<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 001-14057
VENCOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1323993
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3300 AEGON CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
VENCOR HEALTHCARE, INC.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT JULY 31, 1998
--------------------- ----------------------------
Common stock, $.25 par value 68,206,163 shares
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1 of 30
<PAGE>
VENCOR, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations--for the
quarter and six months ended June 30, 1998 and 1997............ 3
Condensed Consolidated Balance Sheet--June 30, 1998 and
December 31, 1997.............................................. 4
Condensed Consolidated Statement of Cash Flows--for the
six months ended June 30, 1998 and 1997........................ 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 24
Item 2. Changes in Securities and Use of Proceeds....................... 25
Item 5. Other Information............................................... 26
Item 6. Exhibits and Reports on Form 8-K................................ 26
2
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
--------------------- ------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 778,706 $778,295 $1,602,022 $1,458,991
--------- -------- ---------- ----------
Salaries, wages and benefits................................ 459,808 449,806 940,172 846,379
Supplies.................................................... 77,832 77,328 153,884 143,361
Rent........................................................ 59,076 21,783 83,211 40,731
Other operating expenses.................................... 130,964 118,935 258,222 228,721
Depreciation and amortization............................... 28,571 29,479 64,041 53,851
Interest expense............................................ 28,394 20,674 65,589 31,334
Investment income........................................... (1,130) (1,746) (2,310) (3,313)
Non-recurring transactions.................................. 25,772 - 33,436 -
--------- -------- ---------- ----------
809,287 716,259 1,596,245 1,341,064
--------- -------- ---------- ----------
Income (loss) before income taxes........................... (30,581) 62,036 5,777 117,927
Provision for income taxes.................................. (7,129) 25,026 10,348 46,935
--------- -------- ---------- ----------
Income (loss) from operations............................... (23,452) 37,010 (4,571) 70,992
Extraordinary loss on extinguishment of debt,
net of income tax benefit................................ (77,937) (1,590) (77,937) (3,849)
--------- -------- ---------- ----------
Net income (loss)............................... (101,389) 35,420 (82,508) 67,143
Preferred stock dividend requirements....................... (177) - (177) -
--------- -------- ---------- ----------
Income (loss) available to common stockholders.. $(101,566) $ 35,420 $ (82,685) $ 67,143
========= ======== ========== ==========
Earnings (loss) per common share:
Basic:
Income (loss) from operations......................... $ (0.35) $ 0.53 $ (0.07) $ 1.03
Extraordinary loss on extinguishment of debt.......... (1.15) (0.02) (1.15) (0.06)
--------- -------- ---------- ----------
Net income (loss)............................... $ (1.50) $ 0.51 $ (1.22) $ 0.97
========= ======== ========== ==========
Diluted:
Income (loss) from operations......................... $ (0.35) $ 0.52 $ (0.07) $ 1.00
Extraordinary loss on extinguishment of debt.......... (1.15) (0.02) (1.15) (0.05)
--------- -------- ---------- ----------
Net income (loss)............................... $ (1.50) $ 0.50 $ (1.22) $ 0.95
========= ======== ========== ==========
Shares used in computing earnings (loss) per
common share:
Basic.................................................... 67,651 69,194 67,550 69,062
Diluted.................................................. 67,651 71,016 67,550 70,678
</TABLE>
See accompanying notes.
3
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 67,868 $ 82,473
Accounts and notes receivable less allowance for loss of
$74,881--June 30 and $63,551--December 31......................... 584,603 619,068
Inventories........................................................ 25,160 27,605
Income taxes....................................................... 110,335 73,413
Other.............................................................. 53,385 55,589
---------- ----------
841,351 858,148
Property and equipment, at cost..................................... 940,237 1,996,030
Accumulated depreciation............................................ (298,253) (488,212)
---------- ----------
641,984 1,507,818
Goodwill less accumulated amortization of $27,436--June 30
and $18,886--December 31........................................... 675,126 659,311
Investments in affiliates........................................... 185,157 178,301
Other............................................................... 94,760 131,161
---------- ----------
$2,438,378 $3,334,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 145,731 $ 106,019
Salaries, wages and other compensation............................. 189,831 163,642
Other accrued liabilities.......................................... 122,335 115,933
Long-term debt due within one year................................. 10,361 27,468
---------- ----------
468,258 413,062
Long-term debt...................................................... 1,012,176 1,919,624
Deferred credits and other liabilities.............................. 80,857 94,653
Minority interest in equity of consolidated entities................ 2,655 2,050
Series A preferred stock............................................ 1,770 -
Stockholders' equity:
Common stock, $0.25 par value; authorized 180,000 shares; issued
67,874 shares--June 30 and 73,470 shares--December 31............. 16,969 18,368
Capital in excess of par value..................................... 656,575 766,078
Retained earnings.................................................. 199,118 281,803
---------- ----------
872,662 1,066,249
Common treasury stock; 6,159 shares--December 31.................. - (160,899)
---------- ----------
872,662 905,350
---------- ----------
$2,438,378 $3,334,739
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ (82,508) $ 67,143
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization............................................. 64,041 53,851
Provision for doubtful accounts........................................... 15,093 8,368
Extraordinary loss on extinguishment of debt.............................. 126,726 6,265
Non-recurring transactions................................................ 23,963 -
Deferred income taxes..................................................... (12,567) 5,935
Other..................................................................... (863) 515
Changes in operating assets and liabilities:
Accounts and notes receivable.......................................... 29,550 (59,578)
Inventories and other assets........................................... 1,675 (3,694)
Accounts payable....................................................... 45,907 23,832
Income taxes........................................................... (28,387) 26,932
Other accrued liabilities.............................................. (1,490) (5,825)
--------- -----------
Net cash provided by operating activities........................... 181,140 123,744
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................................... (142,755) (132,900)
Acquisition of TheraTx, Incorporated......................................... - (354,647)
Acquisition of Transitional Hospitals Corporation............................ - (574,971)
Acquisition of other healthcare businesses and previously leased facilities.. (16,006) (25,030)
Sale of assets............................................................... 14,708 12,165
Collection of notes receivable............................................... 1,206 390
Series A preferred stock loans............................................... (15,930) -
Net change in investments.................................................... (271) (4,845)
Other........................................................................ (4,207) (2,381)
--------- -----------
Net cash used in investing activities............................... (163,255) (1,082,219)
--------- -----------
Cash flows from financing activities:
Net change in borrowings under revolving lines of credit..................... (228,946) 1,075,250
Issuance of long-term debt................................................... 700,000 2,818
Net proceeds from senior subordinated notes offering......................... 294,000 -
Payment of senior subordinated notes......................................... (732,547) -
Repayment of long-term debt.................................................. (57,466) (122,835)
Payment of deferred financing costs.......................................... (7,758) (5,483)
Issuances of common stock.................................................... 227 2,813
Other........................................................................ - (78)
--------- -----------
Net cash provided by (used in) financing activities................. (32,490) 952,485
--------- -----------
Change in cash and cash equivalents............................................. (14,605) (5,990)
Cash and cash equivalents at beginning of period................................ 82,473 112,466
--------- -----------
Cash and cash equivalents at end of period...................................... $ 67,868 $ 106,476
========= ===========
Supplemental information:
Interest payments............................................................ $ 89,003 $ 32,919
Income tax payments.......................................................... 2,935 23,353
</TABLE>
See accompanying notes.
5
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Vencor, Inc. ("Vencor" or the "Company") operates an integrated network of
healthcare services in 46 states primarily focused on the needs of the elderly.
At June 30, 1998, the Company operated 61 long-term acute care hospitals (5,301
licensed beds), 296 nursing centers (39,094 licensed beds), and a contract
services business ("Vencare") which provided respiratory and rehabilitation
therapies, medical services and pharmacy management services under approximately
3,600 contracts to nursing centers and other healthcare providers.
On April 30, 1998, Ventas, Inc. ("Ventas") effected the spin off of its
healthcare operations through the distribution of the common stock of Vencor to
stockholders of record as of April 27, 1998 (the "Reorganization Transactions").
The distribution was effected on May 1, 1998 (the "Distribution Date"). For
accounting purposes, the consolidated historical financial statements of Ventas
became the historical financial statements of the Company after the Distribution
Date. Any discussion concerning events prior to the Distribution Date refers to
the Company's business as it was conducted prior to the Reorganization
Transactions.
On March 21, 1997, the Company completed the acquisition of TheraTx,
Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy
management services and operator of nursing centers (the "TheraTx Merger"),
pursuant to a cash tender offer. See Note 5.
On June 24, 1997, the Company acquired substantially all of the outstanding
common stock of Transitional Hospitals Corporation ("Transitional"), an operator
of 19 long-term acute care hospitals, pursuant to a cash tender offer. The
Company completed the merger of its wholly owned subsidiary with and into
Transitional on August 26, 1997 (the "Transitional Merger"). See Note 6.
NOTE 2--BASIS OF PRESENTATION
The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying unaudited condensed
consolidated financial statements include the operations of TheraTx and
Transitional since March 21, 1997 and June 24, 1997, respectively.
Beginning July 1, 1997, the accounts of the Company's publicly held
assisted and independent living affiliate, Atria Communities, Inc. ("Atria"),
were accounted for under the equity method. Prior thereto, such accounts were
consolidated with those of the Company and provisions related to minority
interests in the earnings and equity of Atria had been recorded since the
consummation of the initial public offering in August 1996.
Beginning in 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which established new rules for the reporting of
comprehensive income and its components. SFAS 130 requires, among other things,
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported as changes in common stockholders' equity, to be
disclosed as other comprehensive income. The adoption of SFAS 130 had no impact
on the Company's net income or common stockholders' equity for the six months
ended June 30, 1998.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which will become effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
report certain information about operating segments, products and services, the
geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has not yet determined the effect, if any, of SFAS 131 on
the consolidated financial statement disclosures.
6
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities," which requires entities to expense start-up costs, including
organizational costs, as incurred. SOP 98-5 requires most entities to write off
as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. SOP 98-5 is effective for most
entities for fiscal years beginning after December 15, 1998. The Company plans
to adopt the provisions of SOP 98-5 in the first quarter of 1999. The amount of
such unamortized costs were $12.4 million at June 30, 1998.
In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. Management has not determined the
effect, if any, of SFAS 133 on the Company's consolidated financial statements.
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 reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
1997 filed with the Securities and Exchange Commission on Form 10.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Note 8, all such
adjustments are of a normal and recurring nature.
NOTE 3--REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of revenues by payor type follows (in thousands):
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
-------------------- -----------------------
1998 1997 1998 1997
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Medicare........... $272,788 $246,134 $ 571,625 $ 479,267
Medicaid........... 212,879 206,868 421,285 406,374
Private and other.. 318,812 344,115 661,897 603,892
-------- -------- ---------- ----------
804,479 797,117 1,654,807 1,489,533
Elimination........ (25,773) (18,822) (52,785) (30,542)
-------- -------- ---------- ----------
$778,706 $778,295 $1,602,022 $1,458,991
======== ======== ========== ==========
</TABLE>
NOTE 4--EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128 ("SFAS 128"),
"Earnings Per Share," replacing the calculation of primary and fully diluted
earnings per common share with basic and diluted earnings per common share. The
computation of basic earnings per common share is based upon the weighted
average number of common shares outstanding, while the diluted computation also
includes the effect of common stock equivalents consisting primarily of stock
options. Earnings per common share for all prior periods have been restated to
conform to the requirements of SFAS 128. The impact of the restatement was not
significant.
7
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--EARNINGS PER SHARE (CONTINUED)
A computation of earnings per common share for the quarter and six months
ended June 30 follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
-------------------- -------------------
1998 1997 1998 1997
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Income (loss) from operations....................... $ (23,452) $37,010 $ (4,571) $70,992
Extraordinary loss on extinguishment of debt........ (77,937) (1,590) (77,937) (3,849)
--------- ------- -------- -------
Net income (loss).......................... (101,389) 35,420 (82,508) 67,143
Preferred stock dividend requirements............... (177) - (177) -
--------- ------- -------- -------
Income (loss) available to common
stockholders............................ $(101,566) $35,420 $(82,685) $67,143
========= ======= ======== =======
Shares used in the computation:
Weighted average shares outstanding - basic
computation................................... 67,651 69,194 67,550 69,062
Dilutive effect of outstanding stock options..... - 1,822 - 1,616
--------- ------- -------- -------
Adjusted weighted average shares
outstanding - diluted computation....... 67,651 71,016 67,550 70,678
========= ======= ======== =======
Earnings (loss) per common share:
Basic:
Income (loss) from operations................. $ (0.35) $ 0.53 $ (0.07) $ 1.03
Extraordinary loss on extinguishment of debt.. (1.15) (0.02) (1.15) (0.06)
--------- ------- -------- -------
Net income (loss).......................... $ (1.50) $ 0.51 $ (1.22) $ 0.97
========= ======= ======== =======
Diluted:
Income (loss) from operations................. $ (0.35) $ 0.52 $ (0.07) $ 1.00
Extraordinary loss on extinguishment of debt.. (1.15) (0.02) (1.15) (0.05)
--------- ------- -------- -------
Net income (loss).......................... $ (1.50) $ 0.50 $ (1.22) $ 0.95
========= ======= ======== =======
</TABLE>
The effect of dilutive common stock equivalents has been excluded from the
calculation of earnings (loss) per share results for periods in which the
Company has reported a loss from operations.
NOTE 5--THERATX MERGER
On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger as of June 30, 1998
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired................................. $ 633,793
Fair value of liabilities assumed............................. (259,439)
---------
Net assets acquired..................................... 374,354
Cash received from acquired entity............................ (14,915)
---------
Net cash paid........................................... $ 359,439
=========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $315.2 million.
8
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--TRANSITIONAL MERGER
On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which the
Company paid $16.00 per common share. The Company completed the merger of its
wholly-owned subsidiary with and into Transitional on August 26, 1997. A
summary of the Transitional Merger as of June 30, 1998 follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired................................. $713,336
Fair value of liabilities assumed............................. (44,842)
--------
Net assets acquired..................................... 668,494
Cash received from acquired entity............................ (52,874)
--------
Net cash paid........................................... $615,620
========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $363.6 million.
NOTE 7--PRO FORMA INFORMATION
The pro forma effect of the TheraTx Merger and Transitional Merger assuming
that the transactions occurred on January 1, 1997 follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1997
----------
<S> <C>
Revenues...................................................... $1,707,261
Income from operations........................................ 34,310
Net income.................................................... 30,461
Earnings per common share:
Basic:
Income from operations.................................. $ 0.50
Net income.............................................. 0.44
Diluted:
Income from operations.................................. $ 0.49
Net income.............................................. 0.43
</TABLE>
Pro forma income from operations includes $29.7 million of costs incurred
by both TheraTx and Transitional in connection with the acquisitions. Pro forma
financial data have been derived by combining the financial results of the
Company and TheraTx (based upon six month reporting periods ending on June 30)
and Transitional (based upon six month reporting periods ending on May 31).
NOTE 8--NON-RECURRING TRANSACTIONS
During the second quarter of 1998, the Company incurred $25.7 million of
professional and administrative expenses related to the Reorganization
Transactions, losses related to the planned disposal of the Company's home
health and hospice businesses, and the write-off of capitalized amounts related
to the cancellation of a corporate headquarters construction project. During the
first quarter of 1998, the Company incurred $7.7 million of professional and
administrative expenses related to the Reorganization Transactions.
An extraordinary loss on extinguishment of debt of $77.9 million, net of
income taxes, was incurred in the second quarter of 1998 in connection with the
Reorganization Transactions. Extraordinary losses related to the refinancing of
long-term debt reduced 1997 net income by $1.6 million in the second quarter and
$3.8 million for the six month period.
9
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--LONG-TERM DEBT
In connection with the Reorganization Transactions, the Company consummated
the $1.0 billion Credit Agreement (the "Credit Agreement") which includes (i) a
five year $300 million Revolving Credit Facility (the "Revolving Credit
Facility"), (ii) a $250 million Term A Loan (the "Term A Loan") payable in
various installments over five years, (iii) a $250 million Term B Loan (the
"Term B Loan") payable in installments of 1% per year with the outstanding
balance due in seven years and (iv) a $200 million Bridge Loan (the "Bridge
Loan") due in eighteen months, to be repaid from the proceeds of the sale of
certain non-strategic assets (including the sale of Atria common stock).
Interest is payable, depending on certain leverage ratios and the periods of
borrowing, at rates of LIBOR plus 3/4 to 2 1/2% for the Revolving Credit
Facility, Term A Loan and the Bridge Loan. Interest is payable at LIBOR plus 2
1/4 to 3% for the Term B Loan. On April 30, 1998, the Company completed the
private placement of $300 million aggregate principal amount of 9 7/8%
Guaranteed Senior Subordinated Notes due 2005 (the "Notes"). The Notes are not
callable by the Company until 2002. In connection with the issuance of the
Notes, the Company plans to exchange the Notes for publicly registered Notes
having identical terms and conditions.
The Company entered into interest rate swap agreements in May 1997 on $300
million of floating rate debt. These agreements expire in $100 million
increments in May 1999, November 1999 and May 2000, and provide for fixed rates
at 6.4% plus 3/4 to 3%. The fair value of the swap agreements are not
recognized in the condensed consolidated financial statements.
NOTE 10--TRANSACTIONS WITH VENTAS
For the purpose of governing certain of the ongoing relationships between
the Company and Ventas after the Reorganization Transactions and to provide
mechanisms for an orderly transition, the Company and Ventas have entered into
various agreements. The Company believes that the agreements contain terms which
generally are comparable to those which would have been reached in arm's length
negotiations with unaffiliated parties. The most significant agreements are as
follows:
MASTER LEASE AGREEMENTS
Ventas retained substantially all of the real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing centers) and
leases them to the Company under four master lease agreements which set forth
the material terms governing each of the leased properties (individually, a
"Master Lease" and collectively, the "Master Leases").
The leased properties include land, buildings, structures, easements,
improvements on the land and permanently affixed equipment, machinery and other
fixtures relating to the operation of the facilities.
There are multiple bundles of leased properties under each Master Lease
with each bundle containing seven to twelve leased properties. All leased
properties within a bundle have the same base terms, ranging from 10 to 15
years. At the option of the Company, all, but not less than all, of the leased
properties in a bundle may be extended for one five-year renewal term beyond the
base term at the then existing rental rate plus 2% per annum if certain lessee
revenue parameters are obtained. At the option of the Company, all, but not less
than all, of the leased properties in a bundle may be extended for two
additional five-year renewal terms thereafter at the then fair market value
rental rate. The base and renewal terms of each leased property are subject to
termination upon default by either party and certain other conditions described
in the Master Leases.
The Master Leases are structured as triple-net leases. In addition to the
base annual rent of approximately $221.5 million, plus 2% per annum if certain
lessee revenue parameters are obtained, the Company is required to pay all
insurance, taxes, utilities and maintenance related to the leased properties.
10
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--TRANSACTIONS WITH VENTAS (CONTINUED)
DEVELOPMENT AGREEMENT
Under the terms of the Development Agreement, the Company, if it so
desires, will complete the construction of certain development properties
substantially in accordance with the existing plans and specifications for each
such property. Upon completion of each such development property, Ventas has the
option to purchase the development property from the Company at a purchase price
equal to the amount of the Company's actual costs in acquiring, developing and
improving such development property prior to the purchase date. If Ventas
purchases the development property, the Company will lease the development
property from Ventas. The annual base rent under such a lease will be ten
percent of the actual costs incurred by the Company in acquiring and developing
the development property. The other terms of the lease for the development
property will be substantially similar to those set forth in the Master Leases.
PARTICIPATION AGREEMENT
Under the terms and conditions of the Participation Agreement, the Company
has a right of first offer to become the lessee of any real property acquired or
developed by Ventas which is to be operated as a hospital, nursing center or
other healthcare facility, provided that the Company and Ventas negotiate a
mutually satisfactory lease arrangement.
The Participation Agreement also provides, subject to certain terms, that
the Company will provide Ventas with a right of first offer to purchase or
finance any healthcare related real property that the Company determines to sell
or mortgage to a third party, provided that the Company and Ventas negotiate
mutually satisfactory terms for such purchase or mortgage.
The Participation Agreement has a three year term. The Company and Ventas
each have the right to terminate the Participation Agreement in the event of a
change of control.
TRANSITION SERVICES AGREEMENT
The Transition Services Agreement provides that the Company will provide
Ventas with transitional administrative and support services, including but not
limited to finance and accounting, human resources, risk management, legal, and
information systems support through December 31, 1998. Ventas pays the Company
$200,000 per month for services provided under the Transition Services
Agreement.
TAX ALLOCATION AGREEMENT
The Tax Allocation Agreement provides that Ventas will be liable for taxes
of Ventas consolidated group attributable to periods prior to the Distribution
Date with respect to the portion of such taxes attributable to the property held
by Ventas after the Distribution Date and the Company will be liable for such
pre-distribution taxes with respect to the portion of such taxes attributable to
the property held by the Company after the Distribution Date. The Tax Allocation
Agreement further provides that Ventas will be liable for any taxes attributable
to the Reorganization Transactions except that the Company will be liable for
any such taxes to the extent that the Company derives certain future tax
benefits as a result of the payment of such taxes. Ventas and its subsidiaries
are liable for taxes payable with respect to periods after the Reorganization
Transactions that are attributable to Ventas operations and the Company and its
subsidiaries are liable for taxes payable with respect to periods after the
Reorganization Transactions that are attributable to the Company's operations.
If, in connection with a tax audit or filing of an amended return, a taxing
authority adjusts the tax liability of either the Company or Ventas with respect
to taxes for which the other party was liable under the Tax Allocation
Agreement, such other party would be liable for the resulting tax assessment or
would be entitled to the resulting tax refund.
11
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--LITIGATION
In connection with the Reorganization Transactions, liabilities arising
from the following 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 the following legal proceedings and other actions.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition, the
Health Care Financing Administration ("HCFA") has imposed a fine of $113,000.
The Company has appealed both the AHCA and HCFA fines. The Company submitted an
acceptable plan of correction at the Tampa nursing center and has been informed
by AHCA that "immediate jeopardy" no longer exists and the threatened
termination of the Tampa nursing center's Medicare provider agreement has been
reversed.
The Tampa Prosecuting Attorney's office has indicated to the Company that
it is conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. The Company is cooperating fully with
this investigation.
The Company has received notice that the State of Georgia has found
regulatory violations with respect to patient discharges, among other things, at
one of the Company's nursing centers in Savannah, Georgia. The state recommended
a Federal fine of approximately $510,000 for these violations, and HCFA has
imposed that fine. The Company has yet to determine whether it will appeal this
fine.
The HCFA Administrator of the Medicare and Medicaid programs has indicated
that the Company's former facilities in other states also are being monitored.
There can be no assurance that HCFA or other regulators in other jurisdictions
will not initiate investigations relating to these matters or other
circumstances, and there can be no assurance that the results of any such
investigation would not have a material adverse effect on the Company.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported class
consisting of certain residents of the Tampa nursing center and other residents
in the Company's nursing centers nationwide. The complaint alleges various
breaches of contract, and statutory and regulatory violations including
violations of Federal and state RICO statutes. The original complaint has been
amended to delineate several purported subclasses. The plaintiffs seek class
certification, unspecified damages, attorneys' fees and costs. The Company
intends to defend this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain executive officers of the Company during a
specified time frame violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), by, among other things,
issuing to the investing public a series of false and misleading statements
concerning the Company's current operations and the inherent value of the
Company's common stock. The complaint further alleges that as a result of these
purported false and misleading statements concerning the Company's revenues and
successful acquisitions, the price of the Company's common stock was
artificially inflated. In particular, the complaint alleges that the Company
issued false and misleading financial statements during the first, second and
third calendar quarters of 1997 which misrepresented and understated the
12
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--LITIGATION (CONTINUED)
impact that changes in Medicare reimbursement policies would have on the
Company's core services and profitability. The complaint further alleges that
the Company issued a series of materially false statements concerning the
purportedly successful integration of its recent acquisitions and prospective
earnings per share for 1997 and 1998 which the Company knew lacked any
reasonable basis and were not being achieved. The suit seeks damages in an
amount to be proven at trial, pre-judgment and post-judgment interest,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the plaintiff has an effective remedy. The Company believes that the
allegations in the complaint are without merit and intends to defend 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.
As previously reported in the Company's Form 10, a class action lawsuit 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 common stock during the period from February 26, 1997 through May
4, 1997, inclusive. The complaint alleges that Transitional purchased shares of
its common stock from members of the investing public after it had received a
written offer to acquire all of Transitional's common stock and without making
the required disclosure that such an offer had been made. The complaint further
alleges that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had reached
an advanced stage with actual firm offers at substantial premiums to the trading
price of Transitional's stock having been made which were actively being
considered by Transitional's Board of Directors. The complaint asserts claims
pursuant to Sections 10(b), 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. On June 18, 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. The Company has filed a motion for
reconsideration and intends to defend vigorously this action.
The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant
in a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice has intervened in the suit which was brought
under the Federal Civil False Claims Act. AXR provided portable X-ray services
to nursing facilities (including those operated by the Company) and other
healthcare providers. The Company acquired an interest in AXR when The Hillhaven
Corporation was merged into the Company in September 1995 and purchased the
remaining interest in AXR in February 1996. The suit alleges that AXR submitted
false claims to the Medicare and Medicaid programs. The suit seeks damages in an
amount of not less than $1,000,000, treble damages and civil penalties. In
conjunction with the qui tam action, the United States Attorney's Office for the
Eastern District of Arkansas also is conducting a criminal investigation into
the allegations contained in the qui tam complaint and has indicted four former
employees of AXR. AXR has been informed that it is not a target of the
investigation. The Company is cooperating fully in the investigation.
13
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--LITIGATION (CONTINUED)
On June 6, 1997, Transitional announced that it had been advised that it
was the target of a Federal grand jury investigation being conducted by the
United States Attorney's Office for the District of Massachusetts (the "USAO")
arising from activities of Transitional's formerly owned dialysis business. The
investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon Corporation
and Transitional. Transitional spun off its dialysis business, now called Vivra
Incorporated, on September 1, 1989. In January 1998, the Company was informed
that no criminal charges would be filed against the Company. The Company has
been informed that the USAO intends to file a civil action against Transitional
relating to the partnership's former Medicare billing practices. If such a suit
is filed, the Company will vigorously defend the action.
NOTE 12--ATRIA MERGER
On April 20, 1998, Atria announced that it entered into a definitive merger
agreement with Kapson Senior Quarters Corp. ("Kapson"), an affiliate of Lazard
Freres Real Estate Investors LLC ("Lazard"), under which Kapson will acquire
Atria. Under the terms of the merger agreement, a subsidiary of Kapson will
merge into Atria and the public stockholders of Atria will receive $20.25 per
share in cash. The Company, which currently owns 10 million shares of Atria
common stock, will also receive $20.25 per share in cash for approximately 88%
of its Atria common stock (valued at approximately $177.5 million) and will
retain its remaining shares and will beneficially own approximately 12% of Atria
following the merger. In consideration of its continuing investment, the
Company will retain a seat on Atria's Board of Directors and is entitled to
certain registration rights with respect to its remaining shares of Atria common
stock.
On May 13, 1998, ARV Assisted Living, Inc. ("ARV") filed a lawsuit seeking
to enjoin Kapson from acquiring Atria. In addition to compensatory and punitive
damages, the lawsuit seeks to obtain preliminary and permanent injunctions to
prevent Lazard from breaking its contractual and fiduciary duties to ARV by
acquiring Atria, through Kapson, without first offering ARV the opportunity to
be the acquiring party and without obtaining ARV's consent to allow Lazard to
make the acquisition should ARV choose not to pursue it. On June 25, 1998, the
Superior Court for Orange County, California declined to reach a decision on the
merits of the dispute between Lazard and ARV. The court directed Lazard and
Atria to continue their efforts to finalize the acquisition of Atria by Kapson.
The court preliminarily enjoined the closing of the merger prior to the outcome
of a bench trial which began on August 3, 1998. Lazard has informed Atria that
it believes that ARV's claims are without merit and that it intends to contest
vigorously the allegations in ARV's complaint. The merger is subject to
customary conditions including the approval of Atria's stockholders and certain
regulatory approvals. Atria has scheduled a meeting of stockholders for
September 8, 1998 to vote on the merger.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND INFORMATION
The Company is one of the nation's largest providers of healthcare services
in 46 states focused primarily on the needs of the elderly. At June 30, 1998,
the Company operated 61 long-term acute care hospitals (5,301 licensed beds),
296 nursing centers (39,094 licensed beds) and the Vencare contract services
business which provided respiratory and rehabilitation therapies, medical
services and pharmacy management services under approximately 3,600 contracts to
nursing centers and other healthcare providers.
On April 30, 1998, Ventas effected the spin off of its healthcare
operations through the Reorganization Transactions. For accounting purposes, the
consolidated historical financial statements of Ventas became the historical
financial statements of the Company after the Distribution Date. Any discussion
concerning events prior to the Distribution Date refers to the Company's
business as it was conducted prior to the Reorganization Transactions.
In July 1997, Atria completed a secondary equity offering which reduced the
Company's ownership percentage to less than 50%. Accordingly, the Company's
investment in Atria beginning July 1, 1997 has been accounted for under the
equity method.
On March 21, 1997, the TheraTx Merger was completed. TheraTx primarily
provided rehabilitation and respiratory therapy management services and operated
26 nursing centers with annualized revenues approximating $425 million. See
Note 5 of the Notes to Condensed Consolidated Financial Statements.
On June 24, 1997, the Company acquired a controlling interest in
Transitional and, on August 26, 1997, completed the Transitional Merger.
Transitional primarily operated 19 long-term acute care hospitals with
annualized revenues approximating $350 million. See Note 6 of the Notes to
Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
A summary of revenues follows (in thousands):
<TABLE>
<CAPTION>
QUARTER % SIX MONTHS %
-------------------- ------------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Hospitals......................... $239,312 $165,794 44.3 $ 485,677 $ 320,694 51.4
Nursing centers................... 413,600 432,325 (4.3) 847,790 836,578 1.3
Vencare........................... 151,567 182,016 (16.7) 321,340 301,062 6.7
Atria............................. - 16,982 - 31,199
-------- -------- ---------- ----------
804,479 797,117 0.9 1,654,807 1,489,533 11.1
Elimination....................... (25,773) (18,822) (52,785) (30,542)
-------- -------- ---------- ----------
$778,706 $778,295 0.1 $1,602,022 $1,458,991 9.8
======== ======== ========== ==========
</TABLE>
Hospital revenue increases in both the second quarter and six months ended
June 30, 1998 resulted primarily from the Transitional Merger and an increase in
patient days. Hospital patient days rose 46% to 238,387 for the second quarter
and 51% to 486,636 for the first six months of 1998, respectively, compared to
163,327 and 323,180 for the respective periods last year. Non-Medicaid patient
days (for which payment rates are generally higher than Medicaid) increased 48%
in the second quarter to 206,965 from 140,157 last year and 53% for the six
month period to 426,679 from 278,305. Medicaid patient days rose 36% in the
second quarter to 31,422 from 23,170 last year and 34% in the six month period
to 59,957 from 44,875. Hospital revenues for the second quarter of 1997 include
$5.2 million related to the 19 facilities purchased in the Transitional Merger.
During the second quarter of 1998, the provisions of the Balanced Budget Act of
1997 (the "Budget Act") reduced hospital profitability by approximately $6
million. See "Healthcare Legislation."
Excluding the effect of sales and acquisitions, nursing center revenues
decreased 2% over the second quarter of 1997 and increased 1% over the
comparable six month period in 1997. Revenue growth was adversely impacted by a
8.9% and 6.2% decline in Medicare patient days in the second quarter and first
six months of 1998, respectively, and a 5.3% and 2.7% decline in private patient
days in the second quarter and first six months of 1998, respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Vencare revenues were $151.6 million, down from $182.0 million last year. Of
the $30.4 million decline, approximately one-third of the decline is related to
the rehabilitation therapy and pharmacy lines of business. Revenues recorded in
the second quarter last year related to occupational clinics, home health and
hospice, all of which the Company has either divested or will divest in the
future, accounted for most of the remaining decrease. Pharmacy revenues declined
7% to $40.2 million in the second quarter of 1998 from $43.3 million in the same
period last year and declined 5% in the six month period to $80.3 million from
$84.7 million. Salary equivalency reimbursement rates, which became effective on
April 10, 1998, reduced second quarter Vencare profitability by approximately $4
million. See "Healthcare Legislation."
In 1997, the Company initiated the marketing of its Vencare full service
ancillary services contracts to provide a full range of services to nursing
centers not operated by the Company. The change in the Company's marketing
strategy for selling ancillary services was developed in response to the new
prospective payment system established under the Budget Act. The Company
believes that by bundling services through one provider, nursing centers can
provide quality patient care more efficiently with the added benefit of
centralized patient medical records. Under the new prospective payment system,
ancillary services provided by nursing centers are subject to fixed payments. In
this new environment, the Company believes that its full service ancillary
services contracts will enhance the ability of nursing center operators to
manage effectively the costs of providing quality patient care.
The number of Vencare contracts in effect at June 30, 1998 totaled 3,619, down
from 4,524 at the end of the second quarter last year. The contract count at
June 30 of this year includes 106 full service ancillary contracts. During the
second quarter of 1998, the Company canceled 23 full service contracts due to
nonpayment. This did not impact materially the second quarter results since
these amounts were adequately reserved. During 1997, the Company terminated
approximately 700 contracts which did not meet certain growth criteria and
eliminated approximately 670 contracts by combining previously separate
pharmacy, enteral and infusion therapy contracts. These transactions did not
impact materially Vencare operating results in 1997.
The second quarter 1998 loss from operations totaled $23.5 million ($0.35 per
share), compared to income of $37.0 million ($0.52 per diluted share) for the
same period in 1997. For the six month period, loss from operations was $4.6
million ($0.07 per share) compared to income of $71.0 million ($1.00 per diluted
share) in 1997. During the second quarter of 1998, the Company incurred non-
recurring charges of $18.7 million net of tax, or $0.28 per share, for
professional and administrative expenses to complete the Reorganization
Transactions, losses related to the planned divestiture of the Company's home
health and hospice businesses, and the write-off of capitalized amounts related
to the cancellation of a corporate headquarters construction project. The loss
in the second quarter of 1998 was also adversely impacted by a $2.6 million
increase in the provision for income taxes resulting from the Reorganization
Transactions.
The second quarter net loss includes an extraordinary loss on the
extinguishment of debt of $77.9 million, or $1.15 per share, incurred in
connection with the Reorganization Transactions. Extraordinary losses related to
the refinancing of other long-term debt reduced 1997 net income by $1.6 million
or $0.02 per diluted share, in the second quarter and $3.8 million, or $0.05 per
diluted share, for the six month period.
On a pro forma basis, excluding the effect of non-recurring transactions and
assuming the Reorganization Transactions had occurred at the beginning of 1997,
the Company would have reported a net operating loss of $8.7 million or $0.13
per share for the second quarter of 1998 and net operating income of $9.9
million or $0.14 per diluted share for the same period of 1997. For the six
month period, the Company would have reported a net operating loss of $2.5
million or $0.04 per share for the first half of 1998 and net operating income
of $18.1 million or $0.25 per diluted share for the same period of 1997 on a pro
forma basis.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Excluding non-recurring charges, the operating loss incurred in the second
quarter of 1998 was primarily attributable to a decline in Medicare census in
the Company's nursing centers, reductions in hospital and Vencare revenues
resulting from legislative and regulatory changes, and costs incurred related to
the transition of the Company's nursing center and Vencare businesses to the new
Medicare prospective payment system that became effective July 1, 1998. See
"Healthcare Legislation."
LIQUIDITY
Cash provided by operations totaled $181.1 million for the first six months of
1998 compared to $123.7 million for the same period of 1997. Days of revenues in
accounts receivable decreased to 64 at June 30, 1998 compared to 67 at December
31, 1997.
In connection with the Reorganization Transactions, the Company consummated
the Credit Agreement which includes (i) a five year $300 million Revolving
Credit Facility, (ii) a $250 million Term A Loan payable in various installments
over five years, (iii) a $250 million Term B Loan payable in installments of 1%
per year with the outstanding balance due in seven years and (iv) a $200 million
Bridge Loan due in eighteen months, to be repaid from the proceeds of the sale
of certain non-strategic assets (including the sale of Atria common stock). On
April 30, 1998, the Company completed the private placement of $300 million
aggregate principal amount of the Notes, which are not callable by the Company
until 2002. In connection with the issuance of the Notes, the Company plans to
exchange the Notes for publicly registered Notes having identical terms and
conditions.
The Company entered into interest rate swap agreements in May 1997 on $300
million of floating rate debt. These agreements expire in $100 million
increments in May 1999, November 1999 and May 2000, and provide for fixed rates
at 6.4% plus 3/4 to 3%. The fair value of the swap agreements are not
recognized in the condensed consolidated financial statements.
The carrying value and fair value of the Company's investment in Atria common
stock at June 30, 1998 aggregated $88.0 million and $172.5 million,
respectively. If the Company is unable to sell the Atria common stock or other
assets, the Company expects that it would be required to refinance the Bridge
Loan with amounts available under the Revolving Credit Facility, public or
private debt, equity, or a combination thereof.
The Credit Agreement is collateralized by substantially all of the assets and
capital stock of the Company's subsidiaries.
As part of the Reorganization Transactions, the Company issued $17.7 million
of its 6% Series A Non-Voting Convertible Preferred Stock (the "Preferred
Stock") to Ventas as part of the consideration for its healthcare operations and
assets. The Company subsequently loaned officers of the Company approximately
90% of the funds required ($15.9 million) to purchase the Preferred Stock from
Ventas.
Management believes that cash flows from operations and amounts available
under the Credit Agreement are sufficient to meet the Company's future expected
liquidity needs. Working capital totaled $373.1 million at June 30, 1998
compared to $445.1 million at December 31, 1997. At June 30, 1998, available
borrowings under the Revolving Credit Facility approximated $256 million. Since
the Reorganization Transactions, after paying $36.9 million in rents to Ventas
and incurring $42.1 million in capital expenditures, the Company has reduced
outstanding borrowings by $62.5 million primarily through improved working
capital liquidity.
At June 30, 1998, the Company's ratio of debt to debt and equity approximated
54%. Management intends to reduce the Company's leverage through, among other
things, the sale of Atria common stock and other non-strategic investments. See
Note 12 of the Notes to Condensed Consolidated Financial Statements.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $142.8 million for the
first six months of 1998 compared to $132.9 million for the same period of 1997.
Planned capital expenditures in 1998 (excluding acquisitions) are expected to
approximate $250 million to $275 million and include significant expenditures
related to nursing center improvements, completion of construction of additional
nursing centers and information systems. Management believes that its capital
expenditure program is adequate to expand, improve and equip existing
facilities. At June 30, 1998, the estimated cost to complete and equip
construction in progress approximated $109 million.
In connection with its analysis of the Budget Act, management determined in
the second quarter of 1998 to suspend all acquisition and development activities
and the construction of substantially all of its development properties.
Accordingly, management believes that expected proceeds from sales of these
properties to Ventas in accordance with the Development Agreement could
approximate $25 million during 1998.
During 1997, the Company expended approximately $359.4 million and $615.6
million in connection with the TheraTx Merger and the Transitional Merger,
respectively. These purchases were financed primarily through borrowings under
a prior credit facility. See Notes 5 and 6 of the Notes to Condensed
Consolidated Financial Statements for a discussion of these transactions.
The Company also expended $16.0 million for the acquisition of new facilities
(and related healthcare businesses) and previously leased nursing centers in the
first six months of 1998 compared to $25.0 for the same period in 1997. The
Company does not anticipate acquiring additional healthcare facilities over the
next 12 to 18 months.
Capital expenditures were financed primarily through internally generated
funds and, in 1997, from the issuance of long-term debt. The Company intends to
finance any future capital expenditures with internally generated funds and
long-term debt. Sources of capital include available borrowings under the Credit
Agreement, public or private debt and equity.
HEALTHCARE LEGISLATION
Healthcare is one of the largest industries in the United States and continues
to attract much legislative interest and public attention. The Budget Act,
enacted in August 1997, contains extensive changes to the Medicare and Medicaid
programs intended to reduce the projected amount of increase in payments under
those programs by $115 billion and $13 billion, respectively, over the next five
years. Under the Budget Act, annual growth rates for Medicare will be reduced
from over 10% to approximately 7.5% for the next five years based on specific
program baseline projections from the last five years. Virtually all spending
reductions will come from providers and changes in program components. The
Budget Act affects reimbursement systems for each of the Company's operating
units.
The Budget Act will reduce payments made to the Company's hospitals by
reducing incentive payments pursuant to the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), allowable costs for capital expenditures and bad debts,
and payments for services to patients transferred from a prospective payment
system ("PPS") hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts are expected to be
effective between May 1, 1998 and September 1, 1998 with respect to the
Company's hospitals. The reductions for payments for services to patients
transferred from a PPS hospital are expected to be effective October 1, 1998.
The Budget Act also requires the establishment of a prospective payment system
for nursing centers for cost reporting periods beginning on or after July 1,
1998. During the first three years, the per diem rates for nursing centers will
be based on a blend of facility-specific costs and Federal costs. Thereafter,
the per diem rates will be based solely on Federal costs. The rates for such
services were made available by HCFA on May 5, 1998. The payments received
under the new prospective payment system cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HEALTHCARE LEGISLATION (CONTINUED)
Management believes that the Budget Act will adversely impact its hospital
business by reducing the payments previously described. The TEFRA limits have
not had a material adverse effect on the Company's results of operations, and
the Company does not expect that the TEFRA limits will have a material adverse
effect on its results of operations in 1998. The reductions in the TEFRA
incentive payments, which are expected to be effective between May 1, 1998 and
September 1, 1998 with respect to the Company's hospitals, will have an adverse
impact on hospital revenues in the future and may impact adversely the Company's
ability to develop additional long-term care hospitals.
Over the long term, management believes that the new prospective payment
system will benefit the Company's nursing center operations because (i)
management believes that the average acuity levels of its patients will exceed
the national average (which should result in increased payments per patient day)
and (ii) the Company expects to benefit from its ability to reduce the cost of
providing ancillary services to patients in its facilities. As the nursing
center industry adapts to the cost containment measures inherent in the new
prospective payment system, management believes that the volume of ancillary
services provided per patient day to nursing center patients could decline. In
addition, as a result of these changes, many nursing centers may elect to
provide ancillary services to their patients through internal staff and will no
longer contract with outside parties for ancillary services. For these reasons
and others, since the enactment of the Budget Act, sales of new contracts have
declined and may continue to decline subject to the Company's success in
implementing its Vencare comprehensive, full service contracts sales strategy.
The Company is actively implementing strategies and operational modifications to
address changes in the Federal reimbursement system.
In January 1998, HCFA issued rules changing Medicare reimbursement guidelines
for therapy services provided by the Company (including the rehabilitation
contract therapy business acquired as part of the TheraTx Merger). Under the
new rules, HCFA established salary equivalency limits for speech and
occupational therapy services and revised limits for physical and respiratory
therapy services. The limits are based on a blend of data from wage rates for
hospitals and nursing centers and include salary, fringe benefit and expense
factors. Rates are defined by specific geographic market areas, based upon a
modified version of the hospital wage index. The new limits are effective for
services provided on or after April 10, 1998 and will impact negatively Vencare
operating results in 1998. The Company will continue to charge client nursing
centers in accordance with the revised guidelines until such nursing centers
transition to the new prospective payment system. Under the new prospective
payment system, the reimbursement for these services provided to nursing center
patients is a component of the total reimbursement allowed per nursing center
patient and the salary equivalency guidelines are not applicable. Most of the
Company's client nursing centers are expected to transition to the new
prospective payment system on or before January 1, 1999.
There also continues to be state legislative proposals that would impose more
limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and to
make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
Medicare revenues as a percentage of total revenues were 35% and 32% for the
six months ended June 30, 1998 and 1997, respectively, while Medicaid
percentages of revenues approximated 26% and 27% for the respective periods.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INFORMATION
On April 20, 1998, Atria announced that it entered into a definitive merger
agreement with Kapson, under which Kapson will acquire Atria. Under the terms
of the merger agreement, a subsidiary of Kapson will merge into Atria and the
public stockholders of Atria will receive $20.25 per share in cash. The
Company, which currently owns 10 million shares of Atria common stock, will also
receive $20.25 per share in cash for approximately 88% of its Atria common stock
(valued at approximately $177.5 million) and will retain its remaining shares
and will beneficially own approximately 12% of Atria following the merger. In
consideration of its continuing investment, the Company will retain a seat on
Atria's Board of Directors and is entitled to certain registration rights with
respect to its remaining shares of Atria common stock.
On May 13, 1998, ARV filed a lawsuit seeking to enjoin Kapson from acquiring
Atria. In addition to compensatory and punitive damages, the lawsuit seeks to
obtain preliminary and permanent injunctions to prevent Lazard from breaking its
contractual and fiduciary duties to ARV by acquiring Atria, through Kapson,
without first offering ARV the opportunity to be the acquiring party and without
obtaining ARV's consent to allow Lazard to make the acquisition should ARV
choose not to pursue it. On June 25, 1998, the Superior Court for Orange County,
California declined to reach a decision on the merits of the dispute between
Lazard and ARV. The court directed Lazard and Atria to continue their efforts to
finalize the acquisition of Atria by Kapson. The court preliminarily enjoined
the closing of the merger prior to the outcome of a bench trial which began on
August 3, 1998. Lazard has informed Atria that it believes that ARV's claims are
without merit and that it intends to contest vigorously the allegations in ARV's
complaint. The merger is subject to customary conditions including the approval
of Atria's stockholders and certain regulatory approvals. Atria has scheduled a
meeting of stockholders for September 8, 1998 to vote on the merger.
The Company has completed its review of its information systems, clinical
equipment and facilities for year 2000 issues and has begun its program to make
appropriate modifications. External professional organizations have been engaged
to assist in the management and implementation of this program. Management is
currently implementing a plan to replace substantially all of the Company's
financial information systems before the year 2000. The incremental costs
related to year 2000 issues associated with the replacement of the Company's
financial systems are expected to range between $10 to $15 million. A
substantial portion of these costs will be capitalized and amortized over a
three to five year period. The Company expects that the implementation of the
new financial information systems will be completed in the third quarter of
1999. Required modifications to the Company's proprietary VenTouchTM and
TherasysTM clinical information systems are minimal and will generally be
accomplished through the use of existing internal resources. Clinical equipment
in the Company's facilities generally will be replaced or modified as needed
through the use of external professional resources. The Company is requiring all
third party vendors to certify that their products or services will be year 2000
compliant. Incremental costs to complete the necessary changes to clinical
equipment could approximate $10 to $20 million over the next two years.
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. To the extent Federal and state governmental agencies
experience information system failures related to year 2000 issues, the
Company's cash flows, liquidity and financial condition could be impacted
negatively.
The Company's analysis of its year 2000 issues is based on information
currently available and information from third party vendors and suppliers. Due
to the inherent uncertainties related to year 2000 compliance, there can be no
assurance that the Company has accurately assessed all year 2000 issues or that
such issues will not have a material adverse effect on the Company's financial
condition or results of operations.
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Resolution of litigation and other loss
contingencies is not expected to have a material adverse effect on the Company's
liquidity, financial position or results of operations. See Note 11 of the
Notes to Condensed Consolidated Financial Statements.
The Credit Agreement contains customary covenants which require, among other
things, maintenance of certain financial ratios and limit amounts of additional
debt and repurchases of common stock. The Company was in compliance with all
such covenants at June 30, 1998.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INFORMATION (CONTINUED)
As discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements, on December 31, 1997, the Company was required to change the method
of computing earnings per common share on a retroactive basis. The change in
calculation method did not have a material impact on previously reported
earnings per common share.
Disclosures set forth in this Item 2 include forward-looking statements. The
Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance. Numerous factors exist which,
in some cases have affected, and in the future could cause results to differ
materially from these expectations. These statements involve risks and
uncertainties concerning the implementation and interpretation of the healthcare
reform legislation and other factors as detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 QUARTERS 1998 QUARTERS
------------------------------------------ ---------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 680,696 $ 778,295 $ 844,740 $ 812,273 $ 823,316 $ 778,706
--------- --------- --------- --------- --------- ---------
Salaries, wages and benefits............ 396,573 449,806 479,962 461,712 480,364 459,808
Supplies................................ 66,033 77,328 81,148 78,631 76,052 77,832
Rent.................................... 18,948 21,783 23,954 24,789 24,135 59,076
Other operating expenses................ 109,786 118,935 131,977 129,629 127,258 130,964
Depreciation and amortization........... 24,372 29,479 33,385 36,629 35,470 28,571
Interest expense........................ 10,660 20,674 34,773 36,629 37,195 28,394
Investment income....................... (1,567) (1,746) (1,759) (985) (1,180) (1,130)
Non-recurring transactions.............. - - - - 7,664 25,772
--------- --------- --------- --------- --------- ---------
624,805 716,259 783,440 767,034 786,958 809,287
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....... 55,891 62,036 61,300 45,239 36,358 (30,581)
Provision for income taxes.............. 21,909 25,026 24,398 18,005 17,477 (7,129)
--------- --------- --------- --------- --------- ---------
Income (loss) from operations........... 33,982 37,010 36,902 27,234 18,881 (23,452)
Extraordinary loss on extinguishment
of debt, net of income tax benefit... (2,259) (1,590) (346) - - (77,937)
--------- --------- --------- --------- --------- ---------
Net income (loss)........... 31,723 35,420 36,556 27,234 18,881 (101,389)
Preferred stock dividend requirements... - - - - - (177)
--------- --------- --------- --------- --------- ---------
Income (loss) available to
common stockholders..... $ 31,723 $ 35,420 $ 36,556 $ 27,234 $ 18,881 $(101,566)
========= ========= ========= ========= ========= =========
Earnings (loss) per common share:
Basic:
Income (loss) from operations..... $ 0.49 $ 0.53 $ 0.53 $ 0.40 $ 0.28 $ (0.35)
Extraordinary loss on
extinguishment of debt......... (0.03) (0.02) - - - (1.15)
--------- --------- --------- --------- --------- ---------
Net income (loss)............ $ 0.46 $ 0.51 $ 0.53 $ 0.40 $ 0.28 $ (1.50)
========= ========= ========= ========= ========= =========
Diluted:
Income (loss) from operations..... $ 0.48 $ 0.52 $ 0.52 $ 0.40 $ 0.28 $ (0.35)
Extraordinary loss on
extinguishment of debt......... (0.03) (0.02) (0.01) - - (1.15)
--------- --------- --------- --------- --------- ---------
Net income (loss)........... $ 0.45 $ 0.50 $ 0.51 $ 0.40 $ 0.28 $ (1.50)
========= ========= ========= ========= ========= =========
Shares used in computing earnings
(loss) per common share:
Basic............................. 68,929 69,194 69,519 68,048 67,448 67,651
Diluted........................... 70,207 71,016 71,266 68,613 67,857 67,651
</TABLE>
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTERS 1998 QUARTERS
-------------------------------------------------- ------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES (IN THOUSANDS):
Hospitals...................................... $ 154,900 $ 165,794 $ 233,993 $ 231,142 $ 246,365 $ 239,312
Nursing centers................................ 404,253 432,325 445,943 439,895 434,190 413,600
Vencare........................................ 119,046 182,016 183,187 158,222 169,773 151,567
Atria.......................................... 14,217 16,982 - - - -
---------- ---------- ---------- ---------- ---------- ----------
692,416 797,117 863,123 829,259 850,328 804,479
Elimination.................................... (11,720) (18,822) (18,383) (16,986) (27,012) (25,773)
---------- ---------- ---------- ---------- ---------- ----------
$ 680,696 $ 778,295 $ 844,740 $ 812,273 $ 823,316 $ 778,706
========== ========== ========== ========== ========== ==========
HOSPITAL DATA:
End of period data:
Number of hospitals......................... 38 58 60 60 62 61
Number of licensed beds..................... 3,325 5,107 5,302 5,273 5,313 5,301
Revenue mix %:
Medicare.................................... 64 61 65 62 60 59
Medicaid.................................... 10 9 8 7 8 10
Private and other........................... 26 30 27 31 32 31
Patient days:
Medicare.................................... 106,646 107,799 152,640 153,059 173,967 162,991
Medicaid.................................... 21,705 23,170 24,339 27,276 28,535 31,422
Private and other........................... 31,502 32,358 42,265 45,051 45,747 43,974
---------- ---------- ---------- ---------- ---------- ----------
159,853 163,327 219,244 225,386 248,249 238,387
========== ========== ========== ========== ========== ==========
NURSING CENTER DATA:
End of period data:
Number of nursing centers................... 314 311 310 309 305 296
Number of licensed beds..................... 40,942 40,869 40,608 40,383 39,960 39,094
Revenue mix %:
Medicare.................................... 32 32 33 31 34 31
Medicaid.................................... 43 42 42 44 41 43
Private and other........................... 25 26 25 25 25 26
Patient days:
Medicare.................................... 406,642 417,336 400,798 385,694 408,002 374,244
Medicaid.................................... 1,962,287 2,039,999 2,078,236 2,071,981 1,949,544 1,939,521
Private and other........................... 663,575 734,593 729,289 731,808 692,932 677,607
---------- ---------- ---------- ---------- ---------- ----------
3,032,504 3,191,928 3,208,323 3,189,483 3,050,478 2,991,372
========== ========== ========== ========== ========== ==========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare single service contracts.. 4,946 4,524 4,160 3,846 3,639 3,513
Number of Vencare full service contracts.... - - - 31 99 106
---------- ---------- ---------- ---------- ---------- ----------
4,946 4,524 4,160 3,877 3,738 3,619
========== ========== ========== ========== ========== ==========
</TABLE>
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Reorganization Transactions, liabilities arising from
the following 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 the following legal proceedings and other actions.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, AHCA imposed a fine of $270,000 for related regulatory violations. In
addition, HCFA has imposed a fine of $113,000. The Company has appealed both
the AHCA and HCFA fines. The Company submitted an acceptable plan of correction
at the Tampa nursing center and has been informed by AHCA that "immediate
jeopardy" no longer exists and the threatened termination of the Tampa nursing
center's Medicare provider agreement has been reversed.
The Tampa Prosecuting Attorney's office has indicated to the Company that it
is conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. The Company is cooperating fully
with this investigation.
The Company has received notice that the State of Georgia has found regulatory
violations with respect to patient discharges, among other things, at one of the
Company's nursing centers in Savannah, Georgia. The state recommended a Federal
fine of approximately $510,000 for these violations, and HCFA has imposed that
fine. The Company has yet to determine whether it will appeal this fine.
The HCFA Administrator of the Medicare and Medicaid programs has indicated
that the Company's former facilities in other states also are being monitored.
There can be no assurance that HCFA or other regulators in other jurisdictions
will not initiate investigations relating to these matters or other
circumstances, and there can be no assurance that the results of any such
investigation would not have a material adverse effect on the Company.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v. Vencor,
Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States District
Court for the Middle District of Florida on behalf of a purported class
consisting of certain residents of the Tampa nursing center and other residents
in the Company's nursing centers nationwide. The complaint alleges various
breaches of contract, and statutory and regulatory violations including
violations of Federal and state RICO statutes. The original complaint has been
amended to delineate several purported subclasses. The plaintiffs seek class
certification, unspecified damages, attorneys' fees and costs. The Company
intends to defend this action vigorously.
24
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
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. previously
reported in the Company's Form 10 dated April 27, 1998 ("Form 10"). 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.
As previously reported in the Company's Form 10, a class action lawsuit 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 common stock during the period from February 26, 1997 through May
4, 1997, inclusive. The complaint alleges that Transitional purchased shares of
its common stock from members of the investing public after it had received a
written offer to acquire all of Transitional's common stock and without
disclosing 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 the 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. On June 18, 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. The Company has filed a motion for
reconsideration and intends to defend vigorously this action.
As is typical in the healthcare industry, the Company is subject to claims and
legal actions by patients and others in the ordinary course of its business. In
addition, the Company is subject regularly to various regulatory inquiries,
investigations and audits by Federal and state agencies that oversee various
healthcare regulations and laws.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Reorganization Transactions, the Company issued 17,700
shares of its Preferred Stock on April 30, 1998 for an aggregate value of $17.7
million as part of the consideration for the assets relating to the former
healthcare operations of Ventas transferred to the Company. The Preferred Stock
was sold pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended. On or after April 30, 2002, each share
of the Preferred Stock will be convertible, at the option of the holder, in
whole or in part, into such number of shares of the common stock of the Company
as shall equal the aggregate principal amount of the shares of Preferred Stock
being converted divided by 118% of the average of the high and low sales price
on the common stock on May 1, 1998 (the date such common stock was distributed
by Ventas). The average of the high and low sales price on such date was
$10.594. On April 30, 1998, Ventas sold the Preferred Stock for an aggregate
value of $17.7 million in connection with the Reorganization Transactions. The
Preferred Stock was not publicly offered but was sold pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended. The offering was made exclusively to persons who were executive
officers or vice presidents of Ventas and who had substantial knowledge of the
operations of the Company and were provided with access to information
concerning the Company. No underwriter was used in connection with the offering
and as such, no underwriting discounts or commissions were paid. This
transaction occurred while the Company was a wholly-owned subsidiary of Ventas.
25
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
In connection with the 1999 annual meeting to stockholders of the Company, if
the proponent of a stockholder proposal fails to notify the Company of such
proposal, in conformity with the requirements of the Company's bylaws, before
March 14, 1999, but no earlier than February 12, 1999, then management proxies
will be allowed to use their discretionary voting authority on the proposal if
raised at the annual meeting even though there is no discussion of the proposal
in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Restated Certificate of Incorporation of the Company. Exhibit
3.1 to the Company's Form 10, as amended, dated April 27, 1998
(Comm. File No. 001-14057) is hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10, as amended, dated April 27, 1998 (Comm. File
No. 001-14057) is hereby incorporated by reference.
4.1 Indenture dated April 30, 1998, among the Company, Vencor
Operating, Inc. and PNC Bank, National Association, as Trustee.
Exhibit 4.1 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
4.2 Form of 9 7/8% Guaranteed Senior Subordinated Notes due 2005
(included in Exhibit 4.1).
4.3 Registration Rights Agreement dated April 30, 1998, by and among
the Company, Vencor Operating, Inc. and the Initial Purchasers.
Exhibit 4.3 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
4.4 Form of the Company's 8 5/8% Senior Subordinated Notes due 2007.
Exhibit 4.1 to the Ventas, Inc. Current Report on Form 8-K dated
July 21, 1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
4.5 Indenture dated as of July 21, 1997, between the Company and the
Bank of New York, as Trustee. Exhibit 4.2 to the Ventas, Inc.
Current Report of Form 8-K dated July 21, 1997 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.1 Credit Agreement dated as of April 29, 1998, among the Company,
Vencor Operating, Inc., the Lenders party thereto, the Swingline
Bank party thereto, the LC Issuing Bank party thereto, the
Senior Managing Agents, Managing Agents and Co-Agents party
thereto, Morgan Guaranty Trust Company of New York and
NationsBank, N.A. Exhibit 10.1 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-57953) is hereby
incorporated by reference.
10.2 Vencor Retirement Savings Plan Amended and Restated as of
January 1, 1997. Exhibit 10.2 to the Ventas, Inc. Form 10-K for
the year ended December 31, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.3 Amendment No. 1 to the Vencor Retirement Savings Plan Amended
and Restated dated July 1, 1997. Exhibit 10.3 to the Ventas,
Inc. Form 10-K for the year ended December 31, 1997 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.4 Amendment No. 2 to the Vencor Retirement Savings Plan Amended
and Restated dated December 31, 1997. Exhibit 10.4 to the
Ventas, Inc. Form 10-K for the year ended December 31, 1997
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.5 Amendment No. 3 to the Vencor Retirement Savings Plan Amended
and Restated dated December 31, 1997. Exhibit 10.5 to the
Ventas, Inc. Form 10-K for the year ended December 31, 1997
(Comm. File No. 1-10989) is hereby incorporated by reference.
26
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBITS (Continued):
10.6 Vencor, Inc. 401(k) Master Trust Agreement dated January 1, 1997
by and between the Company and Wachovia Bank of North Carolina,
N.A. Exhibit 10.6 to the Ventas, Inc. Form 10-K for the year
ended December 31, 1997 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.7 Amendment No. 1 to Vencor, Inc. 401(k) Master Trust Agreement
dated January 1, 1997 by and between the Company and Wachovia
Bank of North Carolina, N.A. Exhibit 10.7 to the Ventas, Inc.
Form 10-K for the year ended December 31, 1997 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.8 Retirement Savings Plan for Certain Employees of Vencor and its
Affiliates Amended and Restated as of January 1, 1997. Exhibit
10.8 to the Ventas, Inc. Form 10-K for the year ended December
31, 1997 (Comm. File No. 1-19089) is hereby incorporated by
reference.
10.9 Tax Allocation Agreement dated as of April 30, 1998 by and
between the Company and Ventas, Inc.
10.10 Transition Services Agreement dated as of April 30, 1998 by and
between the Company and Ventas, Inc.
10.11 Agreement of Indemnity - Third Party Leases dated as of April
30, 1998 by and between the Company and its subsidiaries and
Ventas, Inc.
10.12 Agreement of Indemnity - Third Party Contracts dated as of April
30, 1998 by and between the Company and its subsidiaries and
Ventas, Inc.
10.13 Vencor, Inc. Deferred Compensation Plan dated January 1, 1996.
Exhibit 10.24 to the Ventas, Inc. Form 10-K for the year ended
December 31, 1996 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.14 Form of Indemnification Agreement between Vencor, Inc. and
certain of its officers and employees. Exhibit 10.31 to the
Ventas, Inc. Form 10-K for the year ended December 31, 1995
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.15 Forbearance Agreement among First Healthcare Corporation,
Medisave Pharmacies, Inc. and Certain Limited Partnerships,
dated as of August 25, 1995. Exhibit 10.52 to the Ventas, Inc.
Form 10-K for the year ended December 31, 1995 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.16 Strategic Alliance Agreement dated as of June 10, 1997 by and
between the Company, Continental Casualty Company and Valley
Forge Life Insurance Company. Exhibit 10.1 to the Ventas, Inc.
Form 10-Q for the quarterly period ended June 30, 1997 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.17 Amended and Restated Agreement and Plan of Merger. Appendix A to
Amendment No. 2 to the Ventas, Inc. Registration Statement on
Form S-4 (Reg. No. 33-59345) is hereby incorporated by
reference.
10.18 Agreement and Plan of Merger dated as of February 9, 1997 among
TheraTx, Incorporated ("TheraTx"), Vencor, Inc. and Peach
Acquisition Corp. ("Peach"). Exhibit (c)(1) to the Statement on
Schedule 14D-1 of Ventas, Inc. and Peach, dated February 14,
1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.19 Amendment No. 1 to Agreement and Plan of Merger dated as of
February 28, 1997 among TheraTx, Vencor, Inc. and Peach. Exhibit
(c)(3) of Amendment No. 2 to the Statement on Schedule 14D-1 of
Ventas, Inc. and Peach, dated March 3, 1997 (Comm. File No. 1-
10989) is hereby incorporated by reference.
27
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBITS (Continued):
10.20 Agreement and Plan of Merger, dated June 18, 1997 by and among
Vencor, Inc., LV Acquisition Corp. and Transitional Hospitals
Corporation. Exhibit 2.1 to the Ventas, Inc. Current Report on
Form 8-K dated July 3, 1997 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.21 Agreement and Plan of Merger, dated May 2, 1997, among Select
Medical Corporation, SM Acquisition Co. and Transitional
Hospitals Corporation. Exhibit 99.1 to the Current Report on
Form 8-K of Transitional dated May 2, 1997 (Comm. File No. 1-
7008) is hereby incorporated by reference.
10.22 Asset Purchase Agreement between Transitional Hospitals
Corporation and Behavioral Healthcare Corporation, dated October
22, 1996. Exhibit 99.1 to the Current Report on Form 8-K of
Transitional dated October 22, 1996 (Comm. File No. 1-7008) is
hereby incorporated by reference.
10.23 Agreement and Plan of Merger between Transitional Hospitals
Corporation and Behavioral Healthcare Corporation, dated October
22, 1996. Exhibit 99.2 to the Current Report on Form 8-K of
Transitional dated October 22, 1996 (Comm. File No. 1-7008) is
hereby incorporated by reference.
10.24 First Amendment to Asset Purchase Agreement between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation,
dated November 30, 1996. Exhibit 99.1 to the Current Report on
Form 8-K of Transitional dated December 16, 1996 (Comm. File No.
1-7008) is hereby incorporated by reference.
10.25 Amendment to Agreement and Plan of Merger between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation,
dated November 30, 1996. Exhibit 99.2 to the Current Report on
Form 8-K of Transitional dated December 16, 1996 (Comm. File No.
1-7008) is hereby incorporated by reference.
10.26 Other Debt Instruments-Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished
to the Commission upon request.
10.27 Vencor, Inc. 1998 Incentive Compensation Plan. Exhibit 10.23 to
the Company's Registration Statement on Form S-4 (Reg. No. 333-
57953) is hereby incorporated by reference.
10.28 Vencor, Inc. 1998 Stock Option Plan for Non-Employee Directors.
Exhibit 10.24 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-57953) is hereby incorporated by reference.
10.29 Vencor, Inc. Deferred Compensation Plan dated April 30, 1998.
Exhibit 10.25 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-57953) is hereby incorporated by reference.
10.30 Vencor, Inc. Non-Employee Directors Deferred Compensation Plan.
Exhibit 10.26 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-57953) is hereby incorporated by reference.
10.31 Vencor, Inc. Supplemental Executive Retirement Plan dated
January 1, 1998, as amended. Exhibit 10.27 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-57953) is
hereby incorporated by reference.
10.32 Form of Vencor Operating, Inc. Change-in-Control Severance
Agreement. Exhibit 10.28 to the Company's Registration Statement
on Form S-4 (Reg. No. 333-57953) is hereby incorporated by
reference.
28
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBITS (Continued):
10.33 Form of Vencor, Inc. Promissory Note. Exhibit 10.29 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-
57953) is hereby incorporated by reference.
10.34 Distribution Agreement between the Company and Ventas, Inc.
Exhibit 10.2 to the Company's Form 10, as amended, dated April
27, 1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.35 Form of Master Lease Agreement between the Company and Ventas,
Inc. Exhibit 10.3 to the Company's Form 10, as amended, dated
April 27, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.36 Development Agreement between the Company and Ventas, Inc.
Exhibit 10.4 to the Company's Form 10, as amended, dated April
27, 1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.37 Form of Participation Agreement between the Company and Ventas,
Inc. Exhibit 10.5 to the Company's Form 10, as amended, dated
April 27, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.38 Agreement and Plan of Reorganization between the Company and
Ventas, Inc. Exhibit 10.1 to the Company's Form 10, as amended,
dated April 27, 1998 (Comm. File No. 001-14057) is hereby
incorporated by reference.
27.1 Financial Data Schedule (included only in filings submitted
under the Electronic Data Gathering, Analysis, and Retrieval
system).
27.2 Restated Financial Data Schedule (included only in filings
submitted under the Electronic Data Gathering, Analysis, and
Retrieval system).
(b) REPORTS ON FORM 8-K:
The Company filed a Current Report on Form 8-K on May 8, 1998 reporting the
completion of the Reorganization Transactions and the spin off. The Form 8-K
also reported the change in the Company's name from Vencor Healthcare, Inc. to
Vencor, Inc. The Company filed an additional Current Report on Form 8-K on June
18, 1998 to disclose earnings expectations for the Company based on its recently
completed analysis of the Budget Act.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: August 14, 1998 /s/ W. BRUCE LUNSFORD
- ---------------------- -----------------------------------
W. Bruce Lunsford
Chairman of the Board, President
and Chief Executive Officer
Date: August 14, 1998 /s/ W. EARL REED, III
- ---------------------- -----------------------------------
W. Earl Reed, III
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
30
<PAGE>
EXHIBIT 10.9
TAX ALLOCATION AGREEMENT
------------------------
TAX ALLOCATION AGREEMENT (the "Agreement") dated as of April 30, 1998,
---------
by and between VENCOR, INC., a Delaware corporation ("Vencor"), and VENCOR
------
HEALTHCARE, INC., a Delaware corporation and a wholly-owned subsidiary of
Vencor("Healthcare Company").
------------------
RECITALS
WHEREAS, the Board of Directors of Vencor has determined that is
appropriate and desirable to (a) pursuant to an Agreement and Plan of
Reorganization, dated as of the date hereof, between Vencor and Healthcare
Company (the "Reorganization Agreement"), separate Vencor and its subsidiaries
------------------------
into two publicly owned companies so that (i) the assets and liabilities
relating to substantially all of the Vencor-owned land, buildings and other
improvements and real estate related assets are allocated to Vencor (the "Real
----
Estate Business"), which will change its name to "Ventas, Inc." immediately
- ---------------
prior to the Distribution (as defined herein), and (ii) the other assets and
liabilities relating to the historical operations of Vencor, including certain
real property under development or to be developed by Vencor, are allocated to
Healthcare Company (the "Healthcare Business"), which will change its name to
-------------------
"Vencor, Inc." immediately prior to the Distribution; and (b) pursuant to a
Distribution Agreement, dated as of the date hereof, between Vencor and
Healthcare Company (the "Distribution Agreement") distribute (the
----------------------
"Distribution"), following such reorganization, as a dividend to the holders of
the issued and outstanding shares of common stock, par value $.25 per share, of
Vencor ("Vencor Common Stock") all of the issued and outstanding shares of
-------------------
common stock, par value $.25 per share, of Healthcare Company ("Healthcare
----------
Company Common Stock") on the basis of one share of Healthcare Company Common
- --------------------
Stock for each share of Vencor Common Stock; and
WHEREAS, Vencor and Healthcare Company desire on behalf of themselves,
their Subsidiaries and their successors to set forth their rights and
obligations with respect to Taxes (as defined herein) due for periods before and
after the Distribution.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and subject to and on the terms and conditions
herein set forth, the parties hereto agree as follows:
<PAGE>
Article I
Definitions
-----------
For the purposes of this Agreement,
1.01 "Agreement" shall have the meaning set forth in the Preamble.
---------
1.02 "Allocation Schedule" shall have the meaning set forth in
-------------------
Section 3.02.
1.03 "Business Day" shall mean a day other than a Saturday, Sunday or
------------
a day on which the banks in New York City or Louisville, Kentucky are authorized
or obligated by law or executive order to close.
1.04 "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
1.05 "Corporate Restructuring Transactions" shall have the meaning
------------------------------------
set forth in the Reorganization Agreement.
1.06 "Date of Distribution" shall mean the end of the day on which
--------------------
Healthcare Company ceases, on account of the distribution of the shares of
Healthcare Company Common Stock to the holders of Vencor Common Stock, to be a
member of the affiliated group of which Vencor is the common parent.
1.07 "Distribution" shall have the meaning set forth in the
------------
Recitals.
1.08 "Distribution Agreement" shall have the meaning set forth in the
----------------------
Recitals.
1.09 "Final Determination" shall mean with respect to any issue (a) a
-------------------
decision, judgment, decree or other order by any court of competent
jurisdiction, which decision, judgment, decree or other order has become final
and not subject to further appeal, (b) a closing agreement whether or not
entered into under Section 7121 of the Code or any other binding settlement
agreement (whether or not with the Internal Revenue Service) entered into in
connection with or in contemplation of an administrative or judicial proceeding,
or (c) the completion of the highest level of administrative proceedings if a
judicial contest is not or is no longer available.
1.10 "Healthcare Company" shall have the meaning set forth in the
------------------
Preamble.
-2-
<PAGE>
1.11 "Healthcare Company Common Stock" shall have the meaning set
-------------------------------
forth in the Recitals.
1.12 "Healthcare Company Group" shall mean, for any period,
------------------------
Healthcare Company and its then Subsidiaries.
1.13 "Indemnitor" shall have the meaning set forth in Section 5.02.
----------
1.14 "Period After Distribution" shall mean any taxable year or other
-------------------------
taxable period beginning after the Date of Distribution and, in the case of any
taxable year or other taxable period that begins before and ends after the Date
of Distribution, that part of the taxable year or other taxable period that
begins after the Date of Distribution.
1.15 "Period Before Distribution" shall mean any taxable year or
--------------------------
other taxable period that ends on or before the Date of Distribution and, in the
case of any taxable year or other taxable period that begins before and ends
after the Date of Distribution, that part of the taxable year or other taxable
period through the Date of Distribution.
1.16 "Reorganization Agreement" shall have the meaning set forth in
------------------------
the Recitals.
1.17 "Restructuring Taxes" shall mean any Taxes to the extent
-------------------
resulting from the Corporate Restructuring Transactions or the Distribution.
1.18 "Subsidiary" shall mean any corporation or other organization
----------
whether incorporated or unincorporated (i) of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party and/or by any one or more of its
Subsidiaries or (ii) of which a party or any one or more of its Subsidiaries is
the general partner or managing member.
1.19 "Tax" or "Taxes" shall mean all federal, state or local taxes,
--- -----
whether domestic or foreign, including income, gross receipts, windfall profits,
franchise, sales, transfer, use, duty, excise, license, employment, property,
value-added, severance, production, withholding or similar taxes, together with
any interest, additions or penalties with respect thereto and any interest in
respect of such additions or penalties.
-3-
<PAGE>
1.20 "Tax Benefit" shall mean an increase in the Tax basis of an
-----------
asset that may be depreciated or amortized for United States Federal income Tax
purposes.
1.21 "Tax Returns" shall mean all reports and returns required to be
-----------
filed with respect to Taxes.
1.22 "Taxing Authority" shall mean any nation, locality,
----------------
municipality, government, state, federation, or other governmental body
authorized to impose Taxes.
1.23 "Vencor" shall have the meaning set forth in the Preamble.
------
1.24 "Vencor Common Stock" shall have the meaning set forth in the
-------------------
Recitals.
1.25 "Vencor Group" shall mean, for any period, Vencor and its then
------------
Subsidiaries.
Article II
Tax Liabilities and Tax Sharing Obligations
-------------------------------------------
2.01 Tax Liability of Healthcare Company. Healthcare Company shall
------------------------------------
be liable for, and shall hold the Vencor Group harmless from and against, (i)
any Tax liability of the Healthcare Company Group for any Period After
Distribution, (ii) any Tax liability of the Vencor Group or Healthcare Company
Group in respect of the Period Before Distribution (other than any Restructuring
Taxes) with respect to the portion of such Taxes attributable to assets owned by
the Healthcare Company Group immediately after the completion of the Corporate
Restructuring Transactions and (iii) any Restructuring Taxes to the extent
Healthcare Company derives a Tax Benefit as a result of the payment of such
Taxes. Healthcare Company shall be entitled to any refund or credit in respect
of Taxes owed or paid by Healthcare Company under this Section 2.01. Any
liability for Taxes under this Section 2.01 with respect to Taxes imposed on the
Vencor Group shall be measured by the Vencor Group's actual liability for Taxes
after applying Tax benefits otherwise available to the Vencor Group other than
Tax benefits that the Vencor Group in good faith determines would actually
offset Tax liabilities of the Vencor Group in other taxable years or periods.
Any right to a refund under this Section 2.01(a) shall be measured by the actual
refund or credit of the Vencor Group attributable to the adjustment without
regard to offsetting Tax attributes of the Vencor Group.
-4-
<PAGE>
2.02 Tax Liability of Vencor. Vencor shall be liable for, and shall
------------------------
hold the Healthcare Company Group harmless against, any Taxes imposed on the
Vencor Group or the Healthcare Company Group other than Taxes for which the
Healthcare Company Group is liable under Section 2.01. Vencor shall be entitled
to any refund or credit in respect of Taxes owed or paid by Vencor under this
Section 2.02. Any liability for Taxes under this Section 2.02 with respect to
Taxes imposed on the Healthcare Company Group shall be measured by the
Healthcare Company Group's actual liability for Taxes after applying Tax
benefits otherwise available to the Healthcare Company Group other than Tax
benefits that the Healthcare Company Group in good faith determines would
actually offset Tax liabilities of the Healthcare Company Group in other taxable
years or periods. Any right to a refund under this Section 2.02 shall be
measured by the actual refund or credit of the Healthcare Company Group
attributable to the adjustment without regard to offsetting Tax attributes of
the Healthcare Company Group.
2.03 Refunds. The amount of any refund, credit or reimbursement in
--------
respect of Taxes paid by Vencor Group in respect of taxable years ending prior
to the Date of Distribution shall be allocated to Healthcare Company and Vencor
in the manner set forth in Sections 2.01 and 2.02.
2.04 Prior Agreements. Except as set forth in this Article II and in
----------------
consideration of the mutual indemnities and other obligations of this Agreement,
any and all prior Tax sharing agreements or practices between any member of the
Vencor Group and any member of the Healthcare Company Group shall be terminated
with respect to the Healthcare Company Group as of the Date of Distribution.
2.05 Period that Includes the Date of Distribution. (a) To the
---------------------------------------------
extent permitted by law or administrative practice, the taxable year of the
Healthcare Company Group shall be treated as closing on the Date of
Distribution.
(b) If it is necessary for purposes of this Agreement to determine the
income Tax liability of any member of the Healthcare Company Group or Vencor
Group for a taxable year that begins on or before and ends after the Date of the
Distribution, the determination shall be made by assuming that such member of
the Healthcare Company Group or Vencor Group had a taxable year that ended on
the Date of the Distribution, except that exemptions, allowances or deductions
that are calculated on an annual basis shall be apportioned on a time basis.
-5-
<PAGE>
2.06 Indemnified Tax Liabilities. Notwithstanding anything contained
---------------------------
herein, no party shall have an indemnification claim under this Agreement for a
Tax liability to the extent that such party may bring an indemnification claim
against a third party for such Tax liability.
Article III
Tax Returns
-----------
3.01 Preparation and Filing of Tax Returns. Healthcare Company
-------------------------------------
shall prepare, and Vencor shall timely file or cause to be filed, all Tax
Returns with respect to taxable years or periods that begin before the Date of
Distribution and end on or after the Date of Distribution that are filed on a
consolidated, combined or unitary basis and that include a member of the Vencor
Group and a member of the Healthcare Company Group. Healthcare Company shall
prepare and timely file or cause to be filed any other Tax Return with respect
to the Healthcare Company Group and Vencor shall prepare and timely file or
cause to be filed any other Tax Return with respect to the Vencor Group.
3.02 Review of Tax Returns. Vencor and Healthcare Company, as the
---------------------
case may be, shall submit to the other party for its review and approval any Tax
Return it is required to file under Section 3.01, if such other party may be
liable under this Agreement for any Taxes shown on such Tax Return, at least 30
days prior the due date (including extentions) for filing such Tax Return. The
party preparing any such Tax Return shall also prepare, and submit to the other
party for its review and approval along with such Tax Return, a schedule
allocating the Tax liability shown on such Tax Return between Vencor and
Healthcare Company in accordance with the terms of this Agreement (the
"Allocation Schedule"). If Vencor and Healthcare Company cannot agree on the
- --------------------
calculations contained in such Tax Return or Allocation Schedule at least 20
days prior to the due date (including extentions) for the filing of such Tax
Return, such calculation shall be made by an internationally recognized
independent accounting firm in the manner described in Article VIII.
3.03 Payment. Vencor and Healthcare Company shall each remit or
-------
cause to be remitted any Taxes due in respect of any Tax Return it is required
to file under this Section 3.01 and shall be entitled to reimbursement only to
the extent provided in this Agreement.
-6-
<PAGE>
Article IV
Payments
--------
4.01 Taxable Year of Distribution. Healthcare Company or Vencor, as
----------------------------
the case may be, shall pay the amount owed to the other party under this
Agreement for the taxable year or period that begins before and ends on or after
the Date of Distribution within 30 calendar days after the filing of the Tax
Returns that include that year or period.
4.02 Other Payments. Other payments due to a party under this
--------------
Agreement shall be due not later than 20 Business Days after the receipt or
crediting of a refund or the receipt of notice of a Final Determination that the
indemnified party is liable for an indemnified cost.
4.03 Notice. Vencor and Healthcare Company shall give each other
------
prompt notice of any payment that may be due to the other under this Agreement.
Article V
Tax Audits
----------
5.01 General. Except as provided in Section 5.02, each of Healthcare
-------
Company and Vencor shall have sole responsibility for all audits or other
proceedings with respect to Tax Returns that it is required to file under
Section 3.01.
5.02 Indemnified Claims. Vencor or Healthcare Company shall promptly
------------------
notify the other in writing prior to the issuance of an actual notice of
assessment by the relevant Taxing Authority (for example, if by the Internal
Revenue Service, prior to the issuance of a Form 5701 Notice of Proposed
Adjustment) of any proposed adjustment to a return that may result in liability
of the other party (the "Indemnitor") under this Agreement. The Indemnitor
----------
shall have the sole right to contest the proposed adjustment and to employ
counsel of its choice at its expense; provided, however, that if the proposed
-------- -------
adjustment involves a Tax Return for which the other party is responsible and
cannot be separated from the Tax Return under applicable law, the Indemnitor
shall not settle the proposed adjustment without the consent of the other party,
which consent shall not be unreasonably withheld. The Indemnitor shall provide
the other party with information about the nature and amounts of the proposed
adjustments and, in the sole discretion of the Indemnitor, may permit the other
party to participate in the proceeding.
-7-
<PAGE>
Article VI
Cooperation
-----------
Vencor and Healthcare Company shall cooperate with each other in the
filing of any Tax Returns and the conduct of any audit or other proceeding and
each shall execute and deliver such powers of attorney and make available such
other documents as are necessary to carry out the intent of this Agreement.
Each party shall use its best efforts to obtain any refund or credit for Taxes
to which the other party is entitled pursuant to this Agreement. Each party
agrees to notify the other party of any audit adjustments which do not result in
Tax liability but can be reasonably expected to affect Tax Returns of the other
party, or any of its Subsidiaries, for a Period After Distribution.
Article VII
Retention of Records; Access
----------------------------
In addition to any obligation imposed by the Reorganization Agreement,
the Vencor Group and the Healthcare Company Group shall (a) in accordance with
their then current record retention policy, retain records, documents,
accounting data and other information (including computer data) necessary for
the preparation and filing of all returns in respect of Taxes of the Vencor
Group or the Healthcare Company Group or for the audit of such returns; and
(b) give to the other reasonable access to such records, documents, accounting
data and other information (including computer data) and to its personnel
(insuring their cooperation) and premises, for the purpose of the review or
audit of such returns to the extent relevant to an obligation or liability of a
party under this Agreement. At any time after the Date of Distribution that the
Healthcare Company Group or Vencor Group proposes to destroy such material or
information, they shall first notify the other and the other shall be entitled
to receive such materials or information proposed to be destroyed.
Article VIII
Disputes
--------
If Vencor and Healthcare Company cannot agree on any calculation of
any liabilities under this Agreement, such calculation shall be made by any
internationally recognized independent public accounting firm acceptable to both
Vencor and Healthcare Company. The decision of such firm shall be final and
binding. The fees and expenses incurred in connection with such calculation
shall be borne equally by Vencor and Healthcare Company.
-8-
<PAGE>
Article IX
Termination of Liabilities
--------------------------
Notwithstanding any other provision in this Agreement, any liabilities
determined under this Agreement shall not terminate any earlier than the
expiration of the applicable statute of limitation for such liability. All
other covenants under this Agreement shall survive indefinitely.
Article X
Waiver of Ownership Limit
-------------------------
Healthcare Company shall not increase the Ownership Limit under
Section 10 of Article Tenth of the Restated Certificate of Incorporation in a
manner applicable to Tenet Healthcare Corporation or exempt Tenet Healthcare
Corporation from the Ownership Limit under Section 12 of Article Tenth of the
Restated Certificate of Incorporation without obtaining the consent of Vencor
with respect to such increase or exemption; provided, however, that Vencor shall
-------- -------
not withhold such consent if Healthcare Company provides Vencor with an opinion
of counsel that such increase or exemption would not create a material risk that
Vencor would not qualify as a REIT. Vencor agrees to provide Healthcare Company
and its counsel with such information and officer's certificates as may be
necessary or advisable in connection with the delivery of such an opinion of
counsel. The foregoing limitation shall terminate on the date that Tenet
Healthcare Corporation owns 9.9% or less of the outstanding common stock of
Vencor.
Article XI
Miscellaneous Provisions
------------------------
10.01 Notices and Governing Law. All notices required or permitted
-------------------------
to be given pursuant to this Agreement shall be given in accordance with the
applicable provisions of the Reorganization Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Kentucky(other than the laws regarding choice of laws and conflicts of laws) as
to all matters, including matters of validity, construction, effect, performance
and remedies.
10.02 Binding Effect; No Assignment; Third Party Beneficiaries. This
--------------------------------------------------------
Agreement shall be binding on, and shall inure to the benefit of, the parties
and their respective successors and assigns. Vencor and Healthcare Company
hereby guarantee the performance of all actions, agreements, covenants and
obligations provided for under
-9-
<PAGE>
this Agreement of each member of the Vencor Group and the Healthcare Company
Group, respectively. Vencor and Healthcare Company shall, upon the written
request of the other, cause any of their respective Subsidiaries to execute this
Agreement. Neither Vencor nor Healthcare Company shall assign any of their
respective rights or delegate any of their respective duties under this
Agreement without the prior written consent of the other party (which consent
shall not be unreasonably withheld). No person (including, without limitation,
any employee of a party or any stockholder of a party) shall be, or shall be
deemed to be, a third party beneficiary of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
VENCOR, INC.
By _______________________
Name:
Title:
VENCOR HEALTHCARE, INC.
By _______________________
Name:
Title:
-10-
<PAGE>
EXHIBIT 10.10
TRANSITION SERVICES AGREEMENT
-----------------------------
THIS TRANSITION SERVICES AGREEMENT (this "Agreement") is made and
---------
entered into as of the 30/th/ day of April, 1998, by and between Vencor, Inc., a
Delaware corporation ("Vencor"), and Vencor Healthcare, Inc., a Delaware
------
corporation ("Healthcare Company").
------------------
RECITALS
--------
WHEREAS, Vencor and Healthcare Company are parties to an Agreement and
Plan of Reorganization, dated as of the date hereof (the "Reorganization
--------------
Agreement"), which provides for certain reorganization transactions (the
- ---------
"Reorganization Transactions"), including but not limited to, certain internal
- ----------------------------
mergers and stock and asset transfers that (a) allocate the assets and
liabilities relating to substantially all of the Vencor-owned land, buildings
and other improvements and real estate related assets (the "Real Estate
-----------
Business") to Vencor, which will change its name to "Ventas, Inc." immediately
- --------
prior to the Distribution (as defined herein), and (b) allocate the other assets
and liabilities relating to the historical operations of Vencor (the "Healthcare
----------
Business") to Healthcare Company, which will change its name to "Vencor, Inc."
- --------
immediately prior to the Distribution;
WHEREAS, Vencor and Healthcare Company are parties to a Distribution
Agreement, dated as of the date hereof (the "Distribution Agreement"), which
----------------------
provides for the distribution (the "Distribution") by Vencor to the holders of
------------
common stock, par value $.25 per share, of Vencor ("Vencor Common Stock") of
-------------------
all the outstanding shares of common stock, par value $.25 per share, of
Healthcare Company ("Healthcare Company Common Stock") on the basis of one share
-------------------------------
of Healthcare Company Common Stock for every share of Vencor Common Stock;
WHEREAS, pursuant to the Reorganization Agreement substantially all of
the assets and employees that provided certain administrative and support
services to Vencor prior to the Distribution will be transferred to Healthcare
Company in connection with the Reorganization Transactions; and
WHEREAS, Vencor desires to receive from Healthcare Company and the
Healthcare Company subsidiaries following the Reorganziation Transactions and
the Distribution (collectively, the "Healthcare Company Group"), and Healthcare
------------------------
Company has agreed to cause the Healthcare Company Group to provide to Vencor,
for a transitional period of time following the Reorganization Transactions and
the Distribution such administrative and support services on the terms set forth
in this Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and subject to and on the terms and conditions
herein set forth, the parties hereto agree as follows:
Section 1. Services. Healthcare Company shall cause the Healthcare
--------
Company Group to provide those administrative and support services set forth in
Exhibit 1 to this Agreement (the "Services") to Vencor or any subsidiary of
- --------- --------
Vencor (including any limited partnerships) designated by Vencor to receive such
Services. Additional administrative and support services may be provided to
Vencor by the Healthcare Company Group if such arrangement is agreed to in
writing and executed by both Vencor and Healthcare Company on behalf of the
Healthcare Company Group. The Healthcare Company Group will provide each
Service to Vencor for the full-time equivalents ("FTEs") per month set forth in
----
Exhibit 1. If Vencor requests additional FTEs per month for any Service, Vencor
- ---------
and Healthcare Company will negotiate in good faith a modification to this
Agreement with respect to the provision of additional FTEs for such Service.
Section 2. Payments. Vencor shall pay $200,000 (the "Monthly Fee") to
-------- -----------
Healthcare Company on or prior to the first day of each month as payment for the
Services to be rendered by the Healthcare Company Group to Vencor during such
month. For any period for which Services are to be provided by the Healthcare
Company Group to Vencor on less than a full-month basis, Vencor shall pay
Healthcare Company the pro rata amount of the Monthly Fee equal to such portion
of the month for which Services are to be provided.
Section 3. Representations and Warranties.
------------------------------
(a) Healthcare Company hereby represents and warrants to Vencor that:
(1) Healthcare Company is a corporation duly organized and
validly existing and in good standing under the laws of its
jurisdiction of incorporation;
(2) Healthcare Company has the requisite corporate power and
authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby; and
(3) this Agreement constitutes a valid and legally binding
obligation of Healthcare Company, enforceable in accordance
with its terms, subject to bankruptcy, insolvency,
reorganization and similar laws of general
-2-
<PAGE>
applicability relating to or affecting creditors' rights and
to general equity principles.
(b) Vencor hereby represents and warrants to Healthcare Company that:
(1) Vencor is a corporation duly organized and validly existing
and in good standing under the laws of its jurisdiction of
incorporation;
(2) Vencor has the requisite corporate power and authority to
execute and deliver this Agreement and to consummate the
transactions contemplated hereby; and
(3) this Agreement constitutes a valid and legally binding
obligation of Vencor, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and
similar laws of general applicability relating to or
affecting creditors' rights and to general equity
principles.
Section 4. Limitation of Liability. No member of the Healthcare
-----------------------
Company Group, nor any officer, director, employee or agent of any member of the
Healthcare Company Group (each, a "Representative"), shall be liable to Vencor
--------------
for any error of judgment or for any Loss (as defined herein) incurred by Vencor
in connection with the matters to which this Agreement relates, except for
Losses resulting from the willful misconduct or fraud on the part of the
Healthcare Company Group or any of its Representatives.
Section 5. Indemnity. Vencor shall indemnify and hold harmless the
---------
Healthcare Company Group and all of its Representatives from and against any and
all losses, liabilities, claims, damages, costs and expenses (including
reasonable attorneys' fees and other expenses of litigation) ("Losses") to which
------
the Healthcare Company Group or any of its Representatives may become subject
arising out of the provision hereunder by Healthcare Company Group, its
Representatives or any third party of Services to Vencor, except for Losses
resulting from the willful misconduct or fraud of the Healthcare Company Group
or any of its Representatives.
Section 6. Term. This Agreement shall be continuously in effect until
----
the earlier of (i) December 31, 1998 or (ii) its termination upon 45 days' prior
written notice by Vencor. Notwithstanding anything herein to the contrary, if
there is a change of control (as defined below) of Vencor at any time prior to
the end of the Term, Healthcare Company may terminate this Agreement upon not
less than 30 days' prior written notice
-3-
<PAGE>
to Vencor. A "change of control" of Vencor shall include, without limitation,
-----------------
(a) a change in the composition of the board of directors of Vencor such that at
the end of any period of twelve (12) consecutive months the persons constituting
a majority of such board of directors are not the same as the persons
constituting a majority at the start of such period (or persons appointed by
such majority), (b) the sale or other disposition by Vencor of (i) any part of
its interest in Vencor or (ii) all or substantially all of the assets of Vencor
(other than a bona fide pledge in connection with a financing), or (c) a merger
or consolidation involving Vencor, which results in the stockholders of Vencor
immediately prior to such event owning less than 50% of the capital stock of the
surviving entity.
Section 7. Miscellaneous.
-------------
(a) This Agreement may be modified or amended from time to time
only by a written instrument executed by the parties hereto.
(b) Vencor shall not have any obligation to refer any resident or
patients to the Healthcare Company Group for the provision of any service or
item of any kind. Vencor and Healthcare Company hereby acknowledge that the
compensation for Services provided for in this Agreement is set in advance, is
consistent with the fair market value of such Services and reflects arms' length
negotiations between the parties hereto and is not determined in a manner that
takes into account in any way any volume or value of referrals or business
generated between the parties.
(c) If Healthcare Company or Vencor shall determine upon advice of
counsel that the continuation of this Agreement will likely be deemed to be a
violation of any applicable federal or state law regarding fraud and abuse,
referral prohibitions, or any similar matter, either party upon receiving such
advice may at any time give the other party written notice of such advice and
if, after consultation, the parties have not determined to their reasonable
satisfaction that no such violation exists and the parties have not amended this
Agreement to remove the risk of such violation to the other party's reasonable
satisfaction, then either party may terminate this Agreement effective as of the
date sixty (60) days after its initial written notice to the other party.
(d) Captions contained in this Agreement are inserted only as a matter
of convenience and reference, and in no way define, limit, extend or describe
the scope of this Agreement, or the intent of any provision hereof. All
references to sections herein shall refer to sections of this Agreement unless
the context clearly requires otherwise.
(e) This Agreement shall be binding upon, and inure to the benefit of,
the parties hereto and their respective successors and assigns.
-4-
<PAGE>
(f) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE COMMONWEALTH OF KENTUCKY, WITHOUT REGARD TO ITS CONFLICTS
OF LAW RULES. ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST ANY PARTY ARISING
OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED IN ANY FEDERAL OR
COMMONWEALTH COURT IN THE COMMONWEALTH OF KENTUCKY. EACH PARTY HEREBY (I)
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH
PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM,
AND (II) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH
SUIT, ACTION OR PROCEEDING.
(g) This Agreement embodies the entire understanding between the
parties hereto with respect to the matters covered herein and supersedes any
prior agreement or understanding between the parties with respect to such
matters.
(h) This Agreement may be executed in counterparts, each of which
shall constitute an original and all of which, when taken together, shall
constitute one Agreement.
(i) Neither party may assign, delegate or otherwise transfer any of
its rights or obligations under this Agreement without the prior written consent
of the other party.
-5-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
VENCOR, INC.
By:
-------------------------------------
Name:
Title:
HEALTHCARE COMPANY, INC.
By:
-------------------------------------
Name:
Title:
-6-
<PAGE>
EXHIBIT 1
Services To Be Provided By Healthcare Company Group To Vencor
-------------------------------------------------------------
Services Full Time
-------- Equivalents
-----------
Staff Accounting .75
Fixed Assets .50
Accounts Payable .25
Payroll .50
H/R and Benefits .50
Risk Management/Insurance .25
Tax 1.00
Legal 1.00
SEC Reporting .50
Treasury Support .25
Market Planning .25
Development .50
MIS Personnel 1.00
<PAGE>
EXHIBIT 10.11
AGREEMENT OF INDEMNITY - THIRD PARTY LEASES
-------------------------------------------
THIS AGREEMENT OF INDEMNITY, made as of the 30th day of April, 1998
(the "Agreement of Indemnity"), by and between Vencor Healthcare, Inc. (which
will change its name to "Vencor, Inc.") a Delaware corporation, Vencor
Operating, Inc., a Delaware corporation, Vencor Nursing Centers East, LLC, a
Delaware limited liability company, Vencor Nursing Centers West, LLC, a Delaware
limited liability company, Vencor Nevada, LLC, a Delaware limited liability
company, New Vencor Hospitals East, LLC, a Delaware limited liability company,
Vencor Hospitals West, LLC, a Delaware limited liability company, Vencor
Hospitals Limited Partnership, a Delaware limited partnership, Vencor Nursing
Centers Limited Partnership, a Delaware limited partnership, each having an
address at 400 West Market Street, Suite 3300, Aegon Center, Louisville,
Kentucky 40202 (each individually, an "Indemnitor"), Vencor, Inc. (which will
change its name to "Ventas, Inc."), a Delaware corporation, having an office at
400 West Market Street, Suite 3300, Aegon Center, Louisville, Kentucky 40202,
First Healthcare Corporation, Hillhaven/Indiana Partnership, Nationwide Care,
Inc., and Pasatiempo Development Corporation ("Indemnitee").
W I T N E S S E T H:
-------------------
WHEREAS, Indemnitee is executing and delivering to Vencor Healthcare,
Inc. and Vencor Operating, Inc. an Assignment and Assumption of Lease
(collectively, "Assignments") with respect to certain real property
-----------
(collectively the "Properties") leased by Indemnitee from various third party
----------
lessors (collectively, the "Lessors") pursuant to the various leases described
-------
in, Exhibit A attached hereto (collectively the "Leases"); and
--------- ------
WHEREAS, the Lessors have not released Indemnitee from Indemnitee's
obligations under the Leases; and
WHEREAS, it is a condition to Indemnitee executing and delivering the
Assignments that Indemnitor execute and deliver to Indemnitee an agreement of
indemnity containing the terms set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Indemnitor shall indemnify, defend and hold harmless Indemnitee,
its direct and indirect shareholders, subsidiaries, partners and affiliates and
their respective
<PAGE>
officers, directors, agents, representatives, successors and assigns
(collectively, the "Indemnified Parties" and each individually, an "Indemnified
Party") from and against any and all Claims (as defined in Paragraph 2 hereof)
incurred by, imposed upon, commenced or asserted against the Indemnified
Parties, or any one or more of them, on or after the date hereof by reason of,
caused by, arising out of, in connection with or resulting from the Leases.
2. For the purposes of this Agreement of Indemnity, the term "Claims"
shall mean all liabilities (statutory or otherwise), obligations, claims,
damages, penalties, causes of action, costs and expenses, losses and injuries of
every kind and nature whatsoever, including all costs reasonably incurred by
Indemnitee in connection with the enforcement of any provision of this Agreement
of Indemnity, including without limitation attorney's and legal assistant fees
and expenses, court costs and fees and consultant fees and expenses.
3. If at any time Indemnitee shall receive written notice of a Claim,
Indemnitee shall give reasonably prompt written notice of such Claim to
Indemnitor; provided that (i) Indemnitee shall have no liability for a failure
-------- ----
to give notice of any Claim of which Indemnitor has otherwise been notified or
has knowledge and (ii) the failure of Indemnitee to give such a notice to
Indemnitor shall not limit the rights of any Indemnified Party or the
obligations of Indemnitor with respect to such Claim except to the extent that
Indemnitor incurs actual expenses or suffers actual monetary loss as a result of
such failure. Indemnitor shall have the right to control the defense or
settlement of any Claim, provided that (A) Indemnitor shall first confirm in
writing to the Indemnified Parties that such Claim is within the scope of this
Agreement of Indemnity and that Indemnitor shall pay any and all amounts
required to be paid in respect of such Claim and (B) if the compromise or
settlement of any such Claim shall not result in the complete release of all
Indemnified Parties from the Claim so compromised or settled, the compromise or
settlement shall require the prior written approval of the Indemnified Parties
not being completely released. The Indemnified Parties, at their election and
at their sole cost and expense, shall have the right, but not the obligation, to
participate in the defense of any Claim. In addition to such right to
participate, Indemnitee (or its designee) shall have the right, by written
notice given to Indemnitor at any time, to assume exclusive control of the
defense of any Claim insofar as the Indemnified Parties are concerned, but,
subject to the next succeeding sentence, such a notice shall result in
Indemnitor being relieved of its obligations in respect of such Claim under this
Agreement of Indemnity. If at any time during the pendency of a Claim
Indemnitor shall not confirm in writing its obligation under (A) above and pay
the claim or it shall
-2-
<PAGE>
disaffirm its responsibility for such Claim, Indemnitee (or its designee) shall
have the right, but not the obligation, to assume the exclusive control of the
defense and settlement of such Claim insofar as the Indemnified Parties are
concerned, and all costs and expenses of such defense shall be paid by
Indemnitor if such Claim is within the scope of this Agreement of Indemnity. If
Indemnitee pays any Claim, the Indemnitor will immediately reimburse Indemnitee
for such amounts with interest from payment date at the Prime Rate plus two
percent (2%).
4. This Agreement of Indemnity shall be governed by and construed in
accordance with the laws of the State of New York. Any legal suit, action or
proceeding against any party arising out of or relating to this Agreement shall
---
be instituted in any Federal or Commonwealth court in the Commonwealth of
Kentucky. Each party hereby (i) irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any such suit, action or proceeding brought in such a
court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum, and (ii) irrevocably submits to the
jurisdiction of any such court in any such suit, action or proceeding.
5. This Agreement of Indemnity shall be binding upon and shall inure
to the benefit of Indemnitor and Indemnitee and their respective successors and
assigns. In addition, each of the Indemnified Parties (other than Indemnitee)
is intended to be, and is hereby expressly made, a third party beneficiary of
Indemnitor's obligations hereunder.
6. This Agreement of Indemnity constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and may not be
modified or amended except pursuant to the terms of an instrument signed by both
Indemnitor or Indemnitee.
7. Every notice, demand, request, consent, approval or other
communication (herein without distinction sometimes referred to as "notices")
which either party hereto is required or desires to give or make or communicate
shall be in writing and shall be given or made or communicated by personal
delivery, telecopy or by mailing the same by registered or certified mail,
return receipt requested, postage prepaid, to the following address:
If to Indemnitor: Vencor Healthcare, Inc.
Attention: Chief Financial Officer
-3-
<PAGE>
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
with a copy to: Vencor Healthcare, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
and Vencor Operating, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
If to Indemnitee: Ventas, Inc.
Attention: President
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
with a copy to: Ventas, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
or at such other address or addresses as any party hereto may designate from
time to time by notice given as herein provided. All notices so sent shall be
deemed to have been delivered, effective, made or communicated, as the case may
be, three (3) days after the date so mailed.
-4-
<PAGE>
8. (a) To the extent that any party hereto or any of its property
has, or may hereafter acquire, directly or indirectly, any right of immunity
from the jurisdiction of any court or from any legal process (including immunity
from attachment prior to judgment) on the grounds of diplomatic status,
sovereignty or any other claims for immunity, each party hereby irrevocably
waives any such right or immunity in respect of its obligations arising under or
in connection with this Agreement of Indemnity. Each party represents and
warrants to the other that it is not now entitled, directly or indirectly, to
any such diplomatic or sovereign immunity or any other form of immunity and that
it is not owned or controlled by any foreign governmental entity or agency and
agrees that, should any party bring any suit, action or proceeding in the
Commonwealth of Kentucky, or any other jurisdiction to enforce any obligation or
liability of any other party arising under or in connection with this Agreement
of Indemnity, no such immunity will be claimed by or on behalf of such party.
(b) All disputes arising out of or relating to this Agreement of
Indemnity and all actions to enforce this Agreement of Indemnity shall be
adjudicated in the state courts of the Commonwealth of Kentucky or the federal
courts sitting in the Commonwealth of Kentucky and each party hereby irrevocably
submits to the jurisdiction of such courts in any suit, action or proceeding
arising out of or relating to this Agreement of Indemnity or in any action to
enforce this Agreement of Indemnity. So far as is permitted under applicable
law, this consent to personal jurisdiction shall be self-operative and no
further instrument or action, other than service of process in one of the
manners specified in this Paragraph 8, or as otherwise permitted by law, shall
be necessary in order to confer jurisdiction upon the person of any party hereto
in any such court.
(c) Provided that service of process is effected upon a party
hereto in one of the manners hereafter specified or as otherwise permitted by
law, such party irrevocably waives, to the fullest extent permitted by law, and
agrees not to assert, by way of motion, as a defense or otherwise (i) any
objection which it may have or may hereafter have to the laying of the venue of
any such suit, action or proceeding brought in such a court as is mentioned in
Paragraph 8(b) or (ii) any claim that any such suit, action or proceeding
brought in such a court has been brought in an inconvenient forum. Provided that
service of process is effected upon any party hereto in one of the manners
specified in this Paragraph 8 or as otherwise permitted by law, each party
hereto agrees that any final judgment from which such party has not or may not
appeal or further appeal in any such suit, action or proceeding brought in such
a court shall be conclusive and binding upon such party and may, so far as is
permitted under applicable law, be enforced in any
-5-
<PAGE>
domestic or foreign courts to the jurisdiction of which such party is subject.
(d) Each party hereto hereby consents to process being served in
any suit, action or proceeding relating to this Agreement of Indemnity either by
(i) the mailing of a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to such party at the address set forth in
Paragraph 7 hereof, (ii) personal delivery of a copy thereof to such position of
an individual as a senior officer of such party or, in the case of an
individual, to such individual or (iii) in any manner permitted by law in the
jurisdiction where service of process is effected on a Business Day (as
hereinafter defined) at the address set forth in Paragraph 7 hereof. The term
"Business Day" means a day of the year on which banks are open for business and
not required or authorized to close in New York City.
(e) Each party shall execute and deliver to the other all such
further instruments as may be necessary to make effective any provision of this
Paragraph 8.
(f) Nothing in this Paragraph 8 shall affect the right of any
party to serve process in any manner permitted by law or limit the right of any
party pursuant to applicable law to bring proceedings against another party in
the courts of any jurisdiction or jurisdictions.
9. If Indemnitor consists of more than one party, the parties
comprising Indemnitor shall be jointly and severally liable for all of the
obligations of Indemnitor hereunder.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement of
Indemnity as of the date first hereinabove written.
VENCOR, INC.,
a Delaware corporation
By:
------------------------------------
Name:
Title:
FIRST HEALTHCARE CORPORATION
By:
------------------------------------
Name:
Title:
HILLHAVEN/INDIANA PARTNERSHIP
By: , General
----------------------------
Partner
By:
-----------------------------
Name:
Title:
NATIONWIDE CARE, INC.
-7-
<PAGE>
By:
------------------------------------
Name:
Title:
PASATIEMPO DEVELOPMENT CORPORATION
By:
------------------------------------
Name:
Title:
VENCOR HEALTHCARE, INC.,
a Delaware corporation
By:
------------------------------------
Name:
Title:
VENCOR OPERATING, INC., a Delaware
corporation
By:
------------------------------------
Name:
Title:
VENCOR NURSING CENTERS EAST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
-8-
<PAGE>
By:
------------------------------------
Name:
Title:
VENCOR NURSING CENTERS WEST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
------------------------------------
Name:
Title:
VENCOR NEVADA, LLC, a Delaware limited
liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
------------------------------------
Name:
Title:
NEW VENCOR HOSPITALS EAST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
------------------------------------
Name:
Title:
-9-
<PAGE>
VENCOR HOSPITALS WEST, LLC, a Delaware
limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
------------------------------------
Name:
Title:
VENCOR HOSPITALS LIMITED PARTNERSHIP,
a Delaware limited partnership
By: VENCOR OPERATING, INC.,
its General Partner
By:
------------------------------------
Name:
Title:
VENCOR NURSING CENTERS LIMITED
PARTNERSHIP, a Delaware limited
partnership
By: VENCOR OPERATING, INC.,
its General Partner
By:
------------------------------------
Name:
Title:
-10-
<PAGE>
SCHEDULE A
----------
AGREEMENTS
----------
-11-
<PAGE>
EXHIBIT 10.12
AGREEMENT OF INDEMNITY - THIRD PARTY CONTRACTS
----------------------------------------------
THIS AGREEMENT OF INDEMNITY, made as of the 30th day of April, 1998
(the "Agreement of Indemnity"), by and between Vencor Healthcare, Inc. (which
will change its name to "Vencor, Inc.") a Delaware corporation, Vencor
Operating, Inc., a Delaware corporation, Vencor Nursing Centers East, LLC, a
Delaware limited liability company, Vencor Nursing Centers West, LLC, a Delaware
limited liability company, Vencor Nevada, LLC, a Delaware limited liability
company, New Vencor Hospitals East, LLC, a Delaware limited liability company,
Vencor Hospitals West, LLC, a Delaware limited liability company, Vencor
Hospitals Limited Partnership, a Delaware limited partnership, Vencor Nursing
Centers Limited Partnership, a Delaware limited partnership, each having an
address at 400 West Market Street, Suite 3300, Aegon Center, Louisville,
Kentucky 40202 (each individually, an "Indemnitor"), Vencor, Inc. (which will
change its name to ("Ventas, Inc."), a Delaware corporation, having an office at
400 West Market Street, Suite 3300, Aegon Center, Louisville, Kentucky 40202 and
First Healthcare Corporation ("Indemnitee").
W I T N E S S E T H:
-------------------
WHEREAS, Indemnitee has entered into those certain agreements listed
in Schedule A (the "Third Party Agreements") with various third parties (the
----------
"Obligees")
WHEREAS, on the date hereof, Indemnitor and Indemnitee will effectuate
certain internal mergers and stock and asset transfers allocating certain assets
and liabilities to each other as part of an overall reorganization
(collectively, the "Distribution Transactions");
WHEREAS, as part of the Distribution Transactions, Indemnitee and
Indemnitor will enter into the several Assignment and Assumption Agreements
dated as of April 30, 1998 among the various Indemnitors and Indemnitees, dated
as of the date hereof, and pursuant thereto, Indemnitee will assign and
Indemnitor will assume, the liabilities, duties, interests, guarantees and all
other rights and obligations of Indemnitee under the "Third Party Agreements";
and
WHEREAS, the Obligees have not released Indemnitee from Indemnitee's
obligations under the Third Party Agreements listed in Schedule A; and
----------
WHEREAS, it is a condition to Indemnitee entering into and
consummating the Distribution Transactions that Indemnitor execute and deliver
to Indemnitee an agreement of indemnity containing the terms set forth herein.
<PAGE>
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Indemnitor shall indemnify, defend and hold harmless Indemnitee,
its direct and indirect shareholders, subsidiaries, partners and affiliates and
their respective officers, directors, agents, representatives, successors and
assigns (collectively, the "Indemnified Parties" and each individually, an
"Indemnified Party") from and against any and all Claims (as defined in
Paragraph 2 hereof) incurred by, imposed upon, commenced or asserted against the
Indemnified Parties, or any one or more of them, on or after the date hereof by
reason of, caused by, arising out of, in connection with or resulting from the
Third Party Agreements.
2. For the purposes of this Agreement of Indemnity, the term "Claims"
shall mean all liabilities (statutory or otherwise), obligations, claims,
damages, penalties, causes of action, costs and expenses, losses and injuries of
every kind and nature whatsoever, including all costs reasonably incurred by
Indemnitee in connection with the enforcement of any provision of this Agreement
of Indemnity, including without limitation attorney's and legal assistant fees
and expenses, court costs and fees and consultant fees and expenses.
3. If at any time Indemnitee shall receive written notice of a Claim,
Indemnitee shall give reasonably prompt written notice of such Claim to
Indemnitor; provided that (i) Indemnitee shall have no liability for a failure
-------- ----
to give notice of any Claim of which Indemnitor has otherwise been notified or
has knowledge and (ii) the failure of Indemnitee to give such a notice to
Indemnitor shall not limit the rights of any Indemnified Party or the
obligations of Indemnitor with respect to such Claim except to the extent that
Indemnitor incurs actual expenses or suffers actual monetary loss as a result of
such failure. Indemnitor shall have the right to control the defense or
settlement of any Claim, provided that (A) Indemnitor shall first confirm in
writing to the Indemnified Parties that such Claim is within the scope of this
Agreement of Indemnity and that Indemnitor shall pay any and all amounts
required to be paid in respect of such Claim and (B) if the compromise or
settlement of any such Claim shall not result in the complete release of all
Indemnified Parties from the Claim so compromised or settled, the compromise or
settlement shall require the prior written approval of the Indemnified Parties
not being completely released. The Indemnified Parties, at their election and
at their sole cost and expense, shall have the right, but not the obligation, to
participate in the defense of any Claim. In addition to such right to
participate, Indemnitee (or its designee) shall have the right, by written
notice given to Indemnitor at any time, to assume exclusive control of the
defense of any Claim insofar as the Indemnified Parties are concerned, but,
subject to the next succeeding sentence, such a notice shall result in
Indemnitor being relieved of its obligations in respect of such Claim under this
-2-
<PAGE>
Agreement of Indemnity. If at any time during the pendency of a Claim
Indemnitor shall not confirm in writing its obligations under (A) above and pay
the claim or it shall disaffirm its responsibility for such Claim, Indemnitee
(or its designee) shall have the right, but not the obligation, to assume the
exclusive control of the defense and settlement of such Claim insofar as the
Indemnified Parties are concerned, and all costs and expenses of such defense
shall be paid by Indemnitor if such Claim is within the scope of this Agreement
of Indemnity. If Indemnitee is required to pay any claim the Indemnitor will
immediately reimburse Indemnitee for such amounts with interest from payment
date at the Prime Rate plus two percent (2%).
4. This Agreement of Indemnity shall be governed by and construed in
accordance with the laws of the State of New York. Any legal suit, action or
proceeding against any party arising out of or relating to this Agreement shall
---
be instituted in any Federal or Commonwealth court in the Commonwealth of
Kentucky. Each party hereby (i) irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any such suit, action or proceeding brought in such a
court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum, and (ii) irrevocably submits to the
jurisdiction of any such court in any such suit, action or proceeding.
5. This Agreement of Indemnity shall be binding upon and shall inure
to the benefit of Indemnitor and Indemnitee and their respective successors and
assigns. In addition, each of the Indemnified Parties (other than Indemnitee)
is intended to be, and is hereby expressly made, a third party beneficiary of
Indemnitor's obligations hereunder.
6. This Agreement of Indemnity constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and may not be
modified or amended except pursuant to the terms of an instrument signed by both
Indemnitor or Indemnitee.
7. Every notice, demand, request, consent, approval or other
communication (herein without distinction sometimes referred to as "notices")
which either party hereto is required or desires to give or make or communicate
shall be in writing and shall be given or made or communicated by personal
delivery, telecopy or by mailing the same by registered or certified mail,
return receipt requested, postage prepaid, to the following address:
-3-
<PAGE>
If to Indemnitor: Vencor Healthcare, Inc.
Attention: Chief Financial Officer
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
with a copy to: Vencor Healthcare, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
and Vencor Operating, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
If to Indemnitee: Ventas, Inc.
Attention: President
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
with a copy to: Ventas, Inc.
Attention: General Counsel
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
or at such other address or addresses as any party hereto may designate from
time to time by notice given as herein provided. All notices so sent shall be
deemed to have been delivered, effective, made or communicated, as the case may
be, three (3) days after the date so mailed.
8. (a) To the extent that any party hereto or any of its property
has, or may hereafter acquire, directly or indirectly, any right of immunity
from the jurisdiction
-4-
<PAGE>
of any court or from any legal process (including immunity from attachment prior
to judgment) on the grounds of diplomatic status, sovereignty or any other
claims for immunity, each party hereby irrevocably waives any such right or
immunity in respect of its obligations arising under or in connection with this
Agreement of Indemnity. Each party represents and warrants to the other that it
is not now entitled, directly or indirectly, to any such diplomatic or sovereign
immunity or any other form of immunity and that it is not owned or controlled by
any foreign governmental entity or agency and agrees that, should any party
bring any suit, action or proceeding in the Commonwealth of Kentucky, or any
other jurisdiction to enforce any obligation or liability of any other party
arising under or in connection with this Agreement of Indemnity, no such
immunity will be claimed by or on behalf of such party.
(b) All disputes arising out of or relating to this Agreement of
Indemnity and all actions to enforce this Agreement of Indemnity shall be
adjudicated in the state courts of the Commonwealth of Kentucky or the federal
courts sitting in the Commonwealth of Kentucky and each party hereby irrevocably
submits to the jurisdiction of such courts in any suit, action or proceeding
arising out of or relating to this Agreement of Indemnity or in any action to
enforce this Agreement of Indemnity. So far as is permitted under applicable
law, this consent to personal jurisdiction shall be self-operative and no
further instrument or action, other than service of process in one of the
manners specified in this Paragraph 8, or as otherwise permitted by law, shall
be necessary in order to confer jurisdiction upon the person of any party hereto
in any such court.
(c) Provided that service of process is effected upon a party hereto
in one of the manners hereafter specified or as otherwise permitted by law, such
party irrevocably waives, to the fullest extent permitted by law, and agrees not
to assert, by way of motion, as a defense or otherwise (i) any objection which
it may have or may hereafter have to the laying of the venue of any such suit,
action or proceeding brought in such a court as is mentioned in Paragraph 8(b)
or (ii) any claim that any such suit, action or proceeding brought in such a
court has been brought in an inconvenient forum. Provided that service of
process is effected upon any party hereto in one of the manners specified in
this Paragraph 8 or as otherwise permitted by law, each party hereto agrees that
any final judgment from which such party has not or may not appeal or further
appeal in any such suit, action or proceeding brought in such a court shall be
conclusive and binding upon such party and may, so far as is permitted under
applicable law, be enforced in any domestic or foreign courts to the
jurisdiction of which such party is subject.
(d) Each party hereto hereby consents to process being served in any
suit, action or proceeding relating to this Agreement of Indemnity either by (i)
the mailing of a copy thereof by registered or certified mail, postage prepaid,
return receipt requested, to such party at the address set forth in Paragraph 7
hereof, (ii) personal delivery of a copy
-5-
<PAGE>
thereof to such position of an individual as a senior officer of such party or,
in the case of an individual, to such individual or (iii) in any manner
permitted by law in the jurisdiction where service of process is effected on a
Business Day (as hereinafter defined) at the address set forth in Paragraph 7
hereof. The term "Business Day" means a day of the year on which banks are open
for business and not required or authorized to close in New York City.
(e) Each party shall execute and deliver to the other all such
further instruments as may be necessary to make effective any provision of this
Paragraph 8.
(f) Nothing in this Paragraph 8 shall affect the right of any party
to serve process in any manner permitted by law or limit the right of any party
pursuant to applicable law to bring proceedings against another party in the
courts of any jurisdiction or jurisdictions.
9. If Indemnitor consists of more than one party, the parties
comprising Indemnitor shall be jointly and severally liable for all of the
obligations of Indemnitor hereunder.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement of
Indemnity as of the date first herein above written.
VENCOR, INC., a Delaware corporation
By:
---------------------------
Name:
Title:
FIRST HEALTHCARE CORPORATION
By:
---------------------------
Name:
Title:
VENCOR HEALTHCARE, INC., a Delaware
corporation
By:
---------------------------
Name:
Title:
VENCOR OPERATING, INC., a Delaware
corporation
By:
---------------------------
Name:
Title:
-7-
<PAGE>
VENCOR NURSING CENTERS EAST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
---------------------------
Name:
Title:
VENCOR NURSING CENTERS WEST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
---------------------------
Name:
Title:
VENCOR NEVADA, LLC, a Delaware limited
liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
---------------------------
Name:
Title:
-8-
<PAGE>
NEW VENCOR HOSPITALS EAST, LLC, a
Delaware limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
---------------------------
Name:
Title:
VENCOR HOSPITALS WEST, LLC, a Delaware
limited liability company
By: VENCOR OPERATING, INC.,
its Managing Member
By:
---------------------------
Name:
Title:
VENCOR HOSPITALS LIMITED
PARTNERSHIP, a Delaware limited partnership
By: VENCOR OPERATING, INC.,
its General Partner
By:
---------------------------
Name:
Title:
VENCOR NURSING CENTERS LIMITED
PARTNERSHIP, a Delaware limited partnership
By: VENCOR OPERATING, INC.,
its General Partner
By:
---------------------------
Name:
Title:
-9-
<PAGE>
SCHEDULE A
----------
AGREEMENTS
----------
1. Guaranty Agreement, dated as of December, 1992, jointly and severally by MGH
Health Services Corporation and Brim of Massachusetts, Inc., as trustees of Fox
Hill Village Trust under Declaration of Trust, dated November 25, 1986.
2. Guaranty Agreement, dated as of November 1, 1997, by and between Vencor,
Massachusetts, Industrial Finance Authority and State Street Bank and Trust
Company.
3. Guaranty Agreement, between Vencor and Howard Bank, N.A., dated as of
November 17, 1995.
4. Guaranty Reimbursement Agreement, by and between Vencor (as successor to The
Hillhaven Corporation) and Starr Farm Partnership, dated as of April 7, 1993, as
amended by the First Amendment to the Guaranty Reimbursement Agreement, dated as
of November 17, 1995.
5. Assumption, Amendment and Restatement of Guaranty Agreement, between First
Healthcare Corporation and Nationsbank (as successor to Citizens and Southern
National Bank).
6. Parent Guaranty Agreement, between The Hillhaven Corporation and Nationsbank
(as successor to Citizens and Southern National Bank).
7. Amended and Restated Guarantee Reimbursement Agreement, dated as of April
29, 1998, by and among Vencor, Inc., Vencor Healthcare, Inc. and Tenet
Healthcare Corporation.
8. Agreement for Sale and Purchase of Mortgages, dated September 26, 1996, by
and between Omega Healthcare Investors, Inc., Vencor, Inc. and First Healthcare
Corporation.
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 67,868
<SECURITIES> 0
<RECEIVABLES> 584,603
<ALLOWANCES> (74,881)
<INVENTORY> 25,160
<CURRENT-ASSETS> 841,351
<PP&E> 940,237
<DEPRECIATION> (298,253)
<TOTAL-ASSETS> 2,438,378
<CURRENT-LIABILITIES> 468,258
<BONDS> 1,012,176
1,770
0
<COMMON> 16,969
<OTHER-SE> 855,693
<TOTAL-LIABILITY-AND-EQUITY> 2,438,378
<SALES> 0
<TOTAL-REVENUES> 1,602,022
<CGS> 0
<TOTAL-COSTS> 1,177,267
<OTHER-EXPENSES> 243,129
<LOSS-PROVISION> 15,093
<INTEREST-EXPENSE> 65,589
<INCOME-PRETAX> 5,777
<INCOME-TAX> 10,348
<INCOME-CONTINUING> (4,571)
<DISCONTINUED> 0
<EXTRAORDINARY> (77,937)
<CHANGES> 0
<NET-INCOME> (82,508)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR,
INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 106,476
<SECURITIES> 0
<RECEIVABLES> 639,889
<ALLOWANCES> (52,687)
<INVENTORY> 36,525
<CURRENT-ASSETS> 938,646
<PP&E> 2,050,914
<DEPRECIATION> (462,968)
<TOTAL-ASSETS> 3,410,057
<CURRENT-LIABILITIES> 457,109
<BONDS> 1,935,019
0
0
<COMMON> 18,215
<OTHER-SE> 859,372
<TOTAL-LIABILITY-AND-EQUITY> 3,410,057
<SALES> 0
<TOTAL-REVENUES> 1,458,991
<CGS> 0
<TOTAL-COSTS> 1,030,471
<OTHER-EXPENSES> 220,353
<LOSS-PROVISION> 8,368
<INTEREST-EXPENSE> 31,334
<INCOME-PRETAX> 117,927
<INCOME-TAX> 46,935
<INCOME-CONTINUING> 70,992
<DISCONTINUED> 0
<EXTRAORDINARY> (3,849)
<CHANGES> 0
<NET-INCOME> 67,143
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.95
</TABLE>
