.25 par value; |
authorized 180,000 shares; |
issued 70,261 shares -- December 31..................... - | 17,565
Capital in excess of par value........................... 460,473 | 667,168
Deferred compensation.................................... (19,722) | -
Retained earnings (accumulated deficit).................. 17,885 | (1,156,467)
---------- | ----------
462,536 | (471,734)
---------- | ----------
$1,434,774 | $1,334,414
========== | ==========
See accompanying notes.
|
4
KINDRED HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Reorganized |
Company | Predecessor Company
------------ | ------------------------------------
Three months | Three months Three months Six months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
------------ | ------------ ------------ ----------
| (Restated) (Restated)
Cash flows from operating |
activities: |
Net income (loss)....................... $ 17,885 | $ (7,985) $ 471,976 $(26,549)
Adjustments to reconcile net |
income (loss) to net |
cash provided by operating |
activities: |
Depreciation and amortization.......... 15,886 | 18,168 18,645 36,070
Provision for doubtful accounts........ 8,740 | 8,567 6,305 17,368
Extraordinary gain on extinguishment |
of debt............................... (2,271) | - (422,791) -
Unusual transactions................... - | (4,535) - (4,535)
Reorganization items................... - | 2,530 (53,666) 5,595
Other.................................. 271 | 7,267 1,357 10,853
Changes in operating assets |
and liabilities: |
Accounts receivable................... (19,698) | 11,667 (14,668) 9,816
Inventories and other assets.......... 10,954 | 2,235 12,476 (462)
Accounts payable...................... (3,034) | 6,874 (10,845) 6,487
Income taxes.......................... 13,079 | 788 108 1,563
Due to third-party |
payors............................... (13,886) | (23,186) 2,051 (10,551)
Other accrued liabilities............. 37,061 | 42,357 28,628 64,103
-------- | -------- --------- --------
Net cash provided by operating |
activities before reorganization |
items............................... 64,987 | 64,747 39,576 109,758
Payment of reorganization |
items.................................. (24,723) | (1,371) (3,745) (3,719)
-------- | -------- --------- --------
Net cash provided by operating |
activities.......................... 40,264 | 63,376 35,831 106,039
-------- | -------- --------- --------
Cash flows from investing |
activities: |
Purchase of property and |
equipment.............................. (25,639) | (14,073) (22,038) (22,323)
Sale of investment in |
Behavioral Healthcare |
Corporation............................ 40,000 | - - -
Sale of other assets.................... 5,162 | 10,715 - 13,069
Surety bond deposits.................... (300) | (200) - (4,147)
Net change in investments............... (45,985) | (7,915) (28,178) (30,485)
Other................................... 165 | 285 224 1,987
-------- | -------- --------- --------
Net cash used in investing |
activities.......................... 26,597) | (11,188) (49,992) (41,899)
-------- | -------- --------- --------
Cash flows from financing |
activities: |
Repayment of long-term |
debt................................... (59,386) | (4,350) (4,355) (10,061)
Payment of debtor-in |
possession deferred |
financing costs........................ - | - (100) (600)
Other................................... (6,612) | (6,598) (5,971) (18,683)
-------- | -------- --------- --------
Net cash used in financing |
activities.......................... (65,998) | (10,948) (10,426) (29,344)
-------- | -------- --------- --------
Change in cash and cash |
equivalents............................. (52,331) | 41,240 (24,587) 34,796
Cash and cash equivalents at |
beginning of period..................... 155,154 | 141,906 184,642 148,350
-------- | -------- --------- --------
Cash and cash equivalents at |
end of period........................... $102,823 | $183,146 $ 160,055 $183,146
======== | ======== ========= ========
Supplemental information: |
Interest payments....................... $ 950 | $ 2,720 $ 2,606 $ 6,164
Income tax payments |
(refunds).............................. 749 | (229) 392 (504)
See accompanying notes.
5
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
Business
Kindred Healthcare, Inc. ("Kindred" or the "Company") (formerly Vencor,
Inc.) provides long-term healthcare services primarily through the operation of
nursing centers and hospitals. At June 30, 2001, the Company's health services
division operated 315 nursing centers in 32 states and a rehabilitation therapy
business. The Company's hospital division operated 56 hospitals in 23 states
and an institutional pharmacy business.
Reorganization
On April 20, 2001 (the "Effective Date"), the Company and its subsidiaries
emerged from proceedings under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") pursuant to the terms of its Amended Plan (as defined).
On March 1, 2001, the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") approved the Company's fourth amended plan of
reorganization filed with the Bankruptcy Court on December 14, 2000, as
modified at the confirmation hearing (the "Amended Plan"). In connection with
its emergence, the Company also changed its name to Kindred Healthcare, Inc.
Since filing for protection under the Bankruptcy Code on September 13, 1999,
the Company had operated its businesses as a debtor-in-possession subject to
the jurisdiction of the Bankruptcy Court. Accordingly, the unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7") and generally accepted accounting
principles applicable to a going concern, which assume that assets will be
realized and liabilities will be discharged in the normal course of business.
In connection with its emergence from bankruptcy, the Company reflected the
terms of the Amended Plan in its consolidated financial statements by adopting
the fresh-start accounting provisions of SOP 90-7. Under fresh-start
accounting, a new reporting entity is deemed to be created and the recorded
amounts of assets and liabilities are adjusted to reflect their estimated fair
values. For accounting purposes, the fresh-start adjustments have been recorded
in the unaudited condensed consolidated financial statements as of April 1,
2001. Since fresh-start accounting materially changed the amounts previously
recorded in the Company's consolidated financial statements, a black line
separates the post-emergence financial data from the pre-emergence data to
signify the difference in the basis of preparation of the financial statements
for each respective entity.
As used in this Form 10-Q/A, the term "Predecessor Company" refers to the
Company and its operations for periods prior to April 1, 2001, while the term
"Reorganized Company" is used to describe the Company and its operations for
periods thereafter.
Comparability of Financial Information
The adoption of fresh-start accounting as of April 1, 2001 materially
changed the amounts previously recorded in the consolidated financial
statements of the Predecessor Company. With respect to reported operating
results, management believes that business segment operating income of the
Predecessor Company is generally comparable to that of the Reorganized Company.
However, capital costs (rent, interest, depreciation and amortization) of the
Predecessor Company that were based on pre-petition contractual agreements and
historical costs are not comparable to those of the Reorganized Company. In
addition, the reported financial position and cash flows of the Predecessor
Company for periods prior to April 1, 2001 generally are not comparable to
those of the Reorganized Company.
6
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION (Continued)
Comparability of Financial Information (Continued)
In connection with the implementation of fresh-start accounting, the Company
recorded an extraordinary gain of $422.8 million from the restructuring of its
debt in accordance with the provisions of the Amended Plan. Other significant
adjustments also were recorded to reflect the provisions of the Amended Plan
and the fair values of the assets and liabilities of the Reorganized Company as
of April 1, 2001. For accounting purposes, these transactions have been
reflected in the operating results of the Predecessor Company for the three
months ended March 31, 2001.
Spin-off
On May 1, 1998, Ventas, Inc. ("Ventas") completed the spin-off of its
healthcare operations to its stockholders through the distribution of the
Predecessor Company's equity securities (the "Spin-off"). Ventas retained
ownership of substantially all of its real property and leases such real
property to the Company. In anticipation of the Spin-off, the Company was
incorporated on March 27, 1998 as a Delaware corporation. For accounting
purposes, the consolidated historical financial statements of Ventas became the
Company's historical financial statements following the Spin-off.
New Accounting Pronouncements
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The adoption of this pronouncement did not
have a material impact on the Company's financial position or results of
operations.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141 ("SFAS 141"), "Business Combinations," which provides that all
business combinations should be accounted for using the purchase method of
accounting and establishes criteria for the initial recognition and measurement
of goodwill and other intangible assets recorded in connection with a business
combination. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001 and to all business combinations accounted for by
the purchase method that are completed after June 30, 2001.
In addition, the FASB issued in June 2001 SFAS No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," which establishes the accounting for
goodwill and other intangible assets following their recognition. SFAS 142
applies to all goodwill and other intangible assets whether acquired singly, as
part of a group, or in a business combination. SFAS 142 also applies to excess
reorganization value recognized in accordance with SOP 90-7. The new
pronouncement provides that goodwill should not be amortized but should be
tested for impairment annually using a fair-value based approach. In addition,
SFAS 142 provides that intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 142 will become effective for the
Company beginning on January 1, 2002. Upon adoption, the Company will be
required to perform a transitional impairment test for the excess
reorganization value recorded as of January 1, 2002. Any impairment loss
recorded as a result of the transitional impairment test will be treated as a
change in accounting principle. Management expects that the annual impact of
eliminating the amortization of excess reorganization value beginning on
January 1, 2002 will approximate $8 million. See Note 4.
Other Information
The accompanying unaudited condensed consolidated financial statements do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual
7
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION (Continued)
Other Information (Continued)
reports on Form 10-K. The Reorganized Company has adopted the accounting
policies of the Predecessor Company as described in the audited consolidated
financial statements of the Predecessor Company for the year ended December 31,
2000 filed with the Securities and Exchange Commission (the "Commission") on
Form 10-K/A.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the Company's customary accounting practices
and the provisions of SOP 90-7. Management believes that the financial
information included herein reflects all adjustments necessary for a fair
presentation of interim results and, except for the items described in Note 4,
all such adjustments are of a normal and recurring nature. Certain prior period
amounts have been reclassified to conform with the current presentation.
On April 20, 2001, the Company announced that PricewaterhouseCoopers LLP
("PwC") had advised the Company that certain non-audit services provided to the
Company during PwC's engagement as the Company's independent accountants by a
subsidiary of PwC in connection with the Company's efforts to sell an equity
investment raised an issue as to PwC's independence. PwC disclosed the
situation to the Commission, which is currently investigating the issue. PwC
has further advised the Company that, notwithstanding the provision of such
non-audit services, PwC was and continues to be independent accountants with
respect to the Company, and it is the present intention of PwC to sign audit
opinions and consents to incorporation as necessary in connection with
documents filed by the Company with the Commission and other third parties. The
Company cannot predict at this time how this issue will be resolved or what
impact, if any, such resolution will have on the Company's past or future
filings with the Commission and other third parties.
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On August 14, 2001, the Company announced that it will restate certain of
its previously issued consolidated financial statements. The Company recently
determined that an oversight related to the allowance for professional
liability risks had occurred in its consolidated financial statements beginning
in 1998. The oversight resulted in the understatement of the provision for
professional liability claims in 1998, 1999 and 2000 because the Company did
not record a reserve for claims incurred but not reported at the respective
balance sheet dates.
The cumulative understatement of professional liability claims reserves
approximated $5 million at December 31, 1998, $28 million at December 31, 1999
and $39 million at December 31, 2000. The previously reported cash flows of the
Company will not be affected by the restatement. The restatement of prior year
results had no effect on the Company's reported operating results for the first
or second quarters of 2001.
The unaudited condensed consolidated financial statements included herein
amend those previously included in the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 2001. Consolidated financial statement
information and related disclosures included in these amended unaudited
condensed consolidated financial statements reflect, where appropriate, changes
resulting from the restatement.
8
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 -- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
The effect of the restatement on the Company's previously issued unaudited
condensed consolidated financial statements follows (in thousands, except per
share amounts):
June 30, 2000
----------------------------------------
Three months ended Six months ended
------------------- -------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
Loss from operations.................. $(5,192) $(7,985) $(20,963) $(26,549)
Net loss.............................. (5,192) (7,985) (20,963) (26,549)
Loss per common share:
Basic:
Loss from operations................ $ (0.08) $ (0.12) $ (0.31) $ (0.39)
Net loss............................ (0.08) (0.12) (0.31) (0.39)
Diluted:
Loss from operations................ $ (0.08) $ (0.12) $ (0.31) $ (0.39)
Net loss............................ (0.08) (0.12) (0.31) (0.39)
December 31, 2000
------------------------
As
previously
reported As restated
----------- -----------
Professional liability
risks.................. $ 62,327 $ 101,209
Total liabilities....... 1,765,523 1,804,405
Accumulated deficit..... (1,117,585) (1,156,467)
Stockholders' deficit... (432,852) (471,734)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On April 20, 2001, the Company and its subsidiaries emerged from proceedings
under Chapter 11 of the Bankruptcy Code pursuant to the terms of the Amended
Plan. The Company and substantially all of its subsidiaries filed voluntary
petitions with the Bankruptcy Court for protection under Chapter 11 of the
Bankruptcy Code on September 13, 1999.
The Chapter 11 cases were consolidated for purposes of joint administration
under Case Nos. 99-3199 (MFW) through 99-3327 (MFW) (collectively, the "Chapter
11 Cases"). Following emergence, the Company is continuing to resolve proofs of
claims filed in the Chapter 11 Cases. On the Effective Date, the automatic stay
imposed by the Bankruptcy Code was terminated.
Amended Plan of Reorganization
The Amended Plan represents a consensual arrangement among Ventas, the
Company's former senior bank lenders (the "Senior Lenders"), holders of the
Company's $300 million 9 7/8% Guaranteed Senior Subordinated Notes due 2005
(the "1998 Notes"), the United States Department of Justice (the "DOJ"), acting
on behalf of the Department of Health and Human Services' Office of the
Inspector General (the "OIG"), and the Centers for Medicare and Medicaid
Services (formerly the Health Care Financing Administration) ("CMS")
(collectively, the "Government") and the advisors to the official committee of
unsecured creditors.
The following is a summary of certain material provisions of the Amended
Plan. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Amended Plan, as filed
with the Commission.
9
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
The Amended Plan provided for, among other things, the following
distributions:
Senior Lender Claims--On the Effective Date, the Senior Lenders received the
Senior Secured Notes aggregating $300 million, bearing interest at the rate of
LIBOR (as defined in the agreement) plus 4 1/2%, with a maturity of seven
years. The interest on the Senior Secured Notes will begin to accrue
approximately two quarters following the Effective Date and, in lieu of
interest payments, the Company will pay a $25.9 million obligation under the
Government Settlement (as defined) within the first two full fiscal quarters
following the Effective Date as described below. In addition, holders of the
Senior Lender claims received an aggregate distribution of 9,826,092 shares of
the new common stock of Kindred (the "Common Stock") on the Effective Date.
Subordinated Noteholder Claims--The holders of the 1998 Notes and the
remaining $2.4 million of the Company's 8 5/8% Senior Subordinated Notes due
2007 (collectively, the "Subordinated Noteholder Claims") received, in the
aggregate, 3,675,408 shares of the Common Stock on the Effective Date. In
addition, the holders of the Subordinated Noteholder Claims received warrants
issued by the Company for the purchase of an aggregate of 7,000,000 shares of
Common Stock, with a five-year term, comprised of warrants to purchase
2,000,000 shares at a price per share of $30.00 and warrants to purchase
5,000,000 shares at a price per share of $33.33 (collectively, the "Warrants").
Ventas Claim--Ventas received the following treatment under the Amended
Plan:
On the Effective Date, the four master leases and a single facility lease
with Ventas were assumed and simultaneously amended and restated as the Amended
Leases. The principal economic terms of the Amended Leases are as follows:
(1)A decrease of $52 million in the aggregate minimum rent from the
annual rent as of May 1, 1999 to a new initial aggregate minimum rent of
$174.6 million (subject to the escalation described below).
(2)Annual aggregate minimum rent payable in cash will escalate at an
annual rate of 3.5% over the prior period annual aggregate minimum rent
for the period from May 1, 2001 through April 30, 2004. Thereafter,
annual aggregate minimum rent payable in cash will escalate at an annual
rate of 2.0%, plus an additional annual accrued escalator amount of 1.5%
of the prior period annual aggregate minimum rent which will accrete
from year to year (with an interest accrual at LIBOR plus 4 1/2%). All
accrued rent will be payable upon the repayment or refinancing of the
Senior Secured Notes, after which the annual aggregate minimum rent
payable in cash will escalate at an annual rate of 3.5% and there will
be no further accrual feature. The annual escalator in each period is
contingent upon the attainment of certain financial targets as described
in the Amended Leases.
(3)A one-time option, that can be exercised by Ventas 5 1/4 years after
the Effective Date, to reset the annual aggregate minimum rent under one
or more of the Amended Leases to the then current fair market rental in
exchange for a payment of $5 million (or a pro rata portion thereof if
fewer than all of the Amended Leases are reset) to the Company.
(4)Under the Amended Leases, the "Event of Default" provisions also were
substantially modified and provide Ventas with more flexibility in
exercising remedies for events of default.
In addition to the Amended Leases, Ventas received a distribution of
1,498,500 shares of the Common Stock on the Effective Date.
10
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
Ventas and the Company also entered into a tax escrow agreement as of the
Effective Date that provides for the escrow of approximately $30 million of
federal, state and local refunds until the expiration of the applicable
statutes of limitation for the auditing of the refund applications (the "Tax
Escrow Agreement"). The escrowed funds will be available for the payment of
certain tax deficiencies during the escrow period except that all interest
paid by the government in connection with any refund or earned on the escrowed
funds will be distributed equally to the parties. At the end of the escrow
period, the Company and Ventas will each be entitled to 50% of any proceeds
remaining in the escrow account.
All agreements and indemnification obligations between the Company and
Ventas, except those modified by the Amended Plan, were assumed by the Company
as of the Effective Date.
United States Claims--The claims of the Government (other than claims of
the Internal Revenue Service and criminal claims, if any) were settled through
a government settlement with the Company and Ventas which was effectuated
through the Amended Plan (the "Government Settlement").
Under the Government Settlement, the Company will pay the Government a
total of $25.9 million as follows:
(1)$10 million was paid on the Effective Date, and
(2)an aggregate of $15.9 million will be paid during the first two full
fiscal quarters following the Effective Date, plus accrued interest at the
rate of 6% per annum beginning as of the Effective Date.
Under the Government Settlement, Ventas will pay the Government a total of
$103.6 million as follows:
(1)$34 million was paid on the Effective Date, and
(2)the remainder will be paid over five years, bearing interest at the rate
of 6% per annum beginning as of the Effective Date.
In addition, the Company agreed to repay the remaining balance of the
obligations owed to CMS (approximately $59 million as of the Effective Date)
pursuant to the terms previously agreed to by the Company (the "CMS
Agreement").
As previously announced, the Company entered into a Corporate Integrity
Agreement with the OIG as part of the overall Government Settlement. The
Corporate Integrity Agreement became effective on the Effective Date. The
Government Settlement also provides for the dismissal of certain pending
claims and lawsuits filed against the Company. See Note 11.
General Unsecured Creditors Claims--The general unsecured creditors of the
Company will be paid the full amount of their allowed claims existing as of
the date of the Company's filing for protection under the Bankruptcy Code.
These amounts generally will be paid in equal quarterly installments over
three years beginning on September 30, 2001. The Company will pay interest on
these claims at the rate of 6% per annum
from the Effective Date, subject to certain exceptions. A convenience class of
unsecured creditors, consisting of creditors holding allowed claims in an
amount less than or equal to $3,000, were paid in full within 30 days of the
Effective Date.
Preferred Stockholder and Common Stockholder Claims--The holders of
preferred stock and common stock of the Company prior to the Effective Date
did not receive any distributions under the Amended Plan. The former preferred
stock and common stock were canceled on the Effective Date.
11
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
Amended Plan of Reorganization (Continued)
Other Significant Provisions--As of the Effective Date, the board of
directors of the Company consisted of seven members: Edward L. Kuntz, Chairman
of the Board of Directors, Jeff Altman of Franklin Mutual Advisors, L.L.C.,
James Bolin of Appaloosa Management, L.P., Garry N. Garrison, Isaac Kaufman of
Advanced Medical Management, Inc., John H. Klein of SBTS and David Tepper of
Appaloosa Management, L.P.
A restricted share plan was approved under the Amended Plan that provided
for the issuance of 600,000 shares of Common Stock to certain key employees of
the Company. The restricted shares are non-transferable and subject to
forfeiture until they have vested generally over a four-year period. In
addition, a new stock option plan was approved under the Amended Plan for the
issuance of stock options for up to 600,000 shares of Common Stock to certain
key employees of the Company. The Amended Plan also approved the Vencor, Inc.
2000 Long-Term Incentive Plan that provides cash bonus awards to certain key
employees on the attainment by the Company of specified performance goals, and
also provided for the continuation of the Company's management retention plan
and the payment of certain performance bonuses on the Effective Date.
Matters Related to Emergence
On the Effective Date, the Company entered into the Credit Facility, a five-
year $120 million senior revolving credit facility (including a $40 million
letter of credit subfacility) with a lending group led by Morgan Guaranty Trust
Company of New York. The Credit Facility constitutes a working capital facility
for general corporate purposes including payments related to the Company's
obligations under the Amended Plan. Direct borrowings under the Credit Facility
will bear interest, at the option of the Company, at (a) prime (or, if higher,
the federal funds rate plus 1/2%) plus 3% or (b) LIBOR (as defined in the
agreement) plus 4%. The Credit Facility is collateralized by substantially all
of the assets of the Company and its subsidiaries, including certain owned real
property.
On the Effective Date, the Company filed a registration statement on Form 8-
A (the "Form 8-A") with the Commission to register its Common Stock and
Warrants under Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act").
NOTE 4 -- FRESH-START ACCOUNTING
As previously discussed, the Company adopted the provisions of fresh-start
accounting as of April 1, 2001. In adopting fresh-start accounting, the Company
engaged an independent financial advisor to assist in the determination of the
reorganization value or fair value of the entity. The independent financial
advisor determined an estimated reorganization value of $762 million before
considering any long-term debt or other obligations assumed in connection with
the Amended Plan. This estimate was based upon the Company's cash flows,
selected comparable market multiples of publicly traded companies, operating
lease obligations and other applicable ratios and valuation techniques. The
estimated total equity value of the Reorganized Company aggregating $435
million was determined after taking into account the values of the obligations
assumed in connection with the Amended Plan.
12
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- FRESH-START ACCOUNTING (Continued)
A reconciliation of fresh-start accounting recorded as of April 1, 2001
follows (in thousands):
Predecessor Reorganized
Company Fresh-start Company
-------------- ------------------------------------------------ -------------
Debt
March 31, 2001 Restructuring Adjustments Reclassifications April 1, 2001
-------------- ------------- ----------- ----------------- -------------
ASSETS (Restated)
Current assets:
Cash and cash
equivalents........... $ 160,055 $ - $ (4,901)(i) $ - $ 155,154
Cash-restricted........ 11,008 (2,763)(a) 6,000 (i) - 14,245
Insurance subsidiary
investments........... 90,617 - - - 90,617
Accounts receivable
less allowance for
loss.................. 330,846 73,138 (b) - - 403,984
Inventories............ 29,132 - - - 29,132
Other.................. 74,732 1,360 (a) - - 76,092
----------- --------- --------- --------- ----------
696,390 71,735 1,099 - 769,224
Property and equipment.. 708,232 - (268,528)(j) - 439,704
Accumulated
depreciation........... (316,862) - 316,862 (j) - -
----------- --------- --------- --------- ----------
391,370 - 48,334 - 439,704
Reorganized value in
excess of amounts
allocable
to identifiable
assets................. - - 157,958 (k) - 157,958
Goodwill................ 156,765 - (156,765)(l) - -
Investment in
affiliates............. 7,824 - 40,282 (m) - 48,106
Other................... 77,673 (7,668)(a) (1,823)(i) - 70,925
2,795 (c) (52)(j)
----------- --------- --------- --------- ----------
$ 1,330,022 $ 66,862 $ 89,033 $ - $1,485,917
=========== ========= ========= ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable....... $ 90,279 $ (2,264)(b) $ (4,030)(i) $ 1,602 (r) $ 85,587
Salaries, wages and
other compensation.... 178,319 - (93)(i) 1,404 (r) 195,841
7,700 (n)
8,511 (o)
Due to third-party
payors................ 47,773 (4,569)(b) - 10,651 (r) 53,855
Other accrued
liabilities........... 91,132 2,795 (c) 25,337 (o) 43,865 (r) 189,029
25,900 (d)
Income taxes........... 2,850 - - 14,867 (r) 17,717
Long-term debt due
within one year....... - - - 18,316 (r) 18,316
----------- --------- --------- --------- ----------
410,353 21,862 37,425 90,705 560,345
Long-term debt.......... - 300,000 (e) - 43,606 (r) 343,606
Professional liability
risks.................. 106,505 - - - 106,505
Deferred credits and
other liabilities...... 14,128 - (1,777)(p) 28,071 (r) 40,422
Liabilities subject to
compromise............. 1,278,223 2,580 (a) (2,028)(i) (162,382)(r) -
(113,576)(b) (2,726)(p)
(902,755)(f)
(94,285)(g)
(3,051)(h)
Series A preferred stock
(subject to compromise
at March 31, 2001)..... 1,743 (1,743)(h) - - -
Stockholders' equity
(deficit):
Reorganized Company
common stock, par
value................. - 3,750 (h) - - 3,750
Predecessor Company
common stock, par
value................. 17,565 - (17,565)(q) - -
Capital in excess of
par value............. 667,187 431,289 (h) 17,565 (q) (684,752)(s) 431,289
Retained earnings
(accumulated
deficit).............. (1,165,682) (11,651)(a) 5,427 (i) 684,752 (s) -
193,547 (b) 48,282 (j)
(25,900)(d) 157,958 (k)
(300,000)(e) (156,765)(l)
902,755 (f) 40,282 (m)
94,285 (g) (7,700)(n)
(430,245)(h) (33,848)(o)
4,503 (p)
----------- --------- --------- --------- ----------
(480,930) 857,830 58,139 - 435,039
----------- --------- --------- --------- ----------
$ 1,330,022 $ 66,862 $ 89,033 $ - $1,485,917
=========== ========= ========= ========= ==========
13
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 -- FRESH-START ACCOUNTING (Continued)
(a) To record the effect of the Tax Escrow Agreement.
(b) To record the discharge of pre-petition accounts receivable, allowances
for loss and liabilities related to the Medicare program in connection
with the Government Settlement.
(c) To record deferred financing costs incurred in connection with the
Credit Facility and the Senior Secured Notes.
(d) To record the Government Settlement obligation.
(e) To record the issuance of the Senior Secured Notes.
(f) To record the discharge of indebtedness in accordance with the Amended
Plan (in thousands):
Senior Lender Claims........................................... $510,908
Subordinated Noteholder Claims................................. 302,391
Accrued interest............................................... 99,185
Unamortized deferred financing costs........................... (9,729)
--------
$902,755
========
(g) To write off accrued Ventas rent discharged in accordance with the
Amended Plan.
(h) To record the issuance of the Common Stock and Warrants of the
Reorganized Company and eliminate the preferred stock (and related
loans) and accrued dividends of the Predecessor Company in accordance
with the Amended Plan.
(i) To record miscellaneous provisions of the Amended Plan.
(j) To adjust the property and equipment to fair value and to write off
previously recorded accumulated depreciation.
(k) To record the reorganized value of the Company in excess of amounts
allocable to identifiable assets. These costs will be amortized using
the straight-line method over 20 years.
(l) To write off historical goodwill of the Predecessor Company.
(m) To adjust investment in affiliates to fair value.
(n) To record the value of the vested portion of restricted stock in
accordance with the Amended Plan.
(o) To record reorganization costs consisting primarily of professional
fees and management compensation to be paid in accordance with the
Amended Plan.
(p) To adjust allowances for loss related to property disposals and non-
income tax deficiencies.
(q) To eliminate the common stock of the Predecessor Company.
(r) To reclassify the pre-petition priority, secured and unsecured claims
that were assumed by the Company in accordance with the Amended Plan.
(s) To eliminate the historical accumulated deficit and adjust
stockholders' equity to reflect the fair value of the Company's total
equity.
14
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 -- PRO FORMA INFORMATION
The unaudited condensed pro forma effect of the Amended Plan assuming that
the Effective Date occurred on January 1, 2000 follows (in thousands, except
per share amounts):
Six months ended
June 30,
---------------------
2001 2000
---------- ----------
(Restated)
Revenues.............................................. $1,523,173 $1,428,880
Income from operations before extraordinary items..... 26,782 10,053
Net income............................................ 28,178 10,053
Basic:
Income from operations before extraordinary items... $ 1.76 $ 0.66
Net income.......................................... 1.85 0.66
Diluted:
Income from operations before extraordinary items... $ 1.62 $ 0.61
Net income.......................................... 1.70 0.61
The pro forma results exclude reorganization items recorded prior to April
1, 2001. The pro forma results are not necessarily indicative of the financial
results that might have resulted had the effective date of the Amended Plan
actually occurred on January 1, 2000.
NOTE 6 -- 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 revenues by payor type follows (in thousands):
Reorganized |
Company | Predecessor Company
----------- | ------------------------------
Three | Three Three
months | months months Six months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
----------- | -------- --------- ----------
Medicare............................................................................ $298,671 | $249,057 $288,390 $ 512,934
Medicaid............................................................................ 263,796 | 220,562 233,160 443,075
Private and other................................................................... 223,593 | 258,178 245,532 501,831
-------- | -------- -------- ----------
786,060 | 727,797 767,082 1,457,840
Elimination......................................................................... (15,296) | (14,373) (14,673) (28,960)
-------- | -------- -------- ----------
$770,764 | $713,424 $752,409 $1,428,880
======== | ======== ======== ==========
NOTE 7 -- EARNINGS PER SHARE
Earnings per common share are based upon the weighted average number of
common shares outstanding during the respective periods. The diluted
calculation of earnings per common share for the Reorganized Company includes
the dilutive effect of the Warrants issued in connection with the Amended Plan
and stock options and non-vested restricted stock issued under various
incentive plans. For the three months ended March 31, 2001, the diluted
calculation of earnings per common share for the Predecessor Company includes
the dilutive effect of its former convertible preferred stock.
15
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7 -- EARNINGS PER SHARE (Continued)
A computation of the earnings per common share follows (in thousands, except
per share amounts):
Reorganized |
Company | Predecessor Company
----------- | --------------------------------
Three | Three Three
months | months months Six months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
----------- | ---------- --------- ----------
| (Restated) (Restated)
Earnings (loss): |
Income (loss) from operations |
before extraordinary items....... $16,489 | $(7,985) $ 49,185 $(26,549)
Extraordinary gain on |
extinguishment of debt........... 1,396 | - 422,791 -
------- | ------- -------- --------
Net income (loss)................. 17,885 | (7,985) 471,976 (26,549)
Preferred stock dividend |
requirements..................... - | (262) (261) (523)
------- | ------- -------- --------
Income (loss) available to common |
stockholders--basic computation.. 17,885 | (8,247) 471,715 (27,072)
Elimination of preferred stock |
dividend requirements upon |
assumed conversion of preferred |
stock............................ - | - 261 -
------- | ------- -------- --------
Net income (loss)--diluted |
computation...................... $17,885 | $(8,247) $471,976 $(27,072)
======= | ======= ======== ========
Shares used in the computation: |
Weighted average shares |
outstanding--basic computation... 15,090 | 70,147 70,261 70,194
Dilutive effect of the Warrants, |
employee stock options and non- |
vested restricted stock.......... 1,443 | - - -
Assumed conversion of preferred |
stock............................ - | - 1,395 -
------- | ------- -------- --------
Adjusted weighted average shares |
outstanding--diluted |
computation...................... 16,533 | 70,147 71,656 70,194
======= | ======= ======== ========
Earnings (loss) per common share: |
Basic: |
Income (loss) from operations |
before extraordinary items....... $ 1.09 | $ (0.12) $ 0.69 $ (0.39)
Extraordinary gain on |
extinguishment of debt........... 0.09 | - 6.02 -
------- | ------- -------- --------
Net income (loss)................ $ 1.18 | $ (0.12) $ 6.71 $ (0.39)
======= | ======= ======== ========
Diluted: |
Income (loss) from operations |
before extraordinary items....... $ 1.00 | $ (0.12) $ 0.69 $ (0.39)
Extraordinary gain on |
extinguishment of debt........... 0.08 | - 5.90 -
------- | ------- -------- --------
Net income (loss)................ $ 1.08 | $ (0.12) $ 6.59 $ (0.39)
======= | ======= ======== ========
NOTE 8 -- BUSINESS SEGMENT DATA
The Company operates two business segments: the health services division and
the hospital division. The health services division operates nursing centers
and a rehabilitation therapy business. The hospital division operates hospitals
and an institutional pharmacy business. The Company defines operating income as
earnings before interest, income taxes, depreciation, amortization and rent.
Operating income reported for each of the Company's business segments excludes
allocations of corporate overhead.
The carrying values of the Company's assets at June 30, 2001 and the capital
costs (rent, interest, depreciation and amortization) included in the unaudited
condensed consolidated statement of operations for the three months ended June
30, 2001 reflect the provisions of the Amended Plan and the impact of fresh-
start accounting. These costs for periods prior to the Company's emergence from
bankruptcy generally were recorded based on contractual agreements or
historical costs and did not reflect the provisions of the Amended Plan. In
addition, during the pendency of the Chapter 11 Cases, no interest costs were
recorded related to the 1998 Notes. Accordingly, assets by business segment at
June 30, 2001 and capital costs of the Reorganized Company for the three months
ended June 30, 2001 are not comparable to those of the Predecessor Company.
16
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- BUSINESS SEGMENT DATA (Continued)
The following table sets forth certain financial data by business segment
(in thousands):
Reorganized |
Company | Predecessor Company
----------- | --------------------------------
Three | Three Three
months | months months Six months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
----------- | --------- --------- ----------
| (Restated) (Restated)
Revenues: |
Health services division: |
Nursing centers.................. $444,137 | $413,159 $429,523 $ 825,862
Rehabilitation services.......... 9,244 | 33,173 10,695 67,550
Other ancillary services......... - | (2) - (7)
Elimination...................... - | (18,509) - (36,600)
-------- | -------- -------- ----------
453,381 | 427,821 440,218 856,805
Hospital division: |
Hospitals........................ 276,112 | 250,027 271,984 503,618
Pharmacy......................... 56,567 | 49,949 54,880 97,417
-------- | -------- -------- ----------
332,679 | 299,976 326,864 601,035
-------- | -------- -------- ----------
786,060 | 727,797 767,082 1,457,840
Elimination of pharmacy charges to |
Company nursing centers.......... (15,296) | (14,373) (14,673) (28,960)
-------- | -------- -------- ----------
$770,764 | $713,424 $752,409 $1,428,880
======== | ======== ======== ==========
Income (loss) from operations |
before extraordinary items: |
Operating income (loss): |
Health services division: |
Nursing centers................. $ 78,735 | $ 75,348 $ 70,543 $ 144,060
Rehabilitation services......... 1,809 | (1,059) 690 (573)
Other ancillary services........ 103 | 242 250 372
-------- | -------- -------- ----------
80,647 | 74,531 71,483 143,859
Hospital division: |
Hospitals....................... 55,685 | 51,547 54,778 106,945
Pharmacy........................ 6,036 | 789 6,176 (411)
-------- | -------- -------- ----------
61,721 | 52,336 60,954 106,534
-------- | -------- -------- ----------
Corporate overhead............... (27,484) | (27,750) (28,697) (57,120)
Unusual transactions............. - | 4,535 - 4,535
Reorganization items............. - | (2,530) 53,666 (5,595)
-------- | -------- -------- ----------
Operating income................ 114,884 | 101,122 157,406 192,213
Rent.............................. (64,580) | (76,788) (76,995) (153,008)
Depreciation and amortization..... (15,886) | (18,168) (18,645) (36,070)
Interest, net..................... (5,025) | (13,651) (12,081) (28,684)
-------- | -------- -------- ----------
Income (loss) before income |
taxes............................ 29,393 | (7,485) 49,685 (25,549)
Provision for income taxes........ 12,904 | 500 500 1,000
-------- | -------- -------- ----------
$ 16,489 | $ (7,985) $ 49,185 $ (26,549)
======== | ======== ======== ==========
Rent: |
Health services division: |
Nursing centers................. $ 40,190 | $ 43,888 $ 44,253 $ 87,477
Rehabilitation services......... 27 | 130 39 199
Other ancillary services........ 3 | 17 - 37
-------- | -------- -------- ----------
40,220 | 44,035 44,292 87,713
Hospital division: |
Hospitals....................... 22,917 | 31,199 30,839 61,894
Pharmacy........................ 968 | 853 941 1,753
-------- | -------- -------- ----------
23,885 | 32,052 31,780 63,647
-------- | -------- -------- ----------
Corporate........................ 475 | 701 923 1,648
-------- | -------- -------- ----------
$ 64,580 | $ 76,788 $ 76,995 $ 153,008
======== | ======== ======== ==========
17
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- BUSINESS SEGMENT DATA (Continued)
Reorganized |
Company | Predecessor Company
----------- | -------------------------------
Three | Three Three Six
months | months months months
ended | ended ended ended
June 30, | June 30, March 31, June 30,
2001 | 2000 2001 2000
----------- | ------------ --------- --------
Depreciation and amortization: |
Health services division: |
Nursing centers.................. $ 5,055 | $ 6,720 $ 7,219 $13,390
Rehabilitation services.......... 11 | 1 - 4
Other ancillary services......... - | 263 129 548
---------- | ---------- ------- -------
5,066 | 6,984 7,348 13,942
Hospital division: |
Hospitals........................ 5,690 | 5,271 5,457 10,578
Pharmacy......................... 447 | 491 627 1,017
---------- | ---------- ------- -------
6,137 | 5,762 6,084 11,595
---------- | ---------- ------- -------
Corporate......................... 4,683 | 5,422 5,213 10,533
---------- | ---------- ------- -------
$ 15,886 | $ 18,168 $18,645 $36,070
========== | ========== ======= =======
Capital expenditures: |
Health services division.......... $ 4,529 | $ 3,794 $ 7,962 $ 6,702
Hospital division................. 8,644 | 2,944 8,901 6,480
Corporate: |
Information systems.............. 3,135 | 6,767 3,496 8,113
Other............................ 9,331 | 568 1,679 1,028
---------- | ---------- ------- -------
$ 25,639 | $ 14,073 $22,038 $22,323
========== | ========== ======= =======
|
Reorganized | Predecessor
Company | Company
----------- | ------------
June 30, | December 31,
2001 | 2000
----------- | ------------
|
Assets: |
Health services division.......... $ 395,934 | $ 494,636
Hospital division................. 460,426 | 354,302
Corporate......................... 578,414 | 485,476
---------- | ----------
$1,434,774 | $1,334,414
========== | ==========
NOTE 9 -- INCOME TAXES
The provision for income taxes is based upon management's estimate of
taxable income or loss for the respective periods and includes the effect of
certain non-taxable and non-deductible items, such as reorganization intangible
amortization, and the increase or decrease in the deferred tax valuation
allowance.
The Company has reduced its net deferred tax assets by a valuation allowance
to the extent management does not believe it is "more likely than not" that the
asset ultimately will be realizable. If all or a portion of the pre-
reorganization deferred tax asset is realized in the future, or considered to
"more likely than not" be realizable by management, the reorganization
intangible recorded in connection with fresh-start accounting will be reduced
accordingly. If the reorganization intangible is eliminated in full, other
intangibles will then be reduced, with any excess treated as an increase to
capital in excess of par value.
The provision for income taxes for the three months ended June 30, 2000 and
March 31, 2001 and the six months ended June 30, 2000 included charges of $2.5
million, $685,000 and $8.4 million, respectively, related to the deferred tax
valuation allowance. No changes in the valuation allowance were recorded in the
second quarter of 2001. As a result of fresh-start accounting, the deferred tax
valuation allowance included in the Company's unaudited condensed consolidated
balance sheet aggregated $284 million at June 30, 2001.
18
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9 -- INCOME TAXES (Continued)
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness. This gain will not be taxable since the
gain resulted from the reorganization under the Bankruptcy Code. However, the
Company will be required, as of the beginning of its 2002 taxable year, to
reduce certain tax attributes relating to the Company including (a) net
operating loss carryforwards ("NOLs"), (b) certain tax credits and (c) tax
bases in assets in an amount equal to such gain on extinguishment. The
reorganization of the Company on the Effective Date constituted an ownership
change under Section 382 of the Internal Revenue Code and the use of any of the
Company's NOLs and tax credits generated prior to the ownership change, that
are not reduced pursuant to the provisions discussed above, will be subject to
an overall annual limitation of approximately $22 million.
The Company had NOLs of approximately $164 million (after the reductions in
the attributes discussed above) and $215 million as of June 30, 2001 and
December 31, 2000, respectively. These carryforwards expire in various amounts
through 2021.
NOTE 10 -- EARLY EXTINGUISHMENT OF DEBT
In connection with the restructuring of its debt in accordance with the
provisions of the Amended Plan, the Company realized an extraordinary gain of
$422.8 million. For accounting purposes, this gain has been reflected in the
operating results of the Predecessor Company for the three months ended March
31, 2001.
A summary of the extraordinary gain follows (in thousands):
Liabilities restructured:
Debt obligations:
Senior Lender Claims........................................... $ 510,908
Subordinated Noteholder Claims................................. 302,391
Accrued interest............................................... 99,185
Unamortized deferred financing costs........................... (9,729)
---------
902,755
Amounts related to prior year Medicare cost reports............. 193,547
Accrued Ventas rent............................................. 94,285
Other........................................................... (6,857)
---------
1,183,730
---------
Consideration exchanged:
Senior Secured Notes............................................ 300,000
Common Stock.................................................... 368,339
Warrants........................................................ 66,700
Government Settlement obligation................................ 25,900
---------
760,939
---------
$ 422,791
=========
On May 30, 2001, the Company prepaid the outstanding balance in full
satisfaction of its obligations under the CMS Agreement, resulting in an
extraordinary gain of $1.4 million. The transaction was financed through the
use of existing cash.
19
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow.
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 Cases have been styled In re: Vencor, Inc., et al.,
Debtors and Debtors in Possession, Case Nos. 99-3199 (MFW) through 99-3327
(MFW), Chapter 11, Jointly Administered. On March 1, 2001, the Bankruptcy Court
approved the Company's fourth amended plan of reorganization filed with the
Bankruptcy Court on December 14, 2000, as modified at the confirmation hearing.
The order confirming the Amended Plan was signed on March 16, 2001 and entered
on the docket of the Bankruptcy Court on March 19, 2001. The effective date of
the Amended Plan was April 20, 2001. See Note 3.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off
(the "Spin-off Agreement"). The Company was seeking a reduction in rent and
other concessions under its master lease agreements with Ventas. On March 31,
1999, the Company and Ventas entered into a standstill agreement which provided
that both companies would postpone through April 12, 1999 any claims either may
have against the other. On April 12, 1999, the Company and Ventas entered into
a second standstill which provided that neither party would pursue any claims
against the other or any other third party related to the Spin-off as long as
the Company complied with certain rent payment terms. The second standstill was
scheduled to terminate on May 5, 1999. Pursuant to a tolling agreement, the
Company and Ventas also agreed that any statutes of limitations or other time-
related constraints in a bankruptcy or other proceeding that might be asserted
by one party against the other would be extended and tolled from April 12, 1999
until May 5, 1999 or until the termination of the second standstill. As a
result of the Company's failure to pay rent, Ventas served the Company with
notices of nonpayment under the master lease agreements. Subsequently, the
Company and Ventas entered into further amendments to the second standstill and
the tolling agreement to extend the time during which no remedies may be
pursued by either party and to extend the date by which the Company may cure
its failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the stipulation that provided for the payment by the Company of a reduced
aggregate monthly rent of approximately $15.1 million (the "Stipulation"). The
Stipulation was approved by the Bankruptcy Court. The Stipulation tolled any
statutes of limitations or other time constraints in a bankruptcy proceeding
for claims that might be asserted by the Company against Ventas. The
Stipulation automatically renewed for one-month periods unless either party
provided a 14-day notice of termination. The Stipulation also provided that the
Company would continue to fulfill its indemnification obligations arising from
the Spin-off. The Stipulation was terminated on the Effective Date.
As a result of the consummation of the Amended Plan, the Company believes
that all known material disputes between the Company and Ventas have been
resolved. The Amended Plan also provided for comprehensive mutual releases
between the Company and Ventas, other than for obligations that the Company is
assuming under the Amended Plan.
The Company's subsidiary, formerly named TheraTx, Incorporated, is a
plaintiff in a declaratory judgment action entitled TheraTx, Incorporated v.
James W. Duncan, Jr., et al., No. 1:95-CV-3193, filed in the United States
District Court for the Northern District of Georgia and currently pending in
the United States Court of Appeals for the Eleventh Circuit, No. 99-11451-FF.
The defendants asserted counterclaims against TheraTx, Incorporated ("TheraTx")
under breach of contract, securities fraud, negligent misrepresentation and
other
20
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
fraud theories for allegedly not performing as promised under a merger
agreement related to TheraTx's purchase of a company called PersonaCare, Inc.
and for allegedly failing to inform the defendants/counterclaimants prior to
the merger that TheraTx's possible acquisition of Southern Management Services,
Inc. might cause the suspension of TheraTx's shelf registration under relevant
rules of the Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both appealed the court's rulings. The United
States Court of Appeals for the Eleventh Circuit affirmed the trial court's
rulings in TheraTx's favor, with the exception of the damages award, and
certified the question of the proper calculation of damages under Delaware law
to the Delaware Supreme Court. The Delaware Supreme Court issued an opinion on
June 1, 2001, which sets forth a rule for determining such damages but did not
calculate any actual damages. On June 25, 2001, the Eleventh Circuit remanded
the action to the trial court to render a decision consistent with the Delaware
Supreme Court's ruling. The Company is defending the action vigorously.
The Company is pursuing various claims against private insurance companies
who issued Medicare supplement insurance policies to individuals who became
patients of the Company's hospitals. After the patients' Medicare benefits are
exhausted, the insurance companies become liable to pay the insureds' bills
pursuant to the terms of these policies. The Company has filed numerous
collection actions against various of these insurers to collect the difference
between what Medicare would have paid and the hospitals' usual and customary
charges. These disputes arise from differences in interpretation of the policy
provisions and federal and state laws governing such policies. Various courts
have issued various rulings on the different issues, some of which have been
adverse to the Company and most of which have been appealed. The Company
intends to continue to pursue these claims vigorously. If the Company does not
prevail on these issues, future results of operations and liquidity could be
materially adversely affected.
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's predecessor against the
Company and Ventas and certain current and former executive officers and
directors of the Company and Ventas. The complaint alleges that the Company,
Ventas and certain current and former executive officers of the Company and
Ventas during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning Ventas' then current operations
and the inherent value of its common stock. The complaint further alleges that
as a result of these purported false and misleading statements concerning
Ventas' revenues and successful acquisitions, the price of the common stock was
artificially inflated. In particular, the complaint alleges that the defendants
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 Ventas' core
services and profitability. The complaint further alleges that the defendants
issued a series of materially false statements concerning the purportedly
successful integration of Ventas' acquisitions and prospective earnings per
share for 1997 and 1998 which the defendants 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.
21
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
In December 1998, the defendants filed a motion to dismiss the case. The court
converted the defendants' motion to dismiss into a motion for summary judgment
and granted summary judgment as to all defendants. The plaintiff appealed the
ruling to the United States Court of Appeals for the Sixth Circuit. On April
24, 2000, the Sixth Circuit affirmed the district court's dismissal of the
action on the grounds that the plaintiff failed to state a claim upon which
relief could be granted. On July 14, 2000, the Sixth Circuit granted the
plaintiff's petition for a rehearing en banc. On May 31, 2001, the Sixth
Circuit issued its en banc decision reversing the trial court's dismissal of
the complaint. The Company is defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of the Company and
Ventas. The plaintiff asserts that such actions were taken deliberately, in bad
faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, 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 Company and Ventas have an effective remedy. The Company
believes that the allegations in the complaint are without merit and intends to
defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 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 Hospitals
Corporation ("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 the Transitional 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), 14(e) and 20(a) of the
Exchange Act, 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. In June 1998, the court granted
the Company's motion to dismiss with leave to amend the Section 10(b) claim and
the state law claims for misrepresentation. The court denied the Company's
motion to dismiss the Section 14(e) and Section 20(a) claims, after which the
Company filed a motion for reconsideration. On March 23, 1999, the court
granted the Company's motion to dismiss all remaining claims and the case was
dismissed. The plaintiff has appealed this ruling to the United States Court of
Appeals for the Ninth Circuit. The Company is defending this action vigorously.
The Company was informed by the DOJ that the Company and Ventas were the
subjects of investigations into various Medicare reimbursement issues,
including hospital cost reporting issues, billing practices for ancillary
services and various quality of care issues in the hospitals and nursing
centers formerly operated by Ventas and currently operated by the Company.
These investigations included some matters for which the
22
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
Company indemnified Ventas in the Spin-off. In cases where neither the Company
nor any of its subsidiaries are defendants but Ventas is the defendant, the
Company agreed to defend and indemnify Ventas for such claims as part of the
Spin-off. The Company cooperated fully in the investigations. All of these
investigations have been resolved by the Government Settlement contained in the
Amended Plan.
The DOJ previously informed the Company that it had intervened in several
pending qui tam actions asserted against the Company and/or Ventas in
connection with these investigations. In addition, the DOJ filed proofs of
claims with respect to certain alleged claims in the Chapter 11 Cases. The
Company, Ventas and the DOJ entered into the Government Settlement, which
resolved all of the DOJ investigations including the pending qui tam actions,
as part of the Amended Plan. The Government Settlement provides that within 30
days after the Effective Date, the Government will move to dismiss with
prejudice to the United States and the relators (except for certain claims
which will be dismissed without prejudice to the United States in certain of
the cases) the pending qui tam actions as against any or all of the Company and
its subsidiaries, Ventas and any current or former officers, directors and
employees of either entity. There can be no assurance that each court before
which a qui tam action is pending will dismiss the case on the DOJ's motion.
For a summary of the terms of the Government Settlement contained in the
Amended Plan, see Note 3.
The following is a summary of the qui tam actions pending or previously
pending against the Company and/or Ventas in which the DOJ intervened. Certain
of the actions described below name other defendants in addition to the Company
and Ventas.
(a) The Company, Ventas and the Company's subsidiary, American X-Rays,
Inc. ("AXR"), are defendants in a civil qui tam action styled United States
ex rel. Doe v. American X-Rays Inc., et al., No. LR-C-95-332, pending in
the United States District Court for the Eastern District of Arkansas and
served on AXR on July 7, 1997. The DOJ intervened in the suit which was
brought under the Federal Civil False Claims Act and added the Company and
Ventas as defendants. The Company acquired an interest in AXR when The
Hillhaven Corporation ("Hillhaven") was merged into the Company in
September 1995 and purchased the remaining interest in AXR in February
1996. AXR provided portable X-ray services to nursing centers (including
some of those operated by Ventas or the Company) and other healthcare
providers. The civil suit alleges that AXR submitted false claims to the
Medicare and Medicaid programs. The suit seeks damages in an amount of not
less than $1,000,000, treble damages and civil penalties. The Company has
defended this action vigorously. The court dismissed the action based upon
the pending settlement between the DOJ, the Company and Ventas. In a
related criminal investigation, the United States Attorney's Office for the
Eastern District of Arkansas ("USAO") indicted four former employees of
AXR; those individuals were convicted of various fraud related counts in
January 1999. AXR had been informed previously that it was not a target of
the criminal investigation, and AXR was not indicted. However, the Company
received several grand jury subpoenas for documents and witnesses which it
moved to quash. The USAO has withdrawn the subpoenas which rendered the
motion moot. The complaint against the Company, Ventas and AXR has been
dismissed with prejudice as to the relators and the United States in
accordance with the Government Settlement contained in the Amended Plan.
(b) The Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"),
Ventas and Hillhaven (former parent company to Medisave), are the
defendants in a civil qui tam action styled United States ex rel. Danley v.
Medisave Pharmacies, Inc., et al., No. CV-N-96-00170-HDM, filed in the
United States District Court for the District of Nevada on March 15, 1996.
The plaintiff alleges that Medisave, an institutional pharmacy provider,
formerly owned by Ventas and owned by the Company since the Spin-off: (a)
charged the Medicare program for unit dose drugs when bulk drugs were
administered and charged
23
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
skilled nursing facilities more for the same drugs for Medicare patients
than for non-Medicare patients; (b) improperly claimed special dispensing
fees that it was not entitled to under Medicaid; and (c) recouped unused
drugs from skilled nursing facilities and returned these drugs to its stock
without crediting Medicare or Medicaid, all in violation of the Federal
Civil False Claims Act. The complaint also alleges that Medisave had a
policy of offering kickbacks, such as free equipment, to skilled nursing
centers to secure and maintain their business. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorneys' fees and
other costs. The Company disputes the allegations in the complaint. The
complaint has been dismissed in accordance with the Government Settlement
contained in the Amended Plan.
(c) Ventas and the Company's subsidiary, Kindred Rehab Services, Inc.
(formerly Vencare, Inc.) ("Vencare"), among others, are defendants in the
action styled United States ex rel. Roberts v. Vencor, Inc., et al., No.
3:97CV-349-J, filed in the United States District Court for the Western
District of Kansas on June 25, 1996 and consolidated with the action styled
United States of America ex rel. Meharg, et al. v. Vencor, Inc., et al.,
No. 3:98SC-737-H, filed in the United States District Court for the Middle
District of Florida on June 4, 1998. The complaint alleges that the
defendants knowingly submitted and conspired to submit false claims and
statements to the Medicare program in connection with their purported
provision of respiratory therapy services to skilled nursing center
residents. The defendants allegedly billed Medicare for respiratory therapy
services and supplies when those services were not medically necessary,
billed for services not provided, exaggerated the time required to provide
services or exaggerated the productivity of their therapists. It is further
alleged that the defendants presented false claims and statements to the
Medicare program in violation of the Federal Civil False Claims Act, by,
among other things, allegedly causing skilled nursing centers with which
they had respiratory therapy contracts, to present false claims to Medicare
for respiratory therapy services and supplies. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorneys' fees and
other costs. The Company disputes the allegations in the complaints. The
two complaints have been dismissed in accordance with the Government
Settlement contained in the Amended Plan.
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et
al., No. 97-10400-GAO, filed in the United States District Court for the
District of Massachusetts on October 15, 1998, the Company's subsidiary,
Transitional, and two unrelated entities, Gambro Healthcare, Inc. and
Dialysis Holdings, Inc., are defendants in this suit alleging that they
violated the Federal Civil False Claims Act and the Medicare and Medicaid
antikickback, antifraud and abuse regulations and committed common law
fraud, unjust enrichment and payment by mistake of fact. Specifically, the
complaint alleges that a predecessor to Transitional formed a joint venture
with Damon Clinical Laboratories to create and operate a clinical testing
laboratory in Georgia that was then used to provide lab testing for
dialysis patients, and that the joint venture billed at below cost in
return for referral of substantially all non-routine testing in violation
of Medicare and Medicaid antikickback and antifraud regulations. It is
further alleged that a predecessor to Transitional and Damon Clinical
Laboratories used multiple panel testing of end stage renal disease rather
than single panel testing that allegedly resulted in the generation of
additional revenues from Medicare and that the entities allegedly added
non-routine tests to tests otherwise ordered by physicians that were not
requested or medically necessary but resulted in additional revenue from
Medicare in violation of the antikickback and antifraud regulations.
Transitional has moved to dismiss the case. Transitional disputes the
allegations in the complaint. The claims against Transitional have been
dismissed with prejudice in accordance with the Government Settlement
contained in the Amended Plan.
24
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM
(Mcx), filed in the United States District Court for the Central District
of California on June 13, 1997. The plaintiff alleges that the defendant
violated the Federal Civil False Claims Act by submitting false claims to
the Medicare, Medicaid and CHAMPUS programs by allegedly: (a) falsifying
patient bills and submitting the bills to the Medicare, Medicaid and
CHAMPUS programs, (b) submitting bills for intensive and critical care not
actually administered to patients, (c) falsifying patient charts in
relation to the billing, (d) charging for physical therapy services
allegedly not provided and pharmacy services allegedly provided by non-
pharmacists, and (e) billing for sales calls made by nurses to prospective
patients. The complaint seeks treble damages, other unspecified damages,
civil penalties, attorneys' fees and other costs. Defendants dispute the
allegations in the complaint. The complaint has been dismissed in
accordance with the Government Settlement contained in the Amended Plan.
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997.
Ventas is alleged to have knowingly violated the Federal Civil False Claims
Act by submitting and conspiring to submit false claims to the Medicare
program. The complaint alleges that Ventas: (a) fabricated diagnosis codes
by ordering medically unnecessary services, such as respiratory therapy;
(b) changed referring physicians' diagnoses in order to qualify for
Medicare reimbursement; and (c) billed Medicare for oxygen use by patients
regardless of whether the oxygen was actually administered to particular
patients. The complaint further alleges that Ventas paid illegal kickbacks
to referring healthcare professionals in the form of medical consulting
service agreements as an alleged inducement to refer patients, in violation
of the Federal Civil False Claims Act, the antikickback and antifraud
regulations and the Stark provisions. It is additionally alleged that
Ventas consistently submitted Medicare claims for clinical services that
were not performed or were performed at lower actual costs. The complaint
seeks unspecified damages, civil penalties, attorneys' fees and costs.
Ventas disputes the allegations in the complaint. The complaint has been
dismissed in accordance with the Government Settlement contained in the
Amended Plan.
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States intervened in this civil qui tam lawsuit on May 17, 1999. On July
23, 1999, the United States filed its amended complaint in the lawsuit and
added the Company as a defendant. The lawsuit alleges that the Company and
Ventas knowingly submitted false claims and false statements to the
Medicare and Medicaid programs including, but not limited to, claims for
reimbursement of costs for certain ancillary services performed in
defendants' nursing centers and for third-party nursing center operators
that the United States alleges are not properly reimbursable costs through
the hospitals' cost reports. The lawsuit involves the Company's hospitals
which were owned by Ventas prior to the Spin-off. The complaint does not
specify the amount of damages sought. The Company and Ventas dispute the
allegations in the amended complaint. The complaint has been dismissed with
prejudice in accordance with the Government Settlement contained in the
Amended Plan.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al.,
filed in the United States District Court for the Eastern District of
Missouri on May 25, 1999, the defendants include the Company, Vencare, and
Ventas. The defendants allegedly submitted and conspired to submit false
claims for payment to the Medicare and CHAMPUS programs, in violation of
the Federal Civil False Claims Act. According to the complaint, the
Company, through its subsidiary, Vencare, allegedly (a) over billed for
respiratory therapy
25
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
services, (b) rendered medically unnecessary treatment, and (c) falsified
supply, clinical and equipment records. The defendants also allegedly
encouraged or instructed therapists to falsify clinical records and over
prescribe therapy services. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorneys' fees and other costs. The
Company disputes the allegations in the complaint. The plaintiffs have
filed an amended complaint with the court which removes all defendants
associated with the Company or Ventas.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its
two subsidiaries, Vencare and Kindred Hospice, Inc. (formerly Vencor
Hospice, Inc.), are alleged to have violated the Federal Civil False Claims
Act by obtaining improper reimbursement from Medicare concerning the
treatment of hospice patients. Defendants are alleged to have obtained
inflated Medicare reimbursement for admitting, treating and/or failing to
discharge in a timely manner hospice patients who were not "hospice
appropriate." The complaint further alleges that the defendants obtained
inflated reimbursement for providing medications for these hospice
patients. The complaint alleges damages in excess of $1,000,000. The
Company disputes the allegations in the complaint. The complaint has been
dismissed in accordance with the Government Settlement contained in the
Amended Plan.
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, Kindred Healthcare Operating, Inc.
(formerly Vencor Operating, Inc.), Ventas, Hillhaven and Medisave, are
alleged to have presented or caused to be presented false or fraudulent
claims for payment to the Medicare program in violation of, among other
things, the Federal Civil False Claims Act. The complaint alleges that
Medisave, a subsidiary of the Company which was transferred from Ventas to
the Company in the Spin-off, systematically up-charged for drugs and
supplies dispensed to Medicare patients. The complaint seeks unspecified
damages, civil penalties, interest, attorneys' fees and other costs. The
Company disputes the allegations in the complaint. The plaintiffs have
filed an amended complaint with the court which removes all defendants
associated with the Company or Ventas.
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to
submit false claims and statements to Medicare, Medicaid, and other federal
and state funded programs during a period commencing in 1993. The conduct
complained of allegedly violates the Federal Civil False Claims Act, the
California False Claims Act, the Florida False Claims Act, the Tennessee
Health Care False Claims Act, and the Illinois Whistleblower Reward and
Protection Act. The defendants allegedly submitted improper and erroneous
claims to Medicare, Medicaid and other programs, for improper or
unnecessary services and services not performed, inadequate collections
efforts associated with billing and collecting bad debts, inflated and
nonexistent laboratory charges, false and inadequate documentation of
claims, splitting charges, shifting revenues and expenses, transferring
patients to hospitals that are reimbursed by Medicare at a higher level,
failing to return duplicate reimbursement payments, and improperly
allocating hospital insurance expenses. In addition, the complaint alleges
that the defendants were inconsistent in their reporting of cost report
data, paid kickbacks to increase patient referrals to hospitals, and
incorrectly reported employee compensation resulting in inflated employee
401(k) contributions. The complaint seeks unspecified damages. The Company
disputes the allegations in the complaint and intends to defend this action
vigorously. On July 27, 2001, the court ordered that the DOJ be allowed to
intervene in the action to effectuate the Government Settlement contained
in the Amended Plan.
26
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11 -- LITIGATION (Continued)
In connection with the Spin-off, liabilities arising from various legal
proceedings and other actions were assumed by the Company and the Company
agreed to indemnify Ventas against any losses, including any costs or expenses,
it may incur arising out of or in connection with such legal proceedings and
other actions. The indemnification provided by the Company also covers losses,
including costs and expenses, which may arise from any future claims asserted
against Ventas based on the former healthcare operations of Ventas. In
connection with its indemnification obligation, the Company has assumed the
defense of various legal proceedings and other actions. Under the Amended Plan,
the Company agreed to continue to fulfill its indemnification obligations
arising from the Spin-off.
The Company is a party to certain legal actions and regulatory
investigations arising in the normal course of its business. The Company is
unable to predict the ultimate outcome of pending litigation and regulatory
investigations. In addition, there can be no assurance that the DOJ, CMS or
other regulatory agencies will not initiate additional investigations related
to the Company's businesses in the future, nor can there be any assurance that
the resolution of any litigation or investigations, either individually or in
the aggregate, would not have a material adverse effect on the Company's
results of operations, liquidity or financial position. In addition, the above
litigation and investigations (as well as future litigation and investigations)
are expected to consume the time and attention of the Company's management and
may have a disruptive effect upon the Company's operations.
NOTE 12 -- SALE OF INVESTMENT
On May 2, 2001, the Company sold its investment in Behavioral Healthcare
Corporation ("BHC") for $40 million. No gain or loss was recorded in connection
with this transaction because the Company reflected the fair value of the
investment on April 1, 2001 in connection with fresh-start accounting. Under
the terms of the Credit Facility and Senior Secured Notes, proceeds from the
sale of BHC will be available to fund future capital expenditures for a period
of approximately one year from the sale. Any proceeds not expended during that
period would be used to permanently reduce the commitments under the Credit
Facility to $75 million and repay any outstanding loans in excess of such
commitment. Any remaining proceeds would be used to repay loans under the
Senior Secured Notes. For accounting purposes, the Company has classified these
funds as "cash-restricted" in the unaudited condensed consolidated balance
sheet at June 30, 2001.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
Certain statements made in this Form 10-Q/A, including, but not limited to,
statements containing the words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ
materially from the Company's expectations as a result of a variety of factors,
including, without limitation, those discussed below. Such forward-looking
statements are based on management's current expectations and include known and
unknown risks, uncertainties and other factors, many of which the Company is
unable to predict or control, that may cause the Company's actual results or
performance to differ materially from any future results or performance
expressed or implied by such forward-looking statements. Factors that may
affect the plans or results of the Company include, without limitation, the
ability of the Company to operate pursuant to the terms of its debt obligations
and the Amended Leases; the Company's ability to meet its rental and debt
services obligations; adverse developments with respect to the Company's
liquidity or results of operations; the ability of the Company to attract and
retain key executives and other healthcare personnel; the effects of healthcare
reform and government regulations, interpretation of regulations and changes in
the nature and enforcement of regulations governing the healthcare industry;
changes in Medicare and Medicaid reimbursement rates; national and regional
economic conditions, including their effect on the availability and cost of
labor, materials and other services; the Company's ability to control costs,
including labor costs, in response to the prospective payment system;
implementation of the Corporate Integrity Agreement and other regulatory
actions; the ability of the Company to comply with the terms of its Corporate
Integrity Agreement; the effect of a restatement of the Company's consolidated
financial statements previously filed with the Commission; and the increase in
the costs of defending and insuring against alleged patient care liability
claims. Many of these factors are beyond the control of the Company and its
management. The Company cautions investors that any forward-looking statements
made by the Company are not guarantees of future performance. The Company
disclaims any obligation to update any such factors or to announce publicly the
results of any revisions to any of the forward-looking statements to reflect
future events or developments.
General
The business segment data in Note 8 of the Notes to Condensed Consolidated
Financial Statements should be read in conjunction with the following
discussion and analysis.
The Company provides long-term healthcare services primarily through the
operation of nursing centers and hospitals. At June 30, 2001, the Company's
health services division operated 315 nursing centers (40,607 licensed beds) in
32 states and a rehabilitation therapy business. The Company's hospital
division operated 56 hospitals (4,867 licensed beds) in 23 states and an
institutional pharmacy business.
On April 20, 2001, the Company and its subsidiaries emerged from the
proceedings under Chapter 11 of the Bankruptcy Code pursuant to the terms of
the Amended Plan.
Since filing for protection under the Bankruptcy Code on September 13, 1999,
the Company had operated its businesses as a debtor-in-possession subject to
the jurisdiction of the Bankruptcy Court. Accordingly, the unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with SOP 90-7 and generally accepted accounting principles
applicable to a going concern, which assume that assets will be realized and
liabilities will be discharged in the normal course of business.
In connection with its emergence from bankruptcy, the Company reflected the
terms of the Amended Plan in its consolidated financial statements by adopting
the fresh-start accounting provisions of SOP 90-7. Under fresh-start
accounting, a new reporting entity is deemed to be created and the recorded
amounts of assets and
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General (Continued)
liabilities are adjusted to reflect their estimated fair values. For accounting
purposes, the fresh-start adjustments have been recorded in the unaudited
condensed consolidated financial statements as of April 1, 2001. Since fresh-
start accounting materially changed the amounts previously recorded in the
Company's consolidated financial statements, a black line separates the post-
emergence financial data from the pre-emergence data to signify the difference
in the basis of preparation of the financial statements for each respective
entity. See Note 4 of the Notes to Condensed Consolidated Financial Statements.
Comparability of Financial Information
The adoption of fresh-start accounting as of April 1, 2001 materially
changed the amounts previously recorded in the consolidated financial
statements of the Predecessor Company. With respect to reported operating
results, management believes that business segment operating income of the
Predecessor Company is generally comparable to that of the Reorganized Company.
However, capital costs (rent, interest, depreciation and amortization) of the
Predecessor Company that were based on pre-petition contractual agreements and
historical costs are not comparable to those of the Reorganized Company. In
addition, the reported financial position and cash flows of the Predecessor
Company for periods prior to April 1, 2001 generally are not comparable to
those of the Reorganized Company.
In connection with the implementation of fresh-start accounting, the Company
recorded an extraordinary gain of $422.8 million from the restructuring of its
debt in accordance with the provisions of the Amended Plan. Other significant
adjustments also were recorded to reflect the provisions of the Amended Plan
and the fair values of the assets and liabilities of the Reorganized Company as
of April 1, 2001. For accounting purposes, these transactions have been
reflected in the operating results of the Predecessor Company for the three
months ended March 31, 2001.
Regulatory Changes
The Balanced Budget Act of 1997 (the "Budget Act") contained extensive
changes to the Medicare and Medicaid programs intended to reduce the projected
amount of increase in payments under those programs over a five year period.
Virtually all spending reductions come from reimbursements to providers and
changes in program components. The Budget Act has affected adversely the
revenues in each of the Company's operating divisions.
The Budget Act established a Medicare prospective payment system ("PPS") for
nursing centers for cost reporting periods beginning on or after July 1, 1998.
All of the Company's nursing centers adopted PPS on July 1, 1998. During the
first three years, the per diem rates for nursing centers were based on a blend
of facility-specific costs and federal costs. Thereafter, the per diem rates
are based solely on federal costs. The payments received under PPS cover all
services for Medicare patients including all ancillary services, such as
respiratory therapy, physical therapy, occupational therapy, speech therapy and
certain covered pharmaceuticals.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division 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 general acute care 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 became
effective between May 1, 1998 and September 1, 1998. The reductions in payments
for services to patients transferred from a general acute care hospital became
effective October 1, 1998. These reductions have had a material adverse impact
on hospital revenues. In addition, these reductions also may affect adversely
the hospital division's ability to develop additional long-term care hospitals
in the future.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Regulatory Changes (Continued)
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients also has declined dramatically. As previously
discussed, Medicare reimbursements to nursing centers under PPS include
substantially all services provided to patients, including ancillary services.
Prior to the implementation of PPS, the costs of such services were reimbursed
under cost-based reimbursement rules. The decline in the demand for ancillary
services is mostly attributable to efforts by nursing centers to reduce
operating costs. As a result, many nursing centers have elected to provide
ancillary services to their patients through internal staff or are seeking
lower acuity patients who require less ancillary services. In response to PPS
and a significant decline in the demand for ancillary services, the Company
realigned its former Vencare division in 1999 by integrating the physical
rehabilitation, speech and occupational therapy businesses into the health
services division and assigning the institutional pharmacy business to the
hospital division. Vencare's respiratory therapy and other ancillary businesses
were discontinued.
Since November 1999, various legislative and regulatory actions have
provided a measure of relief from the impact of the Budget Act. In November
1999, the Balanced Budget Refinement Act (the "BBRA") was enacted. Effective
April 1, 2000, the BBRA made a temporary 20% upward adjustment in the payment
rates for the care of higher acuity patients and allowed nursing centers to
transition more rapidly to the federal payment rates. The BBRA also imposed a
two-year moratorium on certain therapy limitations for skilled nursing center
patients covered under Medicare Part B. Effective October 1, 2000, the BBRA
increased all PPS payment categories by 4% for two years.
In April 2000, CMS published a proposed rule which sets forth updates to the
Resource Utilization Grouping ("RUG") payment rates used under PPS for nursing
centers. On July 31, 2000, CMS issued a final rule that indefinitely postponed
any refinements to the RUG categories used under PPS. It also provided for the
continuance of Medicare payment relief set forth in the BBRA, including the 20%
upward adjustment for certain higher acuity RUG categories through September
30, 2001 and the 4% increase (effective October 2000) for all RUG categories
through September 30, 2002.
In December 2000, the Medicare, Medicaid, and State Child Health Insurance
Program Benefits Improvement and Protection Act of 2000 ("BIPA") was enacted to
provide up to $35 billion in additional funding to the Medicare and Medicaid
programs over the next five years. Under BIPA, the nursing component for each
RUG category increased by 16.66% over the existing rates for skilled nursing
care for the period April 1, 2001 through September 30, 2002. BIPA also
provided some relief from scheduled reductions to the annual inflation
adjustments to the RUG payment rates through September 2001.
In addition, BIPA slightly increased payments for inpatient services and
TEFRA incentive payments for long-term acute care hospitals. Allowable costs
for bad debts also will be increased by 10%. Both of these provisions will
become effective for cost reporting periods beginning on September 1, 2001.
Despite the recent legislation and regulatory actions discussed above,
Medicare revenues recorded under PPS in the Company's health services division
are less than the cost-based reimbursement it received before the enactment of
the Budget Act. In addition, the recent legislation did not impact materially
the reductions in Medicare revenues received by the Company's hospitals as a
result of the Budget Act.
There continues to be legislative and regulatory proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. By repealing the Boren Amendment, the Budget Act
eased existing impediments on the states' ability to reduce their Medicaid
reimbursement levels. 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
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Regulatory Changes (Continued)
care hospitals. Regulatory changes in the Medicare and Medicaid reimbursement
systems applicable to the hospital division also are being considered. There
also are legislative proposals including cost caps and the establishment of
Medicaid prospective payment systems for nursing centers.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. 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 operated by the Company, or the
provision of services and supplies by the Company, will meet the requirements
for participation in such programs.
There can be no assurance that 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 results of
operations, liquidity and financial position.
Results of Operations
Second Quarter 2001 compared to Second Quarter 2000
Health Services Division--Nursing Centers
Revenues increased 7% to $444 million in the second quarter of 2001 from
$413 million in the same quarter of 2000. On a same-store basis, average daily
patient census declined 1% from the second quarter of 2000 (including a 7%
decline in private census). The increase in revenues was attributable to
increased Medicare and Medicaid funding and price increases to private payors.
Medicare revenues per patient day grew 14% to $344 in the second quarter of
2001 compared to $301 in the second quarter a year ago. The increase was
primarily attributable to reimbursement increases associated with the BBRA and
BIPA. As previously discussed, the BBRA established, among other things, a 4%
increase in all PPS payments beginning on October 1, 2000. Under the provisions
of BIPA, the nursing component of each RUG category was increased 16.66% over
the existing rates for skilled nursing care beginning on April 1, 2001. As a
result, the provisions of the BBRA and BIPA increased Medicare reimbursement to
the Company's nursing centers in the second quarter of 2001 by approximately
$3.5 million and $9.5 million, respectively, compared to the same period a year
ago.
Nursing center operating income was $79 million for the second quarter of
2001 compared to $75 million for the second quarter last year. Despite an
increase in revenues, operating margins declined to 17.7% in the second quarter
of 2001 from 18.2% last year, principally due to growth in costs for
professional liability risks, employee health benefits and doubtful accounts.
Costs related to professional liability risks totaled $14 million in the second
quarter of 2001 compared to $9 million in the second quarter of 2000, while
employee health benefits were $12 million and $9 million for the respective
periods. The provision for doubtful accounts rose to $6 million in the second
quarter of 2001 from $3 million for the same period last year. Operating
margins also were adversely impacted by the decline in private census.
Health Services Division--Rehabilitation Services
Revenues declined 72% to $9 million in the second quarter of 2001 from $33
million a year ago. The decline in revenues was primarily attributable to the
transfer, beginning on January 1, 2001, of all remaining services provided to
Company-operated nursing centers to the internal staff of those nursing
centers. Revenues for these services approximated $19 million in the second
quarter of 2000. Revenues also declined as a result of the elimination of
unprofitable external contracts.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Health Services Division -- Rehabilitation Services (Continued)
Operating income totaled $2 million in the second quarter of 2001 compared
to a loss of $1 million in the second quarter last year. The improvement
resulted from the elimination of unprofitable external contracts and reduced
provisions for doubtful accounts based upon collections of past due accounts.
Effective January 1, 2000, revenues for rehabilitation services provided to
Company-operated nursing centers approximate the costs of providing such
services. Accordingly, operating results for the second quarter of both 2001
and 2000 do not reflect any operating income related to Company-operated
nursing centers. While the health services division will continue to provide
rehabilitation services to nursing center customers, revenues related to these
services may continue to decline.
Health Services Division--Other Ancillary Services
Other ancillary services refers to certain ancillary businesses (primarily
respiratory therapy) that were discontinued as part of the realignment of the
Company's former Vencare ancillary services business in 1999.
Hospital Division--Hospitals
Revenues increased 10% to $276 million in the second quarter of 2001 from
$250 million in the same period a year ago. Patient days increased 3% from a
year ago. The increase in revenues was primarily attributable to growth in
volumes and a 7% growth in aggregate revenues per patient day, most of which
was attributable to increased Medicare and Medicaid funding. Revenues from
private payors declined 3% in the second quarter of 2001 despite growth in
patient volumes.
Hospital operating income grew 8% to $56 million in the second quarter of
2001 from $52 million in the second quarter of 2000. Despite increases in
patient volumes and revenues, hospital operating margins declined to 20.2% in
the second quarter of 2001 from 20.6% for the same period last year primarily
as a result of growth in labor and benefit costs. On a per patient day basis,
labor and benefits costs increased 13% to $508 in 2001 from $449 in the second
quarter of 2000.
Hospital Division--Pharmacy
Revenues increased 13% to $57 million in the second quarter of 2001 compared
to $50 million a year ago. The increase resulted primarily from price
increases.
The Company's pharmacies reported an operating profit of $6 million in the
second quarter of 2001 compared to $1 million in the same period of the prior
year. The cost of goods sold as a percentage of revenues declined to 58% in the
second quarter of 2001 from 60% in 2000. The improvement in operating income in
the second quarter of 2001 was primarily attributable to growth in revenues,
improved inventory and cost controls and a decline in the provision for
doubtful accounts resulting from improved cash collections.
Corporate Overhead
Operating income for the Company's operating divisions excludes allocation
of corporate overhead. These costs aggregated $27 million in the second quarter
of 2001 compared to $28 million last year. As a percentage of revenues (before
eliminations), the overhead ratio was 3.5% in the second quarter of 2001
compared to 3.8% in the same period of 2000.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Capital Costs
As previously discussed, the adjustments recorded in connection with fresh-
start accounting materially changed the recorded amounts for rent, interest,
depreciation and amortization in the Company's unaudited consolidated statement
of operations for the three months ended June 30, 2001. As a result, the
capital costs of the Reorganized Company are not comparable to those of the
Predecessor Company.
Capital costs for the second quarter of 2001 reflect the terms of the
Amended Plan and include the effects of reduced rent obligations under the
Amended Leases and interest costs incurred in connection with the Senior
Secured Notes, the CMS Agreement and the Government Settlement obligation.
Depreciation and amortization for the second quarter of 2001 were recorded
based on asset carrying amounts that were adjusted in fresh-start accounting to
reflect fair value on April 1, 2001.
During the pendency of the Chapter 11 Cases, the Company recorded the
contractual amount of interest expense related to the Company's former $1.0
billion bank credit facility and the rents due to Ventas under the pre-petition
master lease agreements. No interest costs were recorded related to the 1998
Notes since the filing of the Chapter 11 Cases. Contractual interest expense
not accrued for the 1998 Notes in each of the three months ended June 30, 2000
and March 31, 2001 approximated $7 million. For the six months ended June 30,
2000, the amount of interest not accrued for the 1998 Notes aggregated $15
million.
Income Taxes
The provision for income taxes is based upon management's estimate of
taxable income or loss for the respective periods and includes the effect of
certain non-taxable and non-deductible items, such as reorganization intangible
amortization, and the increase or decrease in the deferred tax valuation
allowance.
The Company has reduced its net deferred tax assets by a valuation allowance
to the extent management does not believe it is "more likely than not" that the
asset ultimately will be realizable. If all or a portion of the pre-
reorganization deferred tax asset is realized in the future, or considered to
"more likely than not" be realizable by management, the reorganization
intangible recorded in connection with fresh-start accounting will be reduced
accordingly. If the reorganization intangible is eliminated in full, other
intangibles will then be reduced, with any excess treated as an increase to
capital in excess of par value.
The provision for income taxes for the three months ended June 30, 2000 and
March 31, 2001 and the six months ended June 30, 2000 included charges of $2.5
million, $685,000 and $8.4 million, respectively, related to the deferred tax
valuation allowance. No changes in the valuation allowance were recorded in the
second quarter of 2001. As a result of fresh-start accounting, the deferred tax
valuation allowance included in the Company's unaudited condensed consolidated
balance sheet aggregated $284 million at June 30, 2001.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness. This gain will not be taxable since the
gain resulted from the reorganization under the Bankruptcy Code. However, the
Company will be required, as of the beginning of its 2002 taxable year, to
reduce certain tax attributes relating to the Company including (a) NOLs, (b)
certain tax credits and (c) tax bases in assets in an amount equal to such gain
on extinguishment. The reorganization of the Company on the Effective Date
constituted an ownership change under Section 382 of the Internal Revenue Code
and the use of any of the Company's NOLs and tax credits generated prior to the
ownership change, that are not reduced pursuant to the provisions discussed
above, will be subject to an overall annual limitation of approximately
$22 million.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Income Taxes (Continued)
The Company had NOLs of approximately $164 million (after reductions in the
attributes discussed above) and $215 million as of June 30, 2001 and December
31, 2000, respectively. These carryforwards expire in various amounts through
2021.
Consolidated Results
The Company reported pretax income of $29 million for the second quarter of
2001, resulting from improved operating income and the significant impact of
the Amended Plan. For the same period of 2000, the Company reported a pretax
operating loss of $7 million. The operating loss in the second quarter of 2000
includes a gain of approximately $5 million on the sale of a closed hospital
and reorganization items, consisting principally of professional fees incurred
in connection with the Company's restructuring activities, aggregated $3
million.
Income from operations before extraordinary items in the second quarter of
2001 aggregated $16 million compared to a loss of $8 million in the second
quarter of 2000.
Liquidity
Cash flows from operations before reorganization items for the three months
ended June 30, 2001 aggregated $65 million, approximately the same as reported
in the second quarter of 2000. Cash flows in both periods were sufficient to
fund capital expenditures and required repayments of debt.
Working capital totaled $237 million (including $55 million of "cash-
restricted") at June 30, 2001. The Company believes that existing cash levels
and the availability of borrowings under the Credit Facility are sufficient to
meet the Company's current liquidity needs.
In May 2001, the Company prepaid approximately $56 million in full
satisfaction of its obligation under the CMS Agreement. The transaction was
financed through the use of existing cash.
In connection with the emergence from bankruptcy, the Company entered into
the Credit Facility on the Effective Date. The Credit Facility constitutes a
working capital facility for general corporate purposes including payments
related to the Company's obligations under the Amended Plan. The Credit
Facility consists of a five-year $120 million revolving credit facility and
provides for a $40 million letter of credit subfacility. Direct borrowings
under the Credit Facility will bear interest, at the option of the Company, at
(a) prime (or, if higher, the federal funds rate plus 1/2%) plus 3% or (b)
LIBOR (as defined in the agreement) plus 4%. The Credit Facility is
collateralized by substantially all of the assets of the Company and its
subsidiaries, including certain owned real property. At June 30, 2001, there
were no outstanding borrowings under the Credit Facility.
As part of the Amended Plan, the Company also issued $300 million of Senior
Secured Notes on the Effective Date. The Senior Secured Notes have a maturity
of seven years and bear interest at the rate of LIBOR (as defined in the
agreement) plus 4 1/2%. The interest on the Senior Secured Notes will begin to
accrue approximately two quarters following the Effective Date. For accounting
purposes, the Company recorded the appropriate interest costs in the second
quarter of 2001 and intends to amortize the amount accrued during the interest-
free period over the remaining life of the debt. The Senior Secured Notes are
collateralized by a second priority lien on substantially all of the assets of
the Company and its subsidiaries, including certain owned real property.
At June 30, 2001, the Company was in compliance with the terms of the Credit
Facility and the Senior Secured Notes.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
As previously reported, the Company was informed by the DOJ that the Company
and Ventas were the subjects of ongoing investigations into various Medicare
reimbursement issues, including hospital cost reporting issues, Vencare billing
practices and various quality of care issues in the hospitals and nursing
centers formerly operated by Ventas and currently operated by the Company. In
connection with the Amended Plan, the claims of the DOJ were settled through
the Government Settlement. The Government Settlement also provides for the
dismissal of certain pending claims and lawsuits filed against the Company. See
Notes 3 and 11 of the Notes to Condensed Consolidated Financial Statements.
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. These documents are filed annually in settlement of
amounts due to or from the various agencies administering the reimbursement
programs. These cost reports indicated amounts due from the Company aggregating
$58 million. This liability arose during 1999 as part of the Company's routine
settlement of Medicare reimbursement overpayments. Such amounts were classified
as liabilities subject to compromise in the unaudited condensed consolidated
balance sheet and, accordingly, no funds were disbursed by the Company in
settlement of such pre-petition liabilities. Under the terms of the Amended
Plan, this obligation was discharged.
Capital Resources
Capital expenditures totaled $26 million and $14 million for the three
months ended June 30, 2001 and 2000, respectively. Excluding acquisitions,
capital expenditures could approximate $75 million in 2001. Management believes
that its capital expenditure program is adequate to improve and equip existing
facilities.
Capital expenditures in both periods were financed through internally
generated funds. At June 30, 2001, the estimated cost to complete and equip
construction in progress approximated $7 million.
In May 2001, the Company sold its investment in BHC for $40 million. Under
the terms of the Credit Facility and Senior Secured Notes, proceeds from the
sale of BHC will be available to fund future capital expenditures for a period
of approximately one year from the sale. Any proceeds not expended during that
period would be used to permanently reduce the commitments under the Credit
Facility to $75 million and repay any outstanding loans in excess of such
commitment. Any remaining proceeds would be used to repay loans under the
Senior Secured Notes. For accounting purposes, the Company has classified these
funds as "cash-restricted" in the unaudited condensed consolidated balance
sheet at June 30, 2001.
The terms of the Senior Secured Notes and the Credit Facility include
certain covenants which limit the Company's annual capital expenditures. In
addition, borrowings under the Credit Facility to finance acquisitions also are
limited.
Other Information
Effects of Inflation and Changing Prices
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. In recent years, significant cost containment measures
enacted by Congress and certain state legislators have limited the Company's
ability to recover its cost increases through increased pricing of its
healthcare services. Medicare revenues in the Company's nursing centers are
subject to fixed payments under PPS. Medicaid reimbursement rates in many
states in which the Company operates nursing centers also are based on fixed
payment systems. In addition, by repealing the Boren Amendment, the Budget Act
eased existing impediments on the states' ability to reduce their Medicaid
reimbursement levels to the Company's nursing centers. Medicare revenues in the
Company's hospitals also have been reduced by the Budget Act.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of Inflation and Changing Prices (Continued)
During 2000, the BBRA provided a measure of relief to the Medicare
reimbursement reductions imposed by the Budget Act. Under BIPA, the nursing
component of each RUG category was increased by 16.66% over the previous rates
for skilled nursing care beginning on April 1, 2001. The provisions of both the
BBRA and BIPA increased Medicare reimbursement to the Company's nursing centers
during the second quarter of 2001. The Company believes that the provisions of
the BBRA and BIPA will have a positive effect on its operating results in 2001,
particularly in the health services division.
Management believes, however, that its operating margins may continue to be
under pressure because of continuing regulatory scrutiny and growth in
operating expenses in excess of increases in payments by third-party payors. In
addition, as a result of competitive pressures, the Company's ability to
maintain operating margins through price increases to private patients is
limited.
Restatement of Previously Issued Financial Statements
As discussed in Note 2 of the Notes to Condensed Consolidated Financial
Statements, the Company announced on August 14, 2001 that it will restate
certain of its previously issued consolidated financial statements as a result
of an oversight related to the allowance for professional liability risks. The
Company does not believe that the restatement of prior year results will have a
material effect on the Company's operating results for fiscal 2001.
Litigation
The Company is a party to certain material litigation. See Note 11 of the
Notes to Condensed Consolidated Financial Statements.
36
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)
| Reorganized
Predecessor Company | Company
------------------------------------------------ | -----------
(Restated) |
-------------------------------------- |
2000 Quarters First | Second
-------------------------------------- Quarter | Quarter
First Second Third Fourth 2001 | 2001
-------- -------- -------- -------- -------- | -----------
Revenues......................... $715,456 $713,424 $717,253 $742,409 $752,409 | $770,764
-------- -------- -------- -------- -------- | --------
Salaries, wages and benefits..... 405,313 392,383 405,510 420,749 427,649 | 432,182
Supplies......................... 93,398 94,619 92,251 94,272 94,319 | 96,043
Rent............................. 76,220 76,788 77,870 76,931 76,995 | 64,580
Other operating expenses......... 122,589 122,770 135,345 123,066 126,701 | 127,655
Depreciation and amortization.... 17,902 18,168 17,464 20,011 18,645 | 15,886
Interest expense................. 16,239 14,663 14,415 15,114 14,000 | 8,463
Investment income................ (1,206) (1,012) (1,490) (1,685) (1,919) | (3,438)
-------- -------- -------- -------- -------- | --------
730,455 718,379 741,365 748,458 756,390 | 741,371
-------- -------- -------- -------- -------- | --------
Income (loss) before |
reorganization items and income |
taxes........................... (14,999) (4,955) (24,112) (6,049) (3,981) | 29,393
Reorganization items............. 3,065 2,530 4,745 2,296 (53,666) | -
-------- -------- -------- -------- -------- | --------
Income (loss) before income |
taxes........................... (18,064) (7,485) (28,857) (8,345) 49,685 | 29,393
Provision for income taxes....... 500 500 500 500 500 | 12,904
-------- -------- -------- -------- -------- | --------
Income (loss) from operations |
before extraordinary items... (18,564) (7,985) (29,357) (8,845) 49,185 | 16,489
Extraordinary gain on |
extinguishment of debt.......... - - - - 422,791 | 1,396
-------- -------- -------- -------- -------- | --------
Net income (loss)............. (18,564) (7,985) (29,357) (8,845) 471,976 | 17,885
Preferred stock dividend |
requirements.................... (261) (262) (261) (262) (261) | -
-------- -------- -------- -------- -------- | --------
Income (loss) available to |
common stockholders.......... $(18,825) $ (8,247) $(29,618) $ (9,107) $471,715 | $ 17,885
======== ======== ======== ======== ======== | ========
Earnings (loss) per common share: |
Basic: |
Income (loss) from operations |
before extraordinary items.... $ (0.27) $ (0.12) $ (0.42) $ (0.13) $ 0.69 | $ 1.09
Extraordinary gain on |
extinguishment of debt........ - - - - 6.02 | 0.09
-------- -------- -------- -------- -------- | --------
Net income (loss)............. $ (0.27) $ (0.12) $ (0.42) $ (0.13) $ 6.71 | $ 1.18
======== ======== ======== ======== ======== | ========
Diluted: |
Income (loss) from operations |
before extraordinary items.... $ (0.27) $ (0.12) $ (0.42) $ (0.13) $ 0.69 | $ 1.00
Extraordinary gain on |
extinguishment of debt........ - - - - 5.90 | 0.08
-------- -------- -------- -------- -------- | --------
Net income (loss)............. $ (0.27) $ (0.12) $ (0.42) $ (0.13) $ 6.59 | $ 1.08
======== ======== ======== ======== ======== | ========
Shares used in computing earnings |
(loss) per common share: |
Basic.......................... 70,240 70,147 70,265 70,262 70,261 | 15,090
Diluted........................ 70,240 70,147 70,265 70,262 71,656 | 16,533
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands)
| Reorganized
Predecessor Company | Company
------------------------------------------------ | -----------
(Restated) |
-------------------------------------- |
2000 Quarters First | Second
-------------------------------------- Quarter | Quarter
First Second Third Fourth 2001 | 2001
-------- -------- -------- -------- -------- | -----------
Revenues: |
Health services division: |
Nursing centers............. $412,703 $413,159 $420,588 $429,177 $429,523 | $444,137
Rehabilitation services..... 34,377 33,173 34,032 33,454 10,695 | 9,244
Other ancillary services.... (5) (2) (1) 8 - | -
Elimination................. (18,091) (18,509) (19,671) (20,920) - | -
-------- -------- -------- -------- -------- | --------
428,984 427,821 434,948 441,719 440,218 | 453,381
Hospital division: |
Hospitals................... 253,591 250,027 244,391 259,938 271,984 | 276,112
Pharmacy.................... 47,468 49,949 51,593 55,242 54,880 | 56,567
-------- -------- -------- -------- -------- | --------
301,059 299,976 295,984 315,180 326,864 | 332,679
-------- -------- -------- -------- -------- | --------
730,043 727,797 730,932 756,899 767,082 | 786,060
Elimination of pharmacy |
charges to Company nursing |
centers..................... (14,587) (14,373) (13,679) (14,490) (14,673) | (15,296)
-------- -------- -------- -------- -------- | --------
$715,456 $713,424 $717,253 $742,409 $752,409 | $770,764
======== ======== ======== ======== ======== | ========
Income (loss) from operations |
before extraordinary items: |
Operating income (loss): |
Health services division: |
Nursing centers............ $ 68,712 $ 75,348 $ 69,493 $ 65,185 $ 70,543 | $ 78,735
Rehabilitation services.... 486 (1,059) 2,837 5,783 690 | 1,809
Other ancillary services... 130 242 2,687 1,678 250 | 103
-------- -------- -------- -------- -------- | --------
69,328 74,531 75,017 72,646 71,483 | 80,647
Hospital division: |
Hospitals.................. 55,398 51,547 47,284 51,629 54,778 | 55,685
Pharmacy................... (1,200) 789 1,075 6,757 6,176 | 6,036
-------- -------- -------- -------- -------- | --------
54,198 52,336 48,359 58,386 60,954 | 61,721
-------- -------- -------- -------- -------- | --------
Corporate overhead.......... (29,370) (27,750) (29,993) (26,710) (28,697) | (27,484)
Unusual transactions........ - 4,535 (9,236) - - | -
Reorganization items........ (3,065) (2,530) (4,745) (2,296) 53,666 | -
-------- -------- -------- -------- -------- | --------
Operating income........... 91,091 101,122 79,402 102,026 157,406 | 114,884
Rent......................... (76,220) (76,788) (77,870) (76,931) (76,995) | (64,580)
Depreciation and |
amortization................ (17,902) (18,168) (17,464) (20,011) (18,645) | (15,886)
Interest, net................ (15,033) (13,651) (12,925) (13,429) (12,081) | (5,025)
-------- -------- -------- -------- -------- | --------
Income (loss) before income |
taxes....................... (18,064) (7,485) (28,857) (8,345) 49,685 | 29,393
Provision for income taxes... 500 500 500 500 500 | 12,904
-------- -------- -------- -------- -------- | --------
$(18,564) $ (7,985) $(29,357) $ (8,845) $ 49,185 | $ 16,489
======== ======== ======== ======== ======== | ========
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
(In thousands)
| Reorganized
Predecessor Company | Company
----------------------------------------- | -----------
Restated |
-------------------------------- |
2000 Quarters First | Second
-------------------------------- Quarter | Quarter
First Second Third Fourth 2001 | 2001
------- ------- ------- ------- ------- | -----------
Rent: |
Health services division: |
Nursing centers.............. $43,589 $43,888 $45,037 $44,288 $44,253 | $40,190
Rehabilitation services...... 69 130 80 150 39 | 27
Other ancillary services..... 20 17 33 44 - | 3
------- ------- ------- ------- ------- | -------
43,678 44,035 45,150 44,482 44,292 | 40,220
Hospital division: |
Hospitals.................... 30,695 31,199 31,089 30,783 30,839 | 22,917
Pharmacy..................... 900 853 921 940 941 | 968
------- ------- ------- ------- ------- | -------
31,595 32,052 32,010 31,723 31,780 | 23,885
------- ------- ------- ------- ------- | -------
Corporate..................... 947 701 710 726 923 | 475
------- ------- ------- ------- ------- | -------
$76,220 $76,788 $77,870 $76,931 $76,995 | $64,580
======= ======= ======= ======= ======= | =======
|
Depreciation and amortization: |
Health services division: |
Nursing centers.............. $ 6,670 $ 6,720 $ 6,741 $ 7,765 $ 7,219 | $ 5,055
Rehabilitation services...... 3 1 2 (2) - | 11
Other ancillary services..... 285 263 (69) 134 129 | -
------- ------- ------- ------- ------- | -------
6,958 6,984 6,674 7,897 7,348 | 5,066
Hospital division: |
Hospitals.................... 5,307 5,271 5,020 5,572 5,457 | 5,690
Pharmacy..................... 526 491 547 534 627 | 447
------- ------- ------- ------- ------- | -------
5,833 5,762 5,567 6,106 6,084 | 6,137
------- ------- ------- ------- ------- | -------
Corporate..................... 5,111 5,422 5,223 6,008 5,213 | 4,683
------- ------- ------- ------- ------- | -------
$17,902 $18,168 $17,464 $20,011 $18,645 | $15,886
======= ======= ======= ======= ======= | =======
|
Capital expenditures: |
Health services division...... $ 2,908 $ 3,794 $ 5,611 $16,138 $ 7,962 | $ 4,529
Hospital division............. 3,536 2,944 3,162 14,033 8,901 | 8,644
Corporate: |
Information systems.......... 1,346 6,767 11,333 6,029 3,496 | 3,135
Other........................ 460 568 16 1,343 1,679 | 9,331
------- ------- ------- ------- ------- | -------
$ 8,250 $14,073 $20,122 $37,543 $22,038 | $25,639
======= ======= ======= ======= ======= | =======
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data (Continued)
(Unaudited)
| Reorganized
Predecessor Company | Company
------------------------------------------------- | -----------
2000 Quarters First | Second
--------------------------------------- Quarter | Quarter
First Second Third Fourth 2001 | 2001
--------- --------- --------- --------- --------- | -----------
Nursing Center Data: |
End of period data: |
Number of nursing cen- |
ters: |
Owned or leased....... 280 280 278 278 278 | 280
Managed............... 40 41 39 34 35 | 35
--------- --------- --------- --------- --------- | ---------
320 321 317 312 313 | 315
========= ========= ========= ========= ========= | =========
Number of licensed |
beds: |
Owned or leased....... 36,653 36,677 36,465 36,466 36,469 | 36,746
Managed............... 4,262 4,436 4,070 3,723 3,861 | 3,861
--------- --------- --------- --------- --------- | ---------
40,915 41,113 40,535 40,189 40,330 | 40,607
========= ========= ========= ========= ========= | =========
Revenue mix %: |
Medicare............... 28 28 27 28 31 | 32
Medicaid............... 48 48 50 49 47 | 47
Private and other...... 24 24 23 23 22 | 21
Patient days (excludes |
managed facilities): |
Medicare............... 398,329 382,933 381,890 378,782 411,783 | 417,065
Medicaid............... 1,918,732 1,917,429 1,960,359 1,939,047 1,860,256 | 1,871,895
Private and other...... 590,619 579,128 570,679 562,368 532,943 | 533,792
--------- --------- --------- --------- --------- | ---------
2,907,680 2,879,490 2,912,928 2,880,197 2,804,982 | 2,822,752
========= ========= ========= ========= ========= | =========
Revenues per patient |
day: |
Medicare............... $ 292 $ 301 $ 301 $ 321 $ 325 | $ 344
Medicaid............... 103 104 107 109 109 | 110
Private and other...... 167 171 169 171 175 | 176
Weighted average....... 142 143 144 149 153 | 157
Hospital Data: |
End of period data: |
Number of hospitals.... 56 56 56 56 56 | 56
Number of licensed |
beds.................. 4,931 4,880 4,886 4,886 4,867 | 4,867
Revenue mix %: |
Medicare............... 58 53 56 53 56 | 56
Medicaid............... 10 9 12 11 11 | 11
Private and other...... 32 38 32 36 33 | 33
Patient days: |
Medicare............... 188,063 177,083 167,946 171,060 185,731 | 182,906
Medicaid............... 31,964 33,416 34,052 35,322 34,872 | 34,799
Private and other...... 51,747 51,743 50,567 51,700 52,426 | 53,016
--------- --------- --------- --------- --------- | ---------
271,774 262,242 252,565 258,082 273,029 | 270,721
========= ========= ========= ========= ========= | =========
Revenues per patient |
day: |
Medicare............... $ 782 $ 754 $ 814 $ 808 $ 820 | $ 839
Medicaid............... 767 632 847 839 871 | 872
Private and other...... 1,584 1,845 1,557 1,782 1,703 | 1,742
Weighted average....... 933 953 968 1,007 996 | 1,020
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's exposure to market risk contains
"forward-looking statements" that involve risks and uncertainties. The
information presented has been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Given the unpredictability of interest rates as well as other factors,
actual results could differ materially from those projected in such forward-
looking information.
The Company's only significant exposure to market risk is changes in LIBOR
interest rates which affect the interest paid on its borrowings.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity date.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in thousands)
Expected Maturities Fair
--------------------------------------------------- Value
2001 2002 2003 2004 2005 Thereafter Total 6/30/01
----- ----- ---- ---- ---- ---------- -------- --------
Liabilities:
Long-term debt,
including amounts due
within one year:
Fixed rate.............. $ 350 $ 436 $197 $72 $ 48 $ 1,433 $ 2,536 $ 2,930
Average interest rate.. 10.1% 10.0% 9.6% 8.5% 8.8% 8.8%
Variable rate........... $ - $ - $ - $ - $ - $300,000 $300,000 $280,500
Average interest rate
(a)
--------
(a)Interest is payable, at the option of the Company, at one, two, three or six
month LIBOR plus 4 1/2%.
41
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.
KINDRED HEALTHCARE, INC.
Date: August 29, 2001 /s/ Edward L. Kuntz
----------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
Date: August 29, 2001 /s/ Richard A. Schweinhart
----------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
42