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COMMENT:- Vencor was the first of the giant nursing home chains to enter bankruptcy. The first article published in April 1999 when Vencor was on the brink of bankruptcy gives a good account of Vencor's meteoric rise and equally precipitate fall in the marketplace. It illustrates the instability of the health and aged care marketplace and the extent to which the health and welfare of millions of vulnerable people can be affected. I have therefore reproduced it in full.
You don't have to go back very far - a little less than three years - to find the time when Vencor Inc. was a giant in the health-care industry, and the only question was how big it could get.
Now, the question is whether the company will survive.
On Wednesday, the once-soaring nursing home company failed to meet a deadline for filing its fourth-quarter earnings statement for 1998.
When it comes, the statement will show heavy losses for the quarter - and that's not the worst news. Depending on how some accounting issues are resolved, the company may also have to go back and restate its second- and third-quarter figures, not for the better.
Vencor has been trying to renegotiate the terms of $ 500 million or more in money it owes bank lenders - so far, without success. If it passes that hurdle, it has still further debt that will cause problems - including $ 18. 46 million in monthly rent it owes Ventas, a sister company that owns the properties where Vencor runs its businesses.
It is, in short, in such financial straits that its auditors question whether it can stay in business.
That should be answered within two weeks, when Vencor expects to produce its earnings statement. The best that can happen for now, it seems, is for the company to survive long enough to have a shot at recovery. That is a major comedown from the heights Vencor once attained.
FOUNDED IN 1985, it thrived by creating a niche in the health-care industry. It opened hospitals that provided long-term care for patients who needed a respirator.
Specializing in such long-term facilities, it was profitable and grew, and in 1989 went public. In just over two years its stock shot up 500 percent. In 1990 it made Forbes magazine's list of the nation's 200 best small companies.
Then it took a big leap forward and, in retrospect, began to lay the foundations of its present difficulties.
In early 1995 Vencor announced that it was buying Hillhaven Corp., a $ 1.6 billion acquisition that would vastly expand its size. Hillhaven, a Tacoma, Wash.-based company, operated 311 nursing homes and in its last fiscal year had had revenues of $ 1.6 billion - more than four times Vencor's revenues.
The acquisition also changed Vencor's nature. Until then the company had operated long-term acute-care hospitals and provided contract therapy services. The Hillhaven acquisition propelled it headlong into the nursing home business, which would become the source of more than half its revenue.
In hindsight, the acquisition bore the seeds of trouble. Most of the top executives of Hillhaven decided against joining Vencor, a development Vencor executives were not prepared for. And, time would show, Vencor was not at its best running nursing homes.
More than two years later Bruce Lunsford, Vencor's chief executive, would tell a conference of analysts that the company had been both naive and arrogant upon its entry into the nursing-home business. ''That was a mistake, '' he would admit.
At the time of the acquisition such chastened wisdom lay far in the distance. Vencor had become the No. 2 nursing home chain in the country and its future looked prosperous. In the next two years revenues grew to $ 3.1 billion and net income went from $ 48 million in 1996 to $ 130 million in 1997.
THESE WERE the glory days. Vencor was a hot stock, a highrolling company, a civic prize to be fought over. Cincinnati and Louisville competed to be the chosen city where the company would build its new headquarters tower, and Louisville officials were ecstatic when Vencor decided to stay.
The tower's design, unveiled in September 1997, seemed a fitting symbol for the company itself: bold, modern and swirling skyward.
But beneath the shining facade, trouble was growing. Earlier in 1997 Congress had approved dramatic changes in how much the Medicare program would pay for nursing-home clients and other patients.
The act was signed into law Aug. 5. On Oct. 22 Vencor made a sobering announcement:
The new federal payment structure, still months from taking effect, was already hurting Vencor's revenues. Other nursing-home companies, uncertain how the new payment plan would affect their incomes, were reluctant to sign contracts with Vencor's Vencare unit, which sells therapy and rehab services. The company expected its fourth-quarter earnings to decline.
That was just the beginning of Vencor's problems with the new federal payment system, although it was not apparent then. As it was, the news was enough to send Vencor's stock tumbling almost 30 percent, to $ 30.50 a share. Though that now seems like a handsome price, it then was a blow, and the stock did not recover.
IN HINDSIGHT, the combination of Vencor's expansion into nursing homes and the whittled-down Medicare payment system were a crippling combination.
''I would say in retrospect that the company's aggressive growth . . . has proved the source of their problems today,'' said J.C. Bradford analyst Frank G. Morgan. ''They incurred significant debt to finance that growth.''
Morgan said Vencor's strategy of adding nursing homes to its hospital operations ''would've made sense, except that a lot of that occurred during a period when most people believed that a change in reimbursement would occur.''
In early 1998, with the stock in the mid-20s, Vencor announced a bold move: It would split into two companies.
One would keep operating hospitals and nursing homes and keep the Vencor name. The other, which came to be named Ventas, would be a real estate company that owned the properties in which Vencor ran its businesses. Ventas would be Vencor's landlord.
As a separate company, Ventas would have presumed growth prospects of its own. And Vencor would be free to mind its core business of taking care of people. All this, Lunsford said, should allow both companies to create the kind of stock value Vencor shareholders had become accustomed to.
TO DATE, the split has never restored the value of what was once purely Vencor stock - far from it - but it has created another problem.
As with most tenants, Vencor pays Ventas rent under lease agreements. The nature of those agreements - how much of the value of the properties Vencor may have to claim - is now in question. How that question is resolved could inflict further damage on Vencor's already shaky financial position by requiring the company to claim liabilities associated with the properties.
Early last year, about the same time that Vencor was splitting in two, the company launched a strategy to cope with shrinking government reimbursements. But it quickly produced a legal and public-relations nightmare.
Vencor wanted to reserve certain of its nursing homes for Medicare and private-pay patients, both of which pay more than Medicaid, the government program for the poor that covers much nursing-home care.
Toward that end, the company began evicting some Medicaid patients, sometimes under the guise of clearing the way for renovations.
It didn't take long for newspapers to begin telling the tales of heartbroken and disoriented elderly nursinghome residents uprooted from familiar surroundings. Regulators found that care guidelines were not being followed for some residents before their evictions - and that some died shortly after being discharged.
Vencor paid $ 370,000 in state and federal fines for violations in Florida, is appealing a $ 543,000 federal fine for Georgia violations, and faces a class-action lawsuit on behalf of evictees. The company's actions even prompted passage of a federal law prohibiting such evictions.
LAST SUMMER, as nursing-home occupancy fell, the company issued another warning of poor earnings ahead. But even more jarring was the accompanying news. Vencor would cut 1,000 jobs nationwide and, in a move fraught with symbolism, postpone plans to build its signature tower on the riverfront.
When it actually posted a secondquarter loss rather than merely a subpar profit, the company's credibility fell on Wall Street, and its shares dropped 35 percent in a week.
It was no surprise when the company said last January that more losses, again attributed to the new Medicare schedule, would be reported for 1998's fourth quarter - the third straight quarter in the red.
As Vencor's financial situation worsened last year, it became clear that managers with more experience at running large nursing-home operations were needed to pull the company out of trouble.
The first major shakeup came at the end of July when Vencor announced that co-founder and chief operating officer Michael Barr and chief financial officer W. Earl Reed III had been removed from its board.
Both would both resign two months later, leaving Vencor chairman and CEO Lunsford as the last member of the top management group that had guided Vencor from a small upstart to a Fortune 500 company.
Edward Kuntz, a former chairman and CEO of a competing company, Living Centers of America, was hired to replace Barr. Reed was replaced by Richard Schweinhart, a senior vice president of Columbia/HCA Healthcare Corp. in Nashville.
Barr, who co-founded Vencor with Lunsford, summed up his departure by saying at the time, ''From a pure business standpoint, I'm an entrepreneur . . . and I'm not necessarily a big corporate guy. It's probably time to have somebody like Eddie (Kuntz) come in and take over the reins.''
Kuntz would soon take control of the company. On Jan. 22 Lunsford resigned and Kuntz became chairman and CEO.
Lunsford stayed on at Ventas, Vencor's primary landlord, as chairman.
THAT NOW PUTS Lunsford and new Ventas CEO Debra Cafaro on the opposite side of the table from Kuntz and Vencor in a hard-nosed bargaining battle, with the financial survival of both companies at stake.
The battle is over the rent Vencor pays its former spinoff. Vencor failed to make its $ 18.46 million rent payment April 1 and is asking Ventas for a reduction in its lease payments.
Some analysts say Ventas may have no choice, because if Vencor fails, Ventas' revenue stream dries up. Others say Ventas is in a position of strength since it owns the property and is first in line for payment in the case of a Vencor bankruptcy.
''That's the issue: How much of a rent concession will Ventas make and how much of a debt concession will the lenders to Vencor make?'' said John Ransom, an analyst with Raymond James and Associates.
But the independent auditors of both companies now openly question the ability of each to continue in business in light of Vencor's inability so far to renegotiate its debt.
In happier days, Vencor's then-president Bruce Lunsford, left, and architect Henry Cobb discussed a $ 60Jmillion, 23-story office tower the company had planned near the river in downtown Louisville.
COMMENT:- This Sept 1999 article, written shortly after Vencor entered Chapter 11 banruptcy summarises the rise and fall of Vencor in a tabulated form. It is reproduced in full.
1985: Founded by Bruce Lunsford, who bought one hospital and converted it to specialize in serving patients dependent on ventilators.
1989: Went public; operated seven hospitals at the time.
1990: Named to Forbes magazine's list of the nation's 200 best small companies.
1995: Branched into nursing homes through $ 1.9 billion acquisition of Hillhaven Corp., the nation's second-largest nursing home company - which was four times Vencor's size.
1996: Decided to stay in Louisville after considering a move to Cincinnati.
April 1997: Became a Fortune 500 company and unveiled plans for a 23-story headquarters on Louisville's waterfront.
October 1997: Announced earnings would be lower because of concern over a Medicare reimbursement system that would take effect in 1998. Stock fell 30 percent. New Medicare rules would continue to hurt the company's income into 1999.
February 1998: Announced the company would split. New entity would be Ventas Inc., a real-estate investment trust that would own the buildings in which Vencor operated. Split took effect May 1998.
June 1998: Put the headquarters on hold and announced plans to cut 1,000 jobs nationwide due to expected lower earnings.
July 1998: Vencor's stock price fell 35 percent in a week; company realigned its board.
September 1998: Earl Reed resigned as chief financial officer and co- founder Michael Barr resigned as chief operating officer.
November 1998: Disclosed the U.S. Justice Department was probing the company's Medicare billings. In mid-1999, the department would join a Florida whistle-blower suit accusing Vencor of defrauding Medicare, and Ventas would disclose the existence of other whistle-blower suits that could affect both companies.
January 1999: Lunsford steps down as Vencor's CEO and chairman. Two months earlier he had resigned as Ventas' CEO. The company also said it would sell its headquarters' site.
April 1999: Reported a $ 651.5 million loss for 1998. Company's stock fell 15 percent the next day.
June 1999: New York Stock Exchange dropped Vencor's stock from its listings; stock switched to over-the-counter trading.
Sept. 13, 1999: Vencor filed for protection from creditors while trying to reorganize under federal bankruptcy laws.
