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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----- -----
COMMISSION FILE NUMBER 1-10989
VENCOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1055020
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3300 PROVIDIAN CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(502) 596-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT JUNE 30, 1996
--------------------------- --------------------------------
Common stock, $.25 par value 70,398,961 shares
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1 of 16
VENCOR, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Income--for the quarter
and six months ended June 30, 1996 and 1995.................. 3
Condensed Consolidated Balance Sheet--June 30, 1996 and
December 31, 1995............................................ 4
Condensed Consolidated Statement of Cash Flows--for the six
months ended June 30, 1996 and 1995.......................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations.................................... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
2
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER SIX MONTHS
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
Revenues.......................... $634,554 $578,314 $1,260,891 $1,130,492
-------- -------- ---------- ----------
Salaries, wages and benefits...... 366,705 330,455 739,023 652,261
Supplies.......................... 53,999 46,882 105,761 90,398
Rent.............................. 19,102 19,771 38,269 39,350
Other operating expenses.......... 110,873 104,635 215,374 203,882
Depreciation and amortization..... 24,846 22,507 49,639 43,677
Interest expense.................. 12,141 17,171 24,621 32,629
Investment income................. (3,300) (3,548) (6,878) (6,728)
Non-recurring transactions........ - 5,555 - 5,555
-------- -------- ---------- ----------
584,366 543,428 1,165,809 1,061,024
-------- -------- ---------- ----------
Income from operations before
income taxes..................... 50,188 34,886 95,082 69,468
Provision for income taxes........ 19,323 13,799 36,607 27,209
-------- -------- ---------- ----------
Income from operations............ 30,865 21,087 58,475 42,259
Extraordinary loss on
extinguishment of debt, net of
income tax benefit............... - (2,725) - (2,791)
-------- -------- ---------- ----------
Net income..................... 30,865 18,362 58,475 39,468
Preferred stock dividend
requirements..................... - (1,795) - (3,588)
-------- -------- ---------- ----------
Income available to common
stockholders.................. $ 30,865 $ 16,567 $ 58,475 $ 35,880
======== ======== ========== ==========
Earnings per common and common
equivalent share:
Primary:
Income from operations.......... $ .43 $ .32 $ .82 $ .65
Extraordinary loss on
extinguishment of debt......... - (.05) - (.05)
-------- -------- ---------- ----------
Net income..................... $ .43 $ .27 $ .82 $ .60
======== ======== ========== ==========
Fully diluted:
Income from operations.......... $ .43 $ .30 $ .82 $ .61
Extraordinary loss on
extinguishment of debt......... - (.04) - (.04)
-------- -------- ---------- ----------
Net income..................... $ .43 $ .26 $ .82 $ .57
======== ======== ========== ==========
Shares used in computing earnings
per common and common equivalent
share:
Primary.......................... 71,373 60,673 71,415 59,785
Fully diluted.................... 71,373 72,454 71,415 71,597
See accompanying notes.
3
VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 54,362 $ 35,182
Accounts and notes receivable less allowance for loss
of $18,504-- June 30 and $16,785--December 31....... 382,677 360,147
Inventories.......................................... 25,423 24,862
Income taxes......................................... 50,179 77,997
Other................................................ 25,143 26,491
---------- ----------
537,784 524,679
Property and equipment, at cost....................... 1,611,073 1,552,293
Accumulated depreciation.............................. (405,281) (362,199)
---------- ----------
1,205,792 1,190,094
Notes receivable less allowance for loss of $15,700--
June 30 and $15,305--December 31..................... 55,984 78,090
Intangible assets less accumulated amortization of
$26,122--June 30 and $22,149--December 31............ 44,894 42,580
Other................................................. 73,661 77,011
---------- ----------
$1,918,115 $1,912,454
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 104,773 $ 99,887
Salaries, wages and other compensation............... 99,148 99,937
Other accrued liabilities............................ 67,664 75,617
Long-term debt due within one year................... 31,045 9,572
---------- ----------
302,630 285,013
Long-term debt........................................ 699,868 778,100
Deferred credits and other liabilities................ 77,961 77,277
Stockholders' equity:
Common stock, $.25 par value; authorized 180,000
shares; issued 72,306 shares--June 30 and
72,158 shares--December 31.......................... 18,077 18,040
Capital in excess of par value....................... 690,006 684,377
Retained earnings.................................... 161,340 102,865
---------- ----------
869,423 805,282
Common treasury stock; 1,907 shares--June 30
and 2,025 shares--December 31....................... (31,767) (33,218)
---------- ----------
837,656 772,064
---------- ----------
$1,918,115 $1,912,454
========== ==========
See accompanying notes.
4
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
1996 1995
-------- ---------
Cash flows from operating activities:
Net income............................................... $ 58,475 $ 39,468
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 49,639 43,677
Deferred income taxes................................... 2,671 2,211
Extraordinary loss on extinguishment of debt............ - 4,528
Other................................................... 11,430 8,412
Changes in operating assets and liabilities:
Accounts and notes receivable.......................... (26,458) (37,458)
Inventories and other assets........................... 1,332 (4,787)
Accounts payable....................................... 5,151 8,211
Other accrued liabilities.............................. 14,786 1,733
-------- ---------
Net cash provided by operating activities............. 117,026 65,995
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment....................... (61,454) (71,128)
Acquisition of healthcare businesses and previously
leased facilities....................................... (5,182) (38,116)
Sale of assets........................................... 6,171 185
Collection of notes receivable........................... 23,366 2,459
Net change in investments................................ (532) (19,863)
Other.................................................... (3,895) (3,697)
-------- ---------
Net cash used in investing activities................. (41,526) (130,160)
-------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving lines of
credit.................................................. (40,600) 8,500
Issuance of long-term debt............................... 1,677 34,889
Repayment of long-term debt.............................. (18,471) (47,556)
Public offering of common stock.......................... - 66,494
Other issuances of common stock.......................... 928 452
Payment of dividends..................................... - (1,537)
Other.................................................... 146 (3,777)
-------- ---------
Net cash provided by (used in) financing activities... (56,320) 57,465
-------- ---------
Change in cash and cash equivalents....................... 19,180 (6,700)
Cash and cash equivalents at beginning of period.......... 35,182 39,018
-------- ---------
Cash and cash equivalents at end of period................ $ 54,362 $ 32,318
======== =========
Supplemental information:
Interest payments........................................ $ 24,704 $ 30,402
Income tax payments...................................... 7,071 23,041
See accompanying notes.
5
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Vencor, Inc. ("Vencor") operates an integrated network of healthcare
services primarily focused on the needs of the elderly. At June 30, 1996,
Vencor operated 37 hospitals, 310 nursing centers, a contract services
business ("Vencare") which provides respiratory therapy, rehabilitation
therapy and subacute medical services primarily to nursing centers, 53 retail
and institutional pharmacy outlets and 23 independent and assisted living
communities with 3,055 units.
On September 28, 1995, Vencor consummated a merger with The Hillhaven
Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the
"Hillhaven Merger"). See Note 5.
Prior to its merger with Vencor, Hillhaven consummated a merger with
Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock-
for-stock transaction (the "Nationwide Merger"). See Note 6.
NOTE 2--BASIS OF PRESENTATION
The Hillhaven and Nationwide Mergers have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying condensed consolidated
financial statements give retroactive effect to these transactions and include
the combined operations of Vencor, Hillhaven and Nationwide for all periods
presented.
The accompanying condensed consolidated financial statements do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally required in annual reports on Form 10-K.
Accordingly, these financial statements should be read in conjunction with the
audited consolidated financial statements of Vencor for the year ended
December 31, 1995 filed on Form 10-K with the Securities and Exchange
Commission.
The accompanying condensed consolidated financial statements have been
prepared in accordance with Vencor's customary accounting practices and have
not been audited. Management believes that the financial information included
herein reflects all adjustments necessary for a fair presentation of interim
results and, except as discussed in Note 7, all such adjustments are of a
normal and recurring nature.
NOTE 3--REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of revenues by payor type follows (dollars in thousands):
QUARTER SIX MONTHS
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
Medicare............................ $204,755 $176,446 $ 401,483 $ 342,410
Medicaid............................ 199,022 188,912 398,857 373,906
Private and other................... 241,939 213,806 479,954 415,371
-------- -------- ---------- ----------
645,716 579,164 1,280,294 1,131,687
Elimination......................... (11,162) (850) (19,403) (1,195)
-------- -------- ---------- ----------
$634,554 $578,314 $1,260,891 $1,130,492
======== ======== ========== ==========
6
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--EARNINGS PER SHARE
The computation of earnings per common and common equivalent share give
retroactive effect to the Hillhaven and Nationwide Mergers and is based upon
the weighted average number of common shares outstanding adjusted for the
dilutive effect of common stock equivalents (consisting primarily of stock
options) and, in 1995, convertible debt securities.
NOTE 5--HILLHAVEN MERGER
On September 27, 1995, the stockholders of both Vencor and Hillhaven
approved the Hillhaven Merger, effective September 28, 1995. In connection
with the Hillhaven Merger, each share of Hillhaven common stock was converted
on a tax-free basis into 0.935 of a share of Vencor common stock, resulting in
the issuance of approximately 31,651,000 Vencor common shares.
The Hillhaven Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Hillhaven Merger and include the combined operations of Vencor
and Hillhaven for all periods presented. A summary of the results of
operations of the separate entities for the respective periods ended June 30,
1995 follows (dollars in thousands):
NON-RECURRING
VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED
-------- --------- ------------- ----------- ------------
Second quarter:
Revenues............... $140,663 $438,501 $ - $ (850) $ 578,314
Income (loss) from
operations............ 10,813 13,960 (3,686) - 21,087
Net income (loss)...... 10,813 11,235 (3,686) - 18,362
Six months:
Revenues............... $261,094 $870,593 $ - $(1,195) $1,130,492
Income (loss) from
operations............ 19,961 25,984 (3,686) - 42,259
Net income (loss)...... 19,961 23,193 (3,686) - 39,468
NOTE 6--NATIONWIDE MERGER
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. In connection therewith, 4,675,000 shares of common stock
(effected for the Hillhaven Merger exchange ratio) were issued in exchange for
all of the outstanding shares of Nationwide.
The Nationwide Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Nationwide Merger and include the combined operations of
Hillhaven and Nationwide for all periods presented. A summary of the results
of operations of the separate entities for the respective periods ended June
30, 1995 follows (dollars in thousands):
NON-RECURRING
HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED
--------- ---------- ------------- ------------
Second quarter:
Revenues................ $405,133 $33,368 $ - $438,501
Income (loss) from oper-
ations................. 13,113 847 (3,686) 10,274
Net income (loss)....... 12,801 (1,566) (3,686) 7,549
Six months:
Revenues................ $803,793 $66,800 $ - $870,593
Income (loss) from oper-
ations................. 23,837 2,147 (3,686) 22,298
Net income (loss)....... 23,459 (266) (3,686) 19,507
7
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--NON-RECURRING TRANSACTIONS
Operating results for the second quarter of 1995 include pretax charges of
$5.5 million related primarily to the Nationwide Merger.
NOTE 8--PROPOSED INITIAL PUBLIC OFFERING
On May 15, 1996, the Board of Directors authorized the establishment of a
newly formed corporation, Atria Communities, Inc. ("Atria"), to operate
Vencor's independent and assisted living business. As part of the transaction,
Vencor intends to conduct an initial public offering of 5,000,000 shares of
Atria common stock (the "IPO"), the net proceeds from which will be used
primarily to finance the development and acquisition of additional assisted
living communities. Upon consummation of the IPO, it is expected that Vencor
will own 10,000,000 shares of Atria common stock.
A registration statement on Form S-1 detailing the IPO was filed with the
Securities and Exchange Commission on June 26, 1996. Significant agreements
related to the IPO are discussed below.
Credit Facility
Concurrently with the consummation of the IPO, Atria expects to enter into a
senior bank credit facility (the "Atria Credit Facility"), which will have a
maturity of four years and may be extended at the option of the banks for an
additional year. Although the terms of the Atria Credit Facility have not yet
been finalized, it is presently expected to aggregate up to $200 million in
revolving credits, including a letter of credit option not to exceed $70
million. It is anticipated that loans under the Atria Credit Facility will
bear interest, at Atria's option, at either (i) a base rate based on PNC
Bank's prime rate or the daily federal funds rate or (ii) a LIBOR rate. It is
expected that obligations under the Atria Credit Facility will be secured by
all of Atria's property, the capital stock of Atria's present and future
principal subsidiaries and all intercompany indebtedness owed to Atria by its
subsidiaries. It is also contemplated that the Atria Credit Facility will
contain various affirmative, negative and financial covenants. The Atria
Credit Facility will be conditioned upon, among other things, consummation of
the IPO (the net proceeds from which must aggregate at least $50 million), and
Vencor's ownership of at least 63% of Atria's common stock upon consummation
of the IPO and at least 30% thereafter.
Agreements with Atria
Atria and Vencor or its subsidiaries have or will enter into certain
arrangements which will become effective on or before the completion of the
IPO. The agreements are intended to facilitate an orderly transition of Atria
from a division of Vencor to a separate publicly held entity which will be
minimally disruptive to both Atria and Vencor. In addition to various
agreements related to administrative support, shared services and real estate
leases, significant agreements with Atria include:
Guarantees--Vencor will guarantee for four years certain borrowings by
Atria under the Atria Credit Facility in amounts up to $100 million in the
first year following the IPO, declining to $75 million, $50 million and $25
million in each respective year thereafter.
Line of Credit--Certain subsidiaries of Atria will borrow up to $14.0
million from Vencor for a period of one year from the consummation of the
IPO, at which time any amounts borrowed are then due. Interest will be
payable quarterly at rates equal to prime plus 1.0%.
Income Taxes--A tax sharing agreement will provide for risk-sharing
arrangements in connection with various income tax related issues.
8
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--PROPOSED INITIAL PUBLIC OFFERING (CONTINUED)
Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of
1933 of Atria common stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from
the completion of the IPO and are subject to certain conditions and
limitations, including the right of underwriters of an offering to limit
the number of shares owned by Vencor included in such registration.
Liabilities and Indemnifications--Atria will assume all contractual
liabilities relating to the assets transferred by Vencor to Atria.
NOTE 9--SUBSEQUENT EVENT
In June 1996, Vencor announced its intention to repurchase up to 2,000,000
shares of its common stock. As of July 24, 1996, 1,177,800 shares had been
repurchased at an aggregate cost of approximately $33.1 million.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HILLHAVEN AND NATIONWIDE MERGERS
The Hillhaven Merger was consummated on September 28, 1995. At the time of
the Hillhaven Merger, Hillhaven operated 311 nursing centers, 56 retail and
institutional pharmacies and 23 independent and assisted living communities
with 3,122 units. Annualized revenues approximated $1.7 billion.
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. At the time of the Nationwide Merger, Nationwide operated 23
nursing centers containing 3,257 licensed beds and four independent and
assisted living communities with 442 units. Annualized revenues approximated
$125 million.
As discussed in the Notes to Condensed Consolidated Financial Statements,
the Hillhaven and Nationwide Mergers have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying condensed consolidated
financial statements and financial and operating data included herein give
retroactive effect to these transactions and include the combined operations
of Vencor, Hillhaven and Nationwide for all periods presented.
RESULTS OF OPERATIONS
Vencor operates an integrated network of healthcare services focused
primarily on the needs of the elderly through the operations of hospitals,
nursing centers and ancillary services businesses which include Vencare,
pharmacies, and independent and assisted living communities. A summary of
revenues follows (dollars in thousands):
QUARTER SIX MONTHS
------------------ % ---------------------- %
1996 1995 CHANGE 1996 1995 CHANGE
-------- -------- ------ ---------- ---------- ------
Hospitals............... $138,612 $116,186 19.3 $ 268,659 $ 217,331 23.6
-------- -------- ---------- ----------
Nursing centers:
Long-term care......... 266,105 261,370 1.8 529,235 522,515 1.3
Subacute care and
medical rehabilitation
care.................. 136,799 120,504 13.5 275,123 235,172 17.0
-------- -------- ---------- ----------
402,904 381,874 5.5 804,358 757,687 6.2
-------- -------- ---------- ----------
Ancillary services:
Vencare................ 45,010 27,015 66.6 90,625 47,804 89.6
Pharmacies............. 46,855 42,674 9.8 92,227 86,294 6.9
Independent and
assisted living
communities........... 12,335 11,415 8.1 24,425 22,571 8.2
-------- -------- ---------- ----------
104,200 81,104 28.5 207,277 156,669 32.3
-------- -------- ---------- ----------
Elimination............. (11,162) (850) (19,403) (1,195)
-------- -------- ---------- ----------
$634,554 $578,314 9.7 $1,260,891 $1,130,492 11.5
======== ======== ========== ==========
Hospital revenue increases for the second quarter and six months ended June
30, 1996 resulted from the acquisition of facilities and growth in same-store
patient days. Hospital patient days rose 19% to 148,313 in the second quarter
of 1996 and 24% to 294,328 for the first six months of 1996 from the
respective periods a year ago.
As part of its integrated growth strategy, Vencor intends to expand its
subacute medical and rehabilitation services provided in its nursing centers
and reduce the percentage of patient days attributable to custodial patient
care. Patient days related to subacute medical and rehabilitation services
grew 20% to 493,103 in the second quarter and 22% to 996,610 in the six month
period, while patient days related to custodial care declined 4% in the second
quarter to 2,614,378 and 3% to 5,238,391 in the six month period. Revenues
related to custodial care during both the second quarter and six months ended
June 30, 1996 were adversely impacted by a decline in private pay patient
days.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Growth in ancillary services revenues in both periods of 1996 was primarily
attributable to the expansion of the Vencare contract services business, which
provides respiratory and rehabilitation therapy services and subacute care
primarily to nursing centers. The number of Vencare contracts grew from 1,703
at June 30, 1995 to 2,185 at June 30, 1996.
Operating results for the second quarter last year include a non-recurring
pretax charge of $5.5 million ($3.7 million net of tax or $.05 per fully
diluted share) related to the Nationwide Merger. In addition, Vencor incurred
an extraordinary loss of $2.7 million or $.04 per fully diluted share in
connection with the refinancing of certain Nationwide long-term debt.
Income from operations for the second quarter of 1996 totaled $30.9 million,
up 46% from $21.1 million in the second quarter of 1995, and $58.5 million for
the six month period, up 38% from $42.3 million in the same period a year ago.
Excluding the effect of non-recurring transactions, income from operations
increased 25% in the second quarter and 27% for the six month period. The
improvement in both periods resulted primarily from (i) growth in hospital
patient days, Vencare contracts and nursing center subacute volumes and (ii)
reductions in interest expense resulting from refinancing activities and
reductions of long-term debt.
Upon consummation of the Hillhaven Merger, Vencor recorded certain pretax
charges aggregating $128.4 million related primarily to merger transaction
costs, employee benefit plans, consolidation and restructuring activities, and
changes in nursing center accounting estimates. Management expects that the
consolidation of duplicative corporate and operational functions will be
substantially completed during the third quarter of 1996, and that
dispositions of certain nursing center properties will be concluded in 1997.
LIQUIDITY
Cash provided by operations totaled $117.0 million for the six months ended
June 30, 1996 compared to $66.0 million for the same period of 1995. The
increase was attributable to growth in net income, reductions in income tax
payments and improved controls over collections of accounts receivable. Cash
flows in excess of dividend payments and scheduled maturities of long-term
debt were used to fund capital expenditures and prepay certain debt.
As discussed in Note 9 of the Notes to Condensed Consolidated Financial
Statements, Vencor intends to repurchase up to 2,000,000 shares of its common
stock, primarily through the use of internally generated funds and proceeds
from the collection of notes receivable.
Since the consummation of the Hillhaven Merger, Vencor has maintained a $1
billion credit facility (the "Credit Facility"). At June 30, 1996, available
borrowings under the Credit Facility approximated $340 million.
Working capital totaled $235.2 million at June 30, 1996 compared to $239.7
million at December 31, 1995. Management believes that cash flows from
operations and amounts available under the Credit Facility are sufficient to
meet future expected liquidity needs.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $61.5 million in the
first half of 1996 compared to $71.1 million for the same period of 1995.
Planned capital expenditures in 1996 (excluding acquisitions) related to the
improvement and expansion of existing properties and construction of new
facilities are expected to approximate $175 million and include significant
expenditures related to the expansion of Vencor's independent and assisted
living operations. Management believes that its capital expenditure program is
adequate to expand, improve and equip existing facilities. At June 30, 1996,
the estimated cost to complete and equip construction in progress approximated
$50 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES (CONTINUED)
Vencor also expended $5.2 million and $38.1 million for acquisitions of new
facilities (and related healthcare businesses) and previously leased nursing
centers during the six months ended June 30, 1996 and 1995, respectively.
Management intends to acquire additional hospitals, nursing centers and
related healthcare businesses in the future.
Capital expenditures were financed primarily through internally generated
funds and, in 1995, from the public offering of 2.2 million shares of common
stock, the proceeds from which aggregated $66.5 million. Vencor intends to
finance a substantial portion of its capital expenditures with internally
generated funds, issuance of long-term debt and expected proceeds from the
IPO. Sources of capital include available borrowings under the Credit
Facility, public or private debt and equity.
As discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements, Vencor intends to conduct an initial public stock offering of a
minority share of its independent and assisted living business. A registration
statement on Form S-1 detailing the proposed transaction was filed with the
Securities and Exchange Commission on June 26, 1996.
HEALTH CARE LEGISLATION
Congress is currently considering various proposals which could reduce
expenditures under certain government health and welfare programs, including
Medicare and Medicaid. Management cannot predict whether such proposals will
be adopted, or if adopted, what effect, if any, such proposals would have on
its business.
Medicare revenues as a percentage of total revenues were 31% and 30% for the
six months ended June 30, 1996 and June 30, 1995, respectively, while Medicaid
percentages of revenues approximated 31% and 33% for the respective periods.
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against Vencor. Resolution of such litigation and other loss
contingencies is not expected to have a material adverse effect on Vencor's
liquidity, financial position or results of operations.
The Credit Facility contains covenants which require maintenance of certain
financial ratios and limit amounts of additional debt and purchases of common
stock. Vencor was in substantial compliance with all such covenants at June
30, 1996.
12
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)
1995 QUARTERS 1996 QUARTERS
-------------------------------------- ------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
-------- -------- -------- -------- -------- --------
Revenues................ $552,178 $578,314 $575,339 $618,125 $626,337 $634,554
-------- -------- -------- -------- -------- --------
Salaries, wages and
benefits............... 321,806 330,455 347,251 360,506 372,318 366,705
Supplies................ 43,516 46,882 47,868 50,488 51,762 53,999
Rent.................... 19,579 19,771 20,225 19,901 19,167 19,102
Other operating
expenses............... 99,247 104,635 105,335 107,752 104,501 110,873
Depreciation and
amortization........... 21,170 22,507 23,263 22,538 24,793 24,846
Interest expense........ 15,458 17,171 15,169 13,120 12,480 12,141
Investment income....... (3,180) (3,548) (3,304) (3,412) (3,578) (3,300)
Non-recurring
transactions........... - 5,555 103,868 - - -
-------- -------- -------- -------- -------- --------
517,596 543,428 659,675 570,893 581,443 584,366
-------- -------- -------- -------- -------- --------
Income (loss) from
operations before
income taxes........... 34,582 34,886 (84,336) 47,232 44,894 50,188
Provision for income
taxes.................. 13,410 13,799 (21,449) 18,241 17,284 19,323
-------- -------- -------- -------- -------- --------
Income (loss) from
operations............. 21,172 21,087 (62,887) 28,991 27,610 30,865
Extraordinary loss on
extinguishment of debt,
net of income taxes.... (66) (2,725) (19,196) (1,265) - -
-------- -------- -------- -------- -------- --------
Net income (loss).... 21,106 18,362 (82,083) 27,726 27,610 30,865
Preferred stock dividend
requirements........... (1,793) (1,795) (1,692) - - -
Gain on redemption of
preferred stock........ - - 10,176 - - -
-------- -------- -------- -------- -------- --------
Income (loss)
available to common
stockholders........ $ 19,313 $ 16,567 $(73,599) $ 27,726 $ 27,610 $ 30,865
======== ======== ======== ======== ======== ========
Earnings (loss) per
common and
common equivalent
share:
Primary:
Income (loss) from
operations........... $ .33 $ .32 $ (.91) $ .43 $ .39 $ .43
Extraordinary loss on
extinguishment of
debt................. - (.05) (.32) (.02) - -
-------- -------- -------- -------- -------- --------
Net income (loss).... $ .33 $ .27 $ (1.23) $ .41 $ .39 $ .43
======== ======== ======== ======== ======== ========
Fully diluted:
Income (loss) from
operations........... $ .31 $ .30 $ (.91) $ .41 $ .39 $ .43
Extraordinary loss on
extinguishment of
debt................. - (.04) (.32) (.02) - -
-------- -------- -------- -------- -------- --------
Net income (loss).... $ .31 $ .26 $ (1.23) $ .39 $ .39 $ .43
======== ======== ======== ======== ======== ========
Shares used in computing
earnings (loss) per common and
common equivalent share:
Primary............... 58,981 60,673 60,011 68,270 71,455 71,373
Fully diluted......... 70,826 72,454 60,011 71,547 71,455 71,373
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
1995 QUARTERS 1996 QUARTERS
---------------------------------------------- ----------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
---------- ---------- ---------- ---------- ---------- ----------
REVENUES (in thousands):
Hospitals............... $ 101,145 $ 116,186 $ 119,705 $ 119,450 $ 130,047 $ 138,612
---------- ---------- ---------- ---------- ---------- ----------
Nursing centers:
Long-term care......... 261,145 261,370 271,274 279,624 263,130 266,105
Subacute medical and
rehabilitation care... 114,668 120,504 125,952 131,788 138,324 136,799
Non-recurring
transactions.......... - - (24,500) - - -
---------- ---------- ---------- ---------- ---------- ----------
375,813 381,874 372,726 411,412 401,454 402,904
---------- ---------- ---------- ---------- ---------- ----------
Ancillary services:
Vencare (a)............ 20,789 27,015 33,067 39,075 45,615 45,010
Pharmacies (a)......... 43,620 42,674 40,773 41,700 45,372 46,855
Independent and
assisted living
communities........... 11,156 11,415 11,648 12,152 12,090 12,335
---------- ---------- ---------- ---------- ---------- ----------
75,565 81,104 85,488 92,927 103,077 104,200
---------- ---------- ---------- ---------- ---------- ----------
Elimination............. (345) (850) (2,580) (5,664) (8,241) (11,162)
---------- ---------- ---------- ---------- ---------- ----------
$ 552,178 $ 578,314 $ 575,339 $ 618,125 $ 626,337 $ 634,554
========== ========== ========== ========== ========== ==========
HOSPITAL DATA:
End of period data:
Number of hospitals.... 34 36 35 36 36 37
Number of licensed
beds.................. 2,859 3,275 3,214 3,263 3,225 3,265
Revenue mix %:
Medicare............... 58 57 57 58 57 60
Medicaid............... 11 11 11 13 13 12
Private and other...... 31 32 32 29 30 28
Patient days:
Medicare............... 74,742 80,236 79,282 79,749 94,087 95,680
Medicaid............... 14,609 19,330 21,014 21,828 24,152 23,898
Private and other...... 23,814 25,120 24,179 25,709 27,776 28,735
---------- ---------- ---------- ---------- ---------- ----------
113,165 124,686 124,475 127,286 146,015 148,313
========== ========== ========== ========== ========== ==========
NURSING CENTER DATA:
End of period data:
Number of nursing
centers............... 310 311 311 311 311 310
Number of licensed
beds.................. 39,418 39,509 39,513 39,480 39,510 39,378
Revenue mix %:
Medicare............... 28 28 24 28 30 30
Medicaid............... 44 44 47 44 43 43
Private and other...... 28 28 29 28 27 27
Patient days:
Long-term care......... 2,700,250 2,710,176 2,758,760 2,700,914 2,624,013 2,614,378
Subacute medical and
rehabilitation care... 402,261 412,250 419,499 465,490 503,507 493,103
---------- ---------- ---------- ---------- ---------- ----------
3,102,511 3,122,426 3,178,259 3,166,404 3,127,520 3,107,481
========== ========== ========== ========== ========== ==========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare
contracts............. 1,093 1,703 1,917 2,008 2,133 2,185
Number of pharmacy
outlets............... 57 55 56 55 54 53
Number of independent
and assisted living
communities........... 23 23 23 23 23 23
Number of independent
and
assisted living
units................. 3,122 3,122 3,122 3,122 3,090 3,055
- --------
(a) Prior year rehabilitation therapy revenues have been reclassified to
conform with the current year presentation.
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Vencor's Annual Meeting of Stockholders was held on May 15, 1996 in
Louisville, Kentucky. At the meeting, stockholders elected a Board of ten
directors pursuant to the following votes:
DIRECTOR VOTES IN FAVOR VOTES WITHHELD
-------- -------------- --------------
William C. Ballard Jr. .................... 52,037,480 170,003
Michael R. Barr............................ 52,034,376 173,107
Walter F. Beran............................ 52,041,209 166,274
Donna R. Ecton............................. 52,045,311 162,172
Greg D. Hudson............................. 52,038,844 168,639
William H. Lomicka......................... 52,050,088 157,395
W. Bruce Lunsford.......................... 52,035,743 171,740
W. Earl Reed, III.......................... 52,035,881 171,602
R. Gene Smith.............................. 52,037,899 169,584
Jack O. Vance.............................. 52,034,095 173,388
Stockholders also approved amendments to the 1987 Incentive Compensation
Program by the following vote: 51,483,502 in favor, 487,720 against and
227,803 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
11 Statement Re: Computation of earnings per common and common equivalent
share for the quarter and six months ended June 30, 1996 and 1995.
27 Financial Data Schedule (included only in filings submitted under the
Electronic Data Gathering Analysis and Retrieval ("EDGAR") system).
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: July 25, 1996 /s/ W. Bruce Lunsford
_____________________________________
W. Bruce Lunsford
Chairman of the Board, President and
Chief Executive Officer
Date: July 25, 1996 /s/ W. Earl Reed, III
_____________________________________
W. Earl Reed, III
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
16