<PAGE>
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, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
One Vencor Place
680 South Fourth Street
Louisville, KY 40202-2412
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate 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, 1999
--------------------- ----------------------------
Common stock, $0.25 par value 70,390,585 shares
1 of 39
<PAGE>
VENCOR, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations --
for the quarter and six months
ended June 30, 1999 and 1998......................... 3
Condensed Consolidated Balance Sheet --
June 30, 1999 and December 31, 1998.................. 4
Condensed Consolidated Statement of Cash Flows --
for the six months ended June 30, 1999 and 1998...... 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 32
Item 3. Defaults Upon Senior Securities....................... 34
Item 4. Submission of Matters to a Vote of Security Holders... 36
Item 6. Exhibits and Reports on Form 8-K...................... 37
2
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the quarter and six months ended June 30, 1999 and 1998
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Six Months
--------------------- ------------------------
1999 1998 1999 1998
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................ $688,892 $ 778,706 $1,389,124 $1,602,022
-------- --------- ---------- ----------
Salaries, wages and benefits........................ 392,748 459,808 796,642 940,172
Supplies............................................ 70,417 77,832 139,081 153,884
Rent................................................ 76,088 59,076 151,540 83,211
Other operating expenses............................ 149,118 156,736 274,770 291,658
Depreciation and amortization....................... 21,612 28,571 43,897 64,041
Interest expense.................................... 20,032 28,394 39,568 65,589
Investment income................................... (642) (1,130) (1,273) (2,310)
-------- --------- ---------- ----------
729,373 809,287 1,444,225 1,596,245
-------- --------- ---------- ----------
Income (loss) before income taxes................... (40,481) (30,581) (55,101) 5,777
Provision for income taxes.......................... 50 (7,129) 100 10,348
-------- --------- ---------- ----------
Loss from operations................................ (40,531) (23,452) (55,201) (4,571)
Cumulative effect of change in accounting
for start-up costs............................... - - (8,923) -
Extraordinary loss on extinguishment of debt, net
of income tax benefit............................ - (77,937) - (77,937)
-------- --------- ---------- ----------
Net loss................................ (40,531) (101,389) (64,124) (82,508)
Preferred stock dividend requirements............... (262) (177) (523) (177)
-------- --------- ---------- ----------
Loss to common stockholders............. $(40,793) $(101,566) $ (64,647) $ (82,685)
======== ========= ========== ==========
Loss per common share:
Basic:
Loss from operations.......................... $ (0.58) $ (0.35) $ (0.79) $ (0.07)
Cumulative effect of change in accounting
for start-up costs......................... - - (0.13) -
Extraordinary loss on extinguishment of debt.. - (1.15) - (1.15)
-------- --------- ---------- ----------
Net loss................................ $ (0.58) $ (1.50) $ (0.92) $ (1.22)
======== ========= ========== ==========
Diluted:
Loss from operations.......................... $ (0.58) $ (0.35) $ (0.79) $ (0.07)
Cumulative effect of change in accounting
for start-up costs......................... - - (0.13) -
Extraordinary loss on extinguishment of debt.. - (1.15) - (1.15)
-------- --------- ---------- ----------
Net loss................................ $ (0.58) $ (1.50) $ (0.92) $ (1.22)
======== ========= ========== ==========
Shares used in computing loss per common share:
Basic............................................ 70,395 67,651 70,360 67,550
Diluted.......................................... 70,395 67,651 70,360 67,550
</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,
1999 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 28,537 $ 34,551
Accounts and notes receivable less allowance for loss.............. 454,556 471,701
Inventories........................................................ 32,055 28,594
Income taxes....................................................... 12,073 15,315
Other.............................................................. 73,950 78,317
---------- ----------
601,171 628,478
Property and equipment, at cost..................................... 793,640 749,867
Accumulated depreciation............................................ (301,513) (262,551)
---------- ----------
492,127 487,316
Goodwill less accumulated amortization.............................. 444,826 456,644
Investments in affiliates........................................... 15,466 35,707
Assets held for sale................................................ 23,432 28,524
Other............................................................... 73,123 81,221
---------- ----------
$1,650,145 $1,717,890
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 114,876 $ 152,103
Salaries, wages and other compensation............................. 144,947 150,906
Due to third party payors.......................................... 27,080 98,851
Other accrued liabilities.......................................... 143,879 139,254
Long-term debt due within one year................................. 8,888 9,048
Long-term debt in default classified as current.................... 789,609 760,885
---------- ----------
1,229,279 1,311,047
Long-term debt...................................................... 76,395 6,600
Deferred credits and other liabilities.............................. 95,263 85,255
Series A preferred stock............................................ 1,743 1,743
Stockholders' equity:
Common stock, $0.25 par value; authorized 180,000 shares;
issued 70,391 shares -- June 30 and 70,146 shares -- December 31.. 17,598 17,537
Capital in excess of par value..................................... 664,253 665,447
Accumulated deficit................................................ (434,386) (369,739)
---------- ----------
247,465 313,245
---------- ----------
$1,650,145 $1,717,890
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net loss......................................................................... $(64,124) $ (82,508)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................. 43,897 64,041
Provision for doubtful accounts............................................... 12,010 15,093
Extraordinary loss on extinguishment of debt.................................. - 126,726
Unusual transactions.......................................................... 21,720 23,963
Deferred income taxes......................................................... - (12,567)
Cumulative effect of change in accounting for start-up costs.................. 8,923 -
Other......................................................................... 7,598 (863)
Changes in operating assets and liabilities:
Accounts and notes receivable.............................................. 17,383 29,550
Inventories and other assets............................................... 7,225 2,287
Accounts payable........................................................... (37,387) 45,907
Income taxes............................................................... 3,242 (28,387)
Due to third party payors.................................................. 2,544 -
Other accrued liabilities.................................................. 6,260 (1,490)
-------- ---------
Net cash provided by operating activities............................... 29,291 181,752
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment............................................... (50,522) (142,755)
Acquisition of healthcare businesses and previously leased facilities............ - (16,006)
Sale of assets................................................................... 5,850 14,708
Surety bond deposits............................................................. (14,067) -
Series A preferred stock loans................................................... - (15,930)
Net change in investments........................................................ 5,117 (271)
Other............................................................................ (4,172) (3,001)
-------- ---------
Net cash used in investing activities................................... (57,794) (163,255)
-------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving lines of credit......................... 37,400 (228,946)
Issuance of long-term debt....................................................... - 700,000
Net proceeds from senior subordinated notes offering............................. - 294,000
Payment of senior subordinated notes............................................. - (732,547)
Repayment of long-term debt...................................................... (13,356) (57,466)
Payment of deferred financing costs.............................................. (1,558) (7,758)
Issuances of common stock........................................................ 3 227
-------- ---------
Net cash provided by (used in) financing activities..................... 22,489 (32,490)
-------- ---------
Change in cash and cash equivalents................................................. (6,014) (13,993)
Cash and cash equivalents at beginning of period.................................... 34,551 55,627
-------- ---------
Cash and cash equivalents at end of period.......................................... $ 28,537 $ 41,634
======== =========
Supplemental information:
Interest payments.................................................................. $ 23,755 $ 89,003
Income tax payments (refunds)...................................................... (3,141) 2,935
</TABLE>
See accompanying notes.
5
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
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, 1999, the Company operated 293 nursing centers (38,387 licensed
beds), 56 long-term acute care hospitals (4,935 licensed beds), and a contract
services business ("Vencare") which primarily provided respiratory and
rehabilitation therapies, medical services and pharmacy management services to
both Company-operated and non-affiliated nursing centers.
In January 1998, the Board of Directors of Ventas, Inc. ("Ventas") (formerly
known as Vencor, Inc.) authorized its management to proceed with a plan to
separate Ventas into two publicly held corporations, one to operate the nursing
center, hospital and ancillary services businesses and the other to own
substantially all of the real property of Ventas and to lease such real property
to a new operating company (the "Reorganization Transactions"). In anticipation
of the Reorganization Transactions, the Company was incorporated on March 27,
1998 to be the new operating company. On April 30, 1998, Ventas completed the
spin off of its healthcare operations from its real estate holdings through the
distribution of the common stock of Vencor on a one-for-one basis to
stockholders of record of Ventas as of April 27, 1998 (the "Distribution"). The
Distribution was consummated 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which was required to be
adopted in fiscal years beginning after June 15, 1999. In June 1999, FASB
delayed the effective date of SFAS 133 for one year. 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,
1998 filed with the Securities and Exchange Commission on Form 10-K.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Notes 2 and 5, all such
adjustments are of a normal and recurring nature.
The accompanying condensed consolidated financial statements have been
prepared on the basis of accounting principles applicable to going concerns and
contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of uncertainties discussed
herein.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
6
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 -- ACCOUNTING CHANGE
Effective January 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), which requires the Company to
expense start-up costs, including organizational costs, as incurred. In
accordance with the provisions of SOP 98-5, the Company wrote off $8.9 million
of such unamortized costs as a cumulative effect of change in accounting
principle in the first quarter of 1999. The pro forma effect of the change in
accounting for start-up costs, assuming the change occurred on January 1, 1998,
was not significant.
NOTE 3 -- ISSUES AFFECTING LIQUIDITY
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion bank credit facility (the "Credit Agreement"). Namely, the
covenants regarding minimum net worth, total leverage ratio, senior leverage
ratio and fixed charge coverage ratio were not satisfied at December 31, 1998.
Following discussions with the Company's lead banks, the Company sought a
temporary waiver of these covenant violations. On February 3, 1999, the Company
announced that it had obtained the necessary approval from its bank lending
group (the "Senior Lenders") to secure a covenant waiver related to the Credit
Agreement through March 31, 1999. The waiver included certain borrowing
limitations under the $300 million revolving credit portion of the Credit
Agreement (the "Revolving Credit Facility"). Aggregate borrowings under the
Revolving Credit Facility initially were limited to $37.5 million and
subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million to $125 million. On May 28,
1999, the Senior Lenders granted a further waiver through July 30, 1999. Under
this waiver, the aggregate commitment under the Revolving Credit Facility was
permanently reduced from $125 million to $80 million. On July 30, 1999, the
Senior Lenders and the Company further extended the waiver through August 27,
1999. Each of the waivers has included, among other things, an aggregate
borrowing limitation of $55 million under the Revolving Credit Facility during
the respective waiver periods. At the close of business on August 12, 1999,
outstanding borrowings under the Revolving Credit Facility aggregated $55
million.
The waiver also sets forth certain events which would terminate the
obligation of the Senior Lenders to fund the Revolving Credit Facility. If the
Company fails to pay rent to Ventas without the consent of Ventas or the
protection of injunctive relief granting a stay of termination under the four
master lease agreements (the "Master Lease Agreements"), the obligation to
continue funding under the Revolving Credit Facility will be frozen. In
addition, if the Company pays, or a right of setoff is asserted by the
appropriate third party payor seeking to recoup, reimbursement overpayments in
excess of $10 million, the obligation to continue funding under the Revolving
Credit Facility also will be frozen. The waiver also places additional
informational requirements and minimum daily census level requirements on the
Company's nursing centers and hospitals. The Company's failure to comply with
those covenants would result in the termination of the waiver.
As previously reported, the Company was informed on April 9, 1999 by the
Health Care Financing Administration ("HCFA") that the Medicare program had made
a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. On April 21, 1999, the Company reached an
agreement with HCFA to extend the repayment of such amounts over 60 monthly
installments. Under the agreement, monthly
7
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY (Continued)
payments of approximately $1.5 million commenced on May 8, 1999. After November
1999, the remaining balance of the overpayments will bear interest at a
statutory rate applicable to Medicare overpayments, as in effect on November 30,
1999. Assuming that the current rate of 13.25% is in effect on November 30,
1999, the monthly payment amount will be approximately $2.0 million through
March 2004. If the Company is delinquent with two consecutive payments under
the repayment plan, the plan will be defaulted and all subsequent Medicare
reimbursement payments to the Company will be withheld. Amounts due to HCFA
after one year aggregating $71.3 million have been classified as long-term debt
in the Company's condensed consolidated balance sheet at June 30, 1999.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the Company's $300 million 9 7/8% Guaranteed
Senior Subordinated Notes due 2005 (the "1998 Notes"). The indenture under
which the 1998 Notes were issued provides for a 30-day grace period before an
event of default will occur due to the nonpayment of interest. Since the
interest payment was not made within the grace period, the 1998 Notes may be
declared immediately due and payable. If the debt under the Credit Agreement
has not been accelerated, the 1998 Notes may not be accelerated until five days
after notice is given to the Senior Lenders.
There can be no assurances that the Senior Lenders will approve any amendment
or restructuring of the Credit Agreement or will continue to provide the Company
with a covenant waiver or will not seek to declare an event of default or credit
freeze. In such an event, the Senior Lenders are entitled, at their discretion,
to exercise certain remedies including acceleration of the outstanding
borrowings under the Credit Agreement. In addition, the 1998 Notes contain
provisions which allow the holders of the 1998 Notes (the "Noteholders") to
accelerate their debt and seek remedies if the Company has a payment default
under the Credit Agreement or if the obligations under the Credit Agreement have
been accelerated. If the Senior Lenders or the Noteholders elect to exercise
their rights to accelerate the obligations under the Credit Agreement and the
1998 Notes, or if the Senior Lenders do not continue to provide a covenant
waiver, such events would have a material adverse effect on the Company's
liquidity and financial position. Under such circumstances, the financial
position of the Company would necessitate the development of an alternative
financial structure. Considering the Company's limited financial resources and
the existence of certain defaults with respect to the Credit Agreement and the
1998 Notes, there can be no assurance that the Company would succeed in
formulating and consummating an acceptable alternative financial structure.
Under such circumstances, the Company likely would be forced to file for
protection under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy
Code").
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($490 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's condensed
consolidated balance sheet at June 30, 1999 and the Company has a deficit in
working capital aggregating $628 million. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of these uncertainties.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the
Reorganization Transactions (the "Reorganization Agreement"). The Company is
seeking a reduction in rent and other concessions under the Master Lease
Agreements. On March 31, 1999, the Company and Ventas entered into a standstill
agreement (the "Standstill Agreement") which provided that both companies would
postpone through April 12, 1999 any claims either may have against the other,
including any claims that Ventas would have for the Company's decision not to
pay rent due on April 1, 1999. On April 12, 1999, the Company and Ventas
entered into a second standstill agreement (the "Second Standstill") which
provided for the payment on various dates of the rent payments initially due
on April 1. The Second Standstill further provided
8
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY (Continued)
that neither party would pursue any claims against the other or any other third
party related to the Reorganization Transactions as long as the Company complied
with the payment terms. The Second Standstill was scheduled to terminate on May
5, 1999. The Company and Ventas also agreed that any statutes of limitations or
other time-related constraints in a bankruptcy or other proceeding that might be
asserted by one party against the other will be extended and tolled from April
12, 1999 until May 5, 1999 or until the termination of the Second Standstill
(the "Tolling Agreement").
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently, the
Company and Ventas entered into further amendments to the Second Standstill and
the Tolling Agreement to extend the time during which no remedies may be pursued
by either party and to extend the date by which the Company may cure its failure
to pay rent. Under the current arrangement, the Company has agreed to make the
July 1999 rent payments on various dates during August. The Second Standstill
and the Tolling Agreement have been extended to provide that Ventas cannot
exercise any remedy under the Master Lease Agreements through September 3, 1999
(or five days following any failure by the Company to make any payment of July
rent as rescheduled) and neither party can bring any action against the other
through September 3, 1999 unless the Company fails to make the rescheduled rent
payments or unless the Company files for bankruptcy or a bankruptcy action is
filed against the Company. The Company will have until September 10, 1999 to
cure any default related to the nonpayment of the August rent. The Company has
paid all rent due under the Master Lease Agreements through June 1999.
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may serve Ventas with a demand for arbitration
pursuant to the Reorganization Agreement with respect to claims by the Company
against Ventas arising out of the Reorganization Transactions and seek a
temporary restraining order or other interim judicial or arbitral relief barring
Ventas from exercising any remedies based on the Company's failure to pay some
or all of the rent to Ventas, pending final resolution of such arbitration.
Under such circumstances, the Company's failure to pay rent, in the absence of
such temporary restraining order or other interim relief, would result in an
"Event of Default" under the Master Lease Agreements. Upon an Event of Default
under the Master Lease Agreements, the remedies available to Ventas include
terminating the Master Lease Agreements, repossessing and reletting the leased
properties and requiring the Company to (1) remain liable for all obligations
under the Master Lease Agreements, including the difference between the rent
under the Master Lease Agreements and the rent payable as a result of reletting
the leased properties or (2) pay the net present value of the rent due for the
balance of the terms of the Master Lease Agreements. Such a failure to pay rent
also would result in a credit freeze under the current bank waiver. Considering
the Company's limited financial resources, the existing defaults under the
Credit Agreement and the 1998 Notes, and the potential for a credit freeze under
the current bank waiver, it is likely that such circumstances would necessitate
that the Company file for protection under Chapter 11 of the Bankruptcy Code.
As previously reported, the Company has been informed by the United States
Department of Justice (the "DOJ") that it is the subject of ongoing
investigations into various Medicare reimbursement issues, including various
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in its hospitals and nursing centers. The Company is engaged in
active discussions with the DOJ which may result in a resolution of some or all
of the DOJ investigations. To the extent that such a resolution would require a
payment to the government, the Company may not have the necessary resources to
finance such an obligation. See Note 8.
9
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY (Continued)
The Company is continuing to negotiate with the Senior Lenders, Ventas, the
Noteholders and the DOJ in an effort to permanently restructure its financial
obligations and obtain a sustainable capital structure for the Company. Despite
the Company's efforts, there can be no assurance that these discussions will be
successful or that the Company will not elect to file for protection under
Chapter 11 of the Bankruptcy Code before the completion of these negotiations.
If an agreement is reached, then it is likely to result in the existing Vencor
common stock having little, if any, value.
NOTE 4 -- REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third party payors for the provision of healthcare services, including
anticipated settlements under reimbursement agreements with Medicare, Medicaid
and other third party payors.
A summary of revenues by payor type follows (in thousands):
Quarter Six Months
-------------------- ------------------------
1999 1998 1999 1998
--------- --------- ----------- -----------
Medicare........... $234,808 $272,788 $ 484,137 $ 571,625
Medicaid........... 217,681 212,879 428,793 421,285
Private and other.. 270,967 318,812 544,963 661,897
-------- -------- ---------- ----------
723,456 804,479 1,457,893 1,654,807
Elimination........ (34,564) (25,773) (68,769) (52,785)
-------- -------- ---------- ----------
$688,892 $778,706 $1,389,124 $1,602,022
======== ======== ========== ==========
NOTE 5 -- UNUSUAL TRANSACTIONS
Operating results for each period presented include certain unusual
transactions. These transactions are included in other operating expenses in
the condensed consolidated statement of operations for the respective periods in
which they were recorded.
During the second quarter of 1999, the Company recorded $25.4 million of
costs related to (i) the write-off of the Company's remaining investment in
Behavioral Healthcare Corporation ("BHC") ($15.2 million), (ii) the cancellation
of a nursing center software development project ($5.6 million) and (iii)
professional fees incurred in connection with the Company's capital
restructuring activities ($4.6 million). Unusual transactions for the six months
ended June 30, 1999 also include $2.3 million of professional fees incurred in
connection with the Company's capital restructuring activities in the first
quarter.
During the second quarter of 1998, the Company incurred $25.7 million of
professional fees related to the Reorganization Transactions, losses related to
the disposal of certain non-strategic businesses, and the write-off of
capitalized amounts related to a cancelled construction project. Unusual
transactions for the six months ended June 30, 1998 also include $7.7 million of
professional fees incurred in connection with the Reorganization Transactions in
the first quarter.
10
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 -- BUSINESS SEGMENT DATA
The Company operates three business segments: nursing centers, hospitals and
ancillary services (Vencare). The Company defines operating income as earnings
before interest, income taxes, depreciation, amortization and rent. Operating
income reported for each of the Company's three business segments excludes
allocations of corporate overhead. Summary business segment data follows (in
thousands):
<TABLE>
<CAPTION>
Quarter Six Months
-------------------- -----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Nursing centers...................... $382,548 $413,600 $ 764,589 $ 847,790
Hospitals............................ 234,868 239,312 473,390 485,677
Vencare.............................. 106,040 151,567 219,914 321,340
-------- -------- ---------- ----------
723,456 804,479 1,457,893 1,654,807
Elimination.......................... (34,564) (25,773) (68,769) (52,785)
-------- -------- ---------- ----------
$688,892 $778,706 $1,389,124 $1,602,022
======== ======== ========== ==========
Income (loss) from operations:
Operating income (loss):
Nursing centers.................. $ 59,186 $ 49,964 $ 118,308 $ 112,411
Hospitals........................ 59,656 67,328 118,067 144,978
Vencare.......................... 12,815 23,125 27,389 50,017
Corporate overhead............... (29,674) (30,315) (57,447) (57,662)
Unusual transactions............. (25,374) (25,772) (27,686) (33,436)
-------- -------- ---------- ----------
Operating income............. 76,609 84,330 178,631 216,308
Rent............................... 76,088 59,076 151,540 83,211
Depreciation and amortization...... 21,612 28,571 43,897 64,041
Interest, net...................... 19,390 27,264 38,295 63,279
-------- -------- ---------- ----------
Income (loss) before income taxes.. (40,481) (30,581) (55,101) 5,777
Provision for income taxes......... 50 (7,129) 100 10,348
-------- -------- ---------- ----------
$(40,531) $(23,452) $ (55,201) $ (4,571)
======== ======== ========== ==========
June 30, 1999 December 31, 1998
------------- -----------------
Assets:
Nursing centers........................................... $ 538,183 $ 520,412
Hospitals and Vencare..................................... 791,136 848,056
Corporate................................................. 320,826 349,422
---------- ----------
$1,650,145 $1,717,890
========== ==========
</TABLE>
NOTE 7 -- INCOME TAXES
The provision for income taxes in the second quarter of 1999 is based upon
management's estimate of taxable income or loss for the year and includes the
effect of certain non-deductible items such as goodwill amortization and the
recording of additional deferred tax valuation allowances.
During the fourth quarter of 1998, the Company recorded a deferred tax
valuation allowance aggregating $203 million. The allowance was recorded based
upon management's belief that the Company was unlikely to generate sufficient
taxable income to realize the net deferred tax assets recorded at December 31,
1998. The provision for income taxes in 1999 includes a deferred tax valuation
loss of $9.5 million for the second quarter and $11.4 million for the six months
ended June 30, 1999. In addition, the Company recorded a valuation allowance of
$3.4 million related to the change in accounting for start-up costs in the first
quarter of 1999. The deferred tax valuation allowance included in the condensed
consolidated balance sheet at June 30, 1999 totaled $218 million.
11
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow:
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. On March 31, 1999, the Company and
Ventas entered into the Standstill Agreement which provided that both companies
would postpone through April 12, 1999 any claims either may have against the
other, including any claims that Ventas would have for the Company's decision
not to pay rent due on April 1, 1999. The Standstill Agreement was entered into
in furtherance of the discussions between the Company and Ventas concerning
possible reductions in the rent payments and other concessions under the Master
Lease Agreements. On April 12, 1999, the Company and Ventas entered into the
Second Standstill which provided for the payment on various dates of the rent
payments initially due on April 1. The Second Standstill further provided that
neither party would pursue any claims against the other or any other third party
related to the Reorganization Transactions as long as the Company complied with
the payment terms. The Second Standstill was scheduled to terminate on May 5,
1999. Pursuant to the Tolling Agreement, the Company and Ventas also agreed
that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other would be extended and tolled from April 12, 1999 until May 5, 1999 or
until the termination of the Second Standstill. As a result of the Company's
failure to pay rent, Ventas served the Company with notices of nonpayment under
the Master Lease Agreements. Subsequently, the Company and Ventas have entered
into further amendments to the Second Standstill and the Tolling Agreement to
extend the time during which no remedies may be pursued by either party and to
extend the date by which the Company may cure its failure to pay rent. Under
the current arrangement, the Company has agreed to make the July 1999 rent
payments on various dates during August. The Second Standstill and the Tolling
Agreement have been extended to provide that Ventas cannot exercise any remedy
under the Master Lease Agreements through September 3, 1999 (or five days
following any failure by the Company to make any payment of July rent as
rescheduled) and neither party can bring any action against the other through
September 3, 1999 unless the Company fails to make the rescheduled rent payments
or unless the Company files for bankruptcy or a bankruptcy action is filed
against the Company. The Company will have until September 10, 1999 to cure any
default related to the nonpayment of the August rent. The Company has paid all
rent due under the Master Lease Agreements through June 1999. If the parties
are unable to resolve their disputes or maintain an interim resolution, the
Company's failure to pay the rent, in the absence of a temporary restraining
order or other interim relief, would result in an Event of Default under the
Master Lease Agreements. Upon an Event of Default under the Master Lease
Agreements, the remedies available to Ventas include terminating the Master
Lease Agreements, repossessing and reletting the leased properties and requiring
the Company to (1) remain liable for all obligations under the Master Lease
Agreements, including the difference between the rent under the Master Lease
Agreements and the rent payable as a result of reletting the leased properties
or (2) pay the net present value of the rent due for the balance of the terms of
the Master Lease Agreements.
The Company's subsidiary, TheraTx, Incorporated ("TheraTx"), is a plaintiff
in a declaratory judgment action entitled TheraTx, Incorporated v. James W.
Duncan, Jr., et al. currently pending in the United States District Court for
the Northern District of Georgia. The defendants have asserted counterclaims
against TheraTx under breach of contract, securities fraud, negligent
misrepresentation and fraud theories for allegedly not performing as promised
under a merger agreement related to TheraTx's purchase of a company called
PersonaCare, Inc. and for allegedly failing to inform the
defendants/counterclaimants prior to the merger that TheraTx's possible
acquisition of Southern Management Services, Inc. might cause the suspension of
TheraTx's shelf registration under relevant rules of the Securities and Exchange
Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately
12
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (Continued)
$1.3 million and attorneys' fees and other litigation expenses of approximately
$700,000. The Company and the defendants/counterclaimants both have appealed
the court's rulings.
The Company is pursuing various claims against private insurance companies
who issued Medicare supplement insurance policies to individuals who became
patients of the Company's hospitals. After the patients' Medicare benefits are
exhausted, the insurance companies become liable to pay the insureds' bills
pursuant to the terms of these policies. The Company has filed numerous
collection actions against various of these insurers to collect the difference
between what Medicare would have paid and the hospitals' usual and customary
charges. These disputes arise from differences in interpretation of the policy
provisions and certain Federal and state regulations governing such policies.
Various courts have issued various rulings on the different issues, most of
which have been appealed. The Company intends to continue to pursue these
claims vigorously. If the Company does not prevail on these issues, future
results of operations may be materially adversely affected.
The Company received notice in June 1998 that the State of Georgia 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 $543,000 for these violations, which HCFA has
imposed. The Company has appealed this fine.
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 a Tampa nursing center operated by the
Company 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 action was dismissed without prejudice on July 5, 1999.
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 current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (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 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. On January 22, 1999, the court granted the Company's motion
to dismiss the case. The plaintiff has appealed the dismissal to the United
States Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). The
Company is defending this action vigorously.
13
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (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., 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. On March 19, 1999,
the parties agreed to stay all proceedings in the action pending the resolution
of the appeal currently before the Sixth Circuit for the Helwig case described
above. The Company believes that the allegations in the complaint are without
merit and intends to defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a class
consisting of all persons who sold shares of Transitional Hospitals Corporation
("Transitional") common stock during the period from February 26, 1997 through
May 4, 1997, inclusive. The complaint alleges that Transitional purchased
shares of its common stock from members of the investing public after it had
received a written offer to acquire all of 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. In June 1998, the court granted the
Company's motion to dismiss with leave to amend the Section 10(b) claim and the
state law claims for misrepresentation. The court denied the Company's motion
to dismiss the Section 14(e) and Section 20(a) claims, after which the Company
filed a motion for reconsideration. On March 23, 1999, the court granted the
Company's motion to dismiss all remaining claims and the case has been
dismissed. The plaintiff has appealed this ruling. The Company is defending
this action vigorously.
The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a civil 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
DOJ 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 ("Hillhaven")
was merged into the Company in September 1995 and purchased the remaining
interest in AXR in February 1996. The civil suit alleges that AXR submitted
false claims to the Medicare and Medicaid programs. The suit seeks damages in an
amount of not less than $1,000,000, treble damages and civil penalties. In a
related criminal investigation, the United States Attorney's Office for the
Eastern District of Arkansas indicted four former employees of AXR; those
individuals were convicted of various fraud related counts in January 1999. AXR
had been informed previously that it was not a target of the criminal
investigation, and AXR was not indicted. The Company cooperated fully in the
criminal investigation. The Company is defending vigorously the qui tam action.
14
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- 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 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. In March
1998, the Company was added as a defendant to a previously pending qui tam
lawsuit against the other partners related to the partnership's former Medicare
billing practices. The Company has moved to dismiss the action. The Company
intends to defend vigorously the action.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of Los
Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various causes
of action arising out of the Company's sale and lease of several nursing centers
to Lenox in 1997. Lenox subsequently removed certain of its causes of action
and refiled these claims before the United States District Court for the Western
District of Kentucky in a case entitled Lenox Healthcare, Inc. v. Vencor, Inc.,
et al., Case No. 3:99 CV-348-H. The Company has asserted counterclaims,
including RICO claims, against Lenox in the Kentucky action. The Company
believes that the allegations made by Lenox in both complaints are without merit
and intends to defend these actions vigorously.
The Company has been informed by the DOJ that it is the subject of ongoing
investigations into various Medicare reimbursement issues, including various
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in its hospitals and nursing centers. The Company is cooperating
fully in the investigations. The Company is engaged in active discussions with
the DOJ which may result in a resolution of some or all of the DOJ
investigations. Such a resolution could include a payment to the government
which could have a material adverse effect on the Company's liquidity and
financial position.
In connection with the Reorganization Transactions, liabilities arising from
various legal proceedings and other actions were assumed by the Company and the
Company agreed to indemnify Ventas against any losses, including any costs or
expenses, it may incur arising out of or in connection with such legal
proceedings and other actions. The indemnification provided by the Company also
covers losses, including costs and expenses, which may arise from any future
claims asserted against Ventas based on the former healthcare operations of
Ventas. In connection with its indemnification obligation, the Company has
assumed the defense of various legal proceedings and other actions.
The Company is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is unable to predict
the ultimate outcome of pending litigation and regulatory investigations. In
addition, there can be no assurance that HCFA or other regulatory agencies will
not initiate additional investigations related to the Company's business in the
future, nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position. In addition, the above litigation and investigations (as
well as future litigation and investigations) are expected to consume the time
and attention of senior management and may have a disruptive effect upon the
Company's operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
Certain statements made in this Form 10-Q, including, but not limited to,
statements containing the words "anticipates," "believes," "expects," "intends,"
"will," "may" and similar words constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements are based on management's current expectations and include
known and unknown risks, uncertainties and other factors, many of which the
Company is unable to predict or control, that may cause the Company's actual
results or performance to differ materially from any future results or
performance expressed or implied by such forward-looking statements. These
statements involve risks, uncertainties and other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission. Such
factors may include, without limitation, the Company's ability to amend or
refinance its existing debt and lease obligations or otherwise adjust its
current financial structure, the increase in the Company's cost of borrowing,
its ability to attract patients and the effects of healthcare reform and
legislation on the Company's business strategy and operations. In addition, the
Company's current financial difficulties may disrupt its operations and may
result in a number of other operational difficulties, including the following:
(i) the Company may have little, if any, ability to access capital markets, (ii)
the Company's senior management may be required to spend an excessive amount of
time and effort dealing with the Company's financial difficulties instead of
focusing on the operations of its businesses, (iii) the Company may be unable to
retain top management and other key personnel, (iv) the Company may experience a
reduction in the census at its nursing centers and hospitals if patients and
referral sources become concerned about the Company's ability to provide quality
care and (v) suppliers to the Company may stop providing supplies or services to
the Company or provide such supplies or services only on shortened payment or
cash terms. The Company cautions investors that any forward-looking statements
made by the Company are not guarantees of the future performance. The Company
disclaims any obligation to update any such factors or to announce publicly the
results of any revisions to any of the forward-looking statements included
herein to reflect future events or developments.
Background Information
The business segment data in Note 6 of the Notes to Condensed Consolidated
Financial Statements should be read in conjunction with the following discussion
and analysis.
The accompanying condensed consolidated financial statements have been
prepared on the basis of accounting principles applicable to going concerns and
contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of uncertainties discussed
herein.
General
The Company is one of largest providers of long-term healthcare services in
the United States. At June 30, 1999, the Company operated 293 nursing centers
(38,387 licensed beds), 56 long-term acute care hospitals (4,935 licensed beds),
and its Vencare ancillary services business which provided respiratory and
rehabilitation therapies, medical services and pharmacy management services to
both Company-operated and non-affiliated nursing centers.
In January 1998, the Board of Directors of Ventas authorized its management
to proceed with a plan to separate Ventas into two publicly held corporations,
one to operate the nursing center, hospital and ancillary services businesses
and the other to own substantially all of the real property of Ventas and to
lease such real property to a new operating company. In anticipation of the
Reorganization Transactions, the Company was incorporated on March 27, 1998 to
be the new operating company. On April 30, 1998, Ventas completed the spin off
of its healthcare operations from its real estate holdings through the
distribution of the common stock of the Company on a one-for-one basis to the
stockholders of record of Ventas as of April 27, 1998. The Distribution was
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General (Continued)
consummated on May 1, 1998. In connection with the Reorganization Transactions,
the Company continues to manage and operate the real property which it leases
from Ventas pursuant to the Master Lease Agreements. 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.
Results of Operations
Nursing Center Division
Revenues declined 8% to $383 million in the second quarter of 1999 from
$414 million in the same period a year ago and declined 10% to $765 million for
the first six months of 1999 from $848 million last year. On a same-store basis,
revenues declined 5% in the second quarter and 7% for the six months ended June
30 compared to the same periods in 1998. The Balanced Budget Act of 1997 (the
"Budget Act") established a new prospective payment system ("PPS"), which became
effective July 1, 1998 for the Company's nursing centers. Under PPS, Medicare
revenues are substantially less than those earned under the former cost-based
reimbursement system. Second quarter Medicare revenues per patient day declined
19% to $276 from $343 in the second quarter of 1998. For the first six months of
1999, Medicare revenues per patient day declined 20% to $278 from $350 last
year. The revenue decline also was attributable to a deterioration in the mix of
patient days by payor type. The percentage of Medicaid patient days (for which
reimbursement rates generally are less than Medicare and private pay) increased
to 66% and 65% of total patient days for the second quarter and six months ended
June 30, 1999, respectively, compared to 65% and 64%, respectively, last year.
Same-store patient days were relatively unchanged for both the second quarter
and six month period compared to the respective periods in 1998.
Operating income increased 18% to $59 million in the second quarter of 1999
compared to $50 million for the same period of 1998 and increased 5% to $118
million for the first six months of 1999 compared to $112 million last year.
Despite a decline in revenues, operating margins improved in the second quarter
of 1999 to 15.5% from 12.1% in the same quarter of the prior year and to 15.5%
from 13.3% for the first six months of 1999. The improvement in operating
margins resulted primarily from lower ancillary service costs and the
elimination of costs incurred in the second quarter of 1998 associated with the
conversion to PPS. Total operating costs per patient day declined to $112 in
the second quarter of 1999 compared to $121 for the same period a year ago and
to $112 for the first six months of 1999 from $122 last year.
Hospital Division
Revenues declined 2% to $235 million in the second quarter of 1999 from
$239 million last year and declined 3% to $473 million from $486 million for the
six month periods despite increases in same-store patient days of 5% and 4%,
respectively, for the second quarter of 1999 and for the six months ended June
30, 1999. The decline in revenues in both periods resulted primarily from
reductions in the level of Medicare reimbursements.
The Budget Act reduced Medicare reimbursements to the Company's hospitals
related to certain incentive payments, allowable bad debts and capital costs,
and payments for services to patients transferred from general acute care
hospitals. These reimbursement changes became effective at various dates
beginning in the fourth quarter of 1997. Management believes that hospital
revenues in 1999 could be reduced by approximately $40 million from 1997 levels
due to the provisions of the Budget Act.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Hospital Division (Continued)
Operating income declined 11% to $60 million in the second quarter of 1999
from $67 million last year and declined 19% to $118 million from $145 million
for the first six months of the year. Operating margins declined in the second
quarter of 1999 to 25.4% from 28.1% last year and 24.9% for the first six months
from 29.9% last year. Although operating costs per patient day declined 3% in
the second quarter of 1999 and were relatively unchanged for the six month
period compared to last year, operating margins were impacted adversely by the
previously discussed Medicare reimbursement reductions.
Operating income in the hospital division includes the Company's equity in
the operations of BHC, of which the Company owns a 44% voting interest. In the
second quarter of 1999, the Company recorded a loss of $2.8 million in
connection with the operations of BHC, compared to income of $900,000 for the
same period a year ago. For the six months ended June 30, 1999, the Company
recorded a loss of $4.8 million, compared to income of $1.7 million in 1998.
Medicare revenues recorded by the Company's hospitals include reimbursement
for expenses related to certain costs associated with hospital-based ancillary
services provided by Vencare to its nursing center customers. As part of its
ongoing investigations, the DOJ has objected to including such costs on the cost
reports filed by the Company's hospitals. Hospital Medicare revenues related to
the reimbursement of such costs aggregated $7 million and $12 million for the
three months ended June 30, 1999 and 1998, respectively, and $14 million and $25
million for the respective six month periods. If the Company is unsuccessful in
its discussions with the DOJ concerning this issue, the elimination of such
reimbursement could have a material adverse effect on hospital operating income.
See Note 8 to the Notes to Condensed Consolidated Financial Statements.
Vencare Ancillary Services Division
Revenues declined 30% to $106 million in the second quarter of 1999 from
$152 million in the same quarter of 1998 and declined 32% to $220 million from
$321 million for the first six months of the year. For the second quarter,
revenues from respiratory therapy declined 72% to $11 million, rehabilitation
therapy revenues declined 24% to $46 million and pharmacy revenues increased 12%
to $45 million. For the six months ended June 30, 1999, revenues from
respiratory therapy declined 72% to $24 million, rehabilitation therapy revenues
declined 27% to $96 million and pharmacy revenues increased 14% to $91 million.
Declines in other ancillary revenues in both periods were primarily attributable
to the disposal of certain non-strategic businesses in 1998.
Vencare provides ancillary services to both Company-operated and non-
affiliated nursing centers. While all of the Company's nursing centers were
subject to PPS on July 1, 1998, most of its non-affiliated customers became
subject to PPS in January 1999. Under PPS, Medicare reimbursement to nursing
centers was changed from a system based upon reasonable direct and indirect cost
of providing care to patients to one in which nursing centers receive a fixed
per diem payment to cover substantially all services provided to patients,
including ancillary services such as respiratory, rehabilitation, speech and
occupational therapies and certain covered pharmaceuticals. Management believes
that the decline in demand for its Vencare services, particularly respiratory
and rehabilitation therapies, is attributable mostly to efforts by nursing
center customers to reduce operating costs under PPS. In addition, as a result
of these regulatory changes, many nursing centers may elect to provide ancillary
services to their patients through internal staff and may no longer contract
with outside parties for ancillary services.
Operating income declined 45% to $13 million in the second quarter of 1999
from $23 million last year and declined 45% to $27 million for the first six
months of the year from $50 million last year. Operating income during the
first half of 1999 was impacted adversely by a significant decline in demand for
respiratory and rehabilitation therapies. Management believes that such
declines in demand will continue in 1999 as Vencare customers continue to reduce
operating costs under PPS. Accordingly, the Company believes that Vencare
revenues and operating income in 1999 will continue to be materially lower than
1998.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Corporate Overhead
Operating income for the Company's three operating divisions excludes
allocations of corporate overhead. These costs aggregate $30 million for both
the second quarters of 1999 and 1998. For the first six months of the year,
these costs aggregated $57 million in 1999 and $58 million in 1998. As a
percentage of revenues (before elimination), corporate overhead totaled 4.1% and
3.8% for the second quarter of 1999 and 1998, respectively. For the six months
ended June 30, 1999 and 1998, corporate overhead as a percentage of revenues
totaled 3.9% and 3.5%, respectively.
Unusual Transactions
Operating results for each period presented include certain unusual
transactions. These transactions are included in other operating expenses in the
condensed consolidated statement of operations for the respective periods in
which they were recorded.
In the second quarter of 1999, the Company recorded $25.4 million of costs
related to (i) the write-off of the Company's remaining investment in BHC ($15.2
million), (ii) the cancellation of a nursing center software development project
($5.6 million) and (iii) professional fees incurred in connection with the
Company's capital restructuring activities ($4.6 million). Operating results
for the second quarter of 1998 include $25.7 million of professional fees
related to the Reorganization Transactions, losses related to the disposal of
certain non-strategic businesses, and the write-off of capitalized amounts
related to a cancelled construction project.
Unusual transaction costs totaled $27.7 million for the six months ended
June 30, 1999, including $2.3 million of professional fees related to the
Company's capital restructuring activities incurred in the first quarter of
1999. Unusual transactions for the first half of 1998 totaled $33.4 million,
which included $7.7 million of professional fees incurred in connection with the
Reorganization Transactions in the first quarter.
Capital Costs
Upon completion of the Reorganization Transactions, the Company leased
substantially all of its facilities. Prior thereto, the Company owned 271
facilities and leased 80 facilities from third parties. Depreciation and
amortization, rent and net interest costs aggregated $117 million in the second
quarter of 1999 compared to $115 million for the same period last year, and $234
million for the first six months of 1999 compared to $211 million last year.
As a result of the Reorganization Transactions, the overall leverage of the
Company was increased substantially. Capital costs in the second quarter and
six months ended June 30, 1999, including the impact of reduced depreciation and
interest costs, were increased by approximately $9 million and $37 million,
respectively, as a result of the Reorganization Transactions.
In connection with the Reorganization Transactions in 1998, approximately
$992 million of long-term debt was retained by Ventas.
Income Taxes
The provision for income taxes in the second quarter of 1999 is based upon
management's estimate of taxable income or loss for the year and includes the
effect of certain non-deductible items such as goodwill amortization and the
recording of additional deferred tax valuation allowances.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Income Taxes (Continued)
During the fourth quarter of 1998, the Company recorded a deferred tax
valuation allowance aggregating $203 million. The allowance was recorded based
upon management's belief that the Company was unlikely to generate sufficient
taxable income to realize the net deferred tax assets recorded at December 31,
1998. The provision for income taxes in 1999 includes a deferred tax valuation
loss of $9.5 million for the second quarter and $11.4 million for the six months
ended June 30, 1999. In addition, the Company recorded a valuation allowance of
$3.4 million related to the change in accounting for start-up costs in the first
quarter of 1999. The deferred tax valuation allowance included in the condensed
consolidated balance sheet at June 30, 1999 totaled $218 million.
Consolidated Results
The Company reported a pretax loss from operations of $40 million in the
second quarter of 1999 compared to a pretax loss of $31 million in the second
quarter of 1998. For the six months ended June 30, 1999, the Company recorded
a pretax loss from operations of $55 million compared to pretax income of $6
million for the same period last year.
The net loss from operations in the second quarter of 1999, including the
impact of the deferred tax valuation allowance, aggregated $41 million. The net
loss from operations in the second quarter a year ago aggregated $23 million.
For the six months ended June 30, 1999, the Company's net loss from operations
totaled $55 million compared to a loss of $5 million a year ago.
Effective January 1, 1999, the Company adopted the provisions of SOP 98-5,
"Reporting on the Costs of Start-Up Activities," which requires the Company to
expense start-up costs, including organizational costs, as incurred. In
accordance with the provisions of SOP 98-5, the Company wrote off $8.9 million
of such unamortized costs as a cumulative effect of change in accounting
principle in the first quarter of 1999. The pro forma effect of the change in
accounting for start-up costs, assuming the change occurred on January 1, 1998,
was not significant.
The net loss in the second quarter of 1998 includes an extraordinary loss
of $77.9 million incurred in connection with the extinguishment of debt in the
Reorganization Transactions.
Liquidity
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion Credit Agreement. Namely, the covenants regarding minimum net
worth, total leverage ratio, senior leverage ratio and fixed charge coverage
ratio were not satisfied at December 31, 1998. Following discussions with the
Company's lead banks, the Company sought a temporary waiver of these covenant
violations. On February 3, 1999, the Company announced that it had obtained the
necessary approval from its Senior Lenders to secure a covenant waiver related
to the Credit Agreement through March 31, 1999. The waiver included certain
borrowing limitations under the $300 million Revolving Credit Facility.
Aggregate borrowings under the Revolving Credit Facility initially were limited
to $37.5 million and subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
to $125 million. On May 28, 1999, the Senior Lenders granted a further waiver
through July 30, 1999. Under this waiver, the aggregate commitment under the
Revolving Credit Facility was permanently reduced from $125 million to $80
million. On July 30, 1999, the Senior Lenders and the Company further extended
the waiver through August 27, 1999. Each of the waivers has included, among
other things, an aggregate borrowing limitation of $55 million under the
Revolving Credit Facility during the respective waiver periods. At the close of
business on August 12, 1999, outstanding borrowings under the Revolving Credit
Facility aggregated $55 million.
The waiver also sets forth certain events which would terminate the
obligation of the Senior Lenders to fund the Revolving Credit Facility. If the
Company fails to pay rent to Ventas without the consent of Ventas or the
protection of injunctive relief granting a stay of termination under the Master
Lease Agreements, the obligation to continue funding under the Revolving Credit
Facility will be frozen. In addition, if the Company pays, or a right of setoff
is asserted by the appropriate third party payor seeking to recoup,
reimbursement overpayments in excess of $10 million, the obligation to continue
funding under the Revolving Credit Facility also will be frozen. The waiver also
places additional informational requirements and minimum daily census level
requirements on the Company's nursing centers and hospitals. The Company's
failure to comply with those covenants would result in the termination of the
waiver.
As previously reported, the Company was informed on April 9, 1999 by HCFA
that the Medicare program had made a demand for repayment of approximately $90
million of reimbursement overpayments by April 23, 1999. On April 21, 1999, the
Company reached an agreement with HCFA to extend the repayment of such amounts
over 60 monthly installments. Under the agreement, monthly payments of
approximately $1.5 million commenced on May 8, 1999. After November 1999, the
remaining balance of the overpayments will bear interest at a statutory rate
applicable to Medicare overpayments, as in effect on November 30, 1999.
Assuming that the current rate of 13.25% is in effect on November 30, 1999, the
monthly payment amount will be approximately $2.0 million through March 2004.
If the Company is delinquent with two consecutive payments under the repayment
plan, the plan will be defaulted and all subsequent Medicare reimbursement
payments to the Company will be withheld. Amounts due to HCFA after one year
aggregating $71.3 million have been classified as long-term debt in the
Company's condensed consolidated balance sheet at June 30, 1999.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The indenture under which
the 1998 Notes were issued provides for a 30-day grace period before an event of
default will occur due to the nonpayment of interest. Since the interest
payment was not made within the grace period, the 1998 Notes may be declared
immediately due and payable. If the debt under the Credit Agreement has not
been accelerated, the 1998 Notes may not be accelerated until five days after
notice is given to the Senior Lenders.
There can be no assurances that the Senior Lenders will approve any
amendment or restructuring of the Credit Agreement or will continue to provide
the Company with a covenant waiver or will not seek to declare an event of
default or credit freeze. In such an event, the Senior Lenders are entitled, at
their discretion, to exercise certain remedies including acceleration of the
outstanding borrowings under the Credit Agreement. In addition, the 1998 Notes
contain provisions which allow the Noteholders to accelerate their debt and seek
remedies if the Company has a payment default under the Credit Agreement or if
the obligations under the Credit Agreement have been accelerated. If the Senior
Lenders or the Noteholders elect to exercise their rights to accelerate the
obligations under the Credit Agreement and the 1998 Notes, or if the Senior
Lenders do not continue to provide a covenant waiver, such events would have a
material adverse effect on the Company's liquidity and financial position. Under
such circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults with
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
respect to the Credit Agreement and the 1998 Notes, there can be no assurance
that the Company would succeed in formulating and consummating an acceptable
alternative financial structure. Under such circumstances, the Company likely
would be forced to file for protection under Chapter 11 of the Bankruptcy Code.
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($490 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's condensed
consolidated balance sheet at June 30, 1999 and the Company has a deficit in
working capital aggregating $628 million. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of these uncertainties.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. The Company is seeking a reduction in
rent and other concessions under the Master Lease Agreements. On March 31, 1999,
the Company and Ventas entered into the Standstill Agreement which provided that
both companies would postpone through April 12, 1999 any claims either may have
against the other, including any claims that Ventas would have for the Company's
decision not to pay rent due on April 1, 1999. On April 12, 1999, the Company
and Ventas entered into the Second Standstill which provided for the payment on
various dates of the rent payments initially due on April 1. The Second
Standstill further provided that neither party would pursue any claims against
the other or any other third party related to the Reorganization Transactions as
long as the Company complied with the payment terms. The Second Standstill was
scheduled to terminate on May 5, 1999. Pursuant to the Tolling Agreement, the
Company and Ventas also agreed that any statutes of limitations or other time-
related constraints in a bankruptcy or other proceeding that might be asserted
by one party against the other will be extended and tolled from April 12, 1999
until May 5, 1999 or until the termination of the Second Standstill.
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently, the
Company and Ventas entered into further amendments to the Second Standstill and
the Tolling Agreement to extend the time during which no remedies may be pursued
by either party and to extend the date by which the Company may cure its failure
to pay rent. Under the current arrangement, the Company has agreed to make the
July 1999 rent payments on various dates during August. The Second Standstill
and the Tolling Agreement have been extended to provide that Ventas cannot
exercise any remedy under the Master Lease Agreements through September 3, 1999
(or five days following any failure by the Company to make any payment of July
rent as rescheduled) and neither party can bring any action against the other
through September 3, 1999 unless the Company fails to make the rescheduled rent
payments or unless the Company files for bankruptcy or a bankruptcy action is
filed against the Company. The Company will have until September 10, 1999 to
cure any default related to the nonpayment of the August rent. The Company has
paid all rent due under the Master Lease Agreements through June 1999.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may serve Ventas with a demand for
arbitration pursuant to the Reorganization Agreement with respect to claims by
the Company against Ventas arising out of the Reorganization Transactions and
seek a temporary restraining order or other interim judicial or arbitral relief
barring Ventas from exercising any remedies based on the Company's failure to
pay some or all of the rent to Ventas, pending final resolution of such
arbitration. Under such circumstances, the Company's failure to pay rent, in the
absence of such temporary restraining order or other interim relief, would
result in an "Event of Default" under the Master Lease Agreements. Upon an Event
of Default under the Master Lease Agreements, the remedies available to Ventas
include terminating the Master Lease Agreements, repossessing and reletting the
leased properties and requiring the Company to (1) remain liable for all
obligations under the Master Lease Agreements, including the difference between
the rent under the Master Lease Agreements and the rent payable as a result of
reletting the leased properties or (2) pay the net present value of the rent due
for
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
the balance of the terms of the Master Lease Agreements. Such a failure to pay
rent also would result in a credit freeze under the current bank waiver.
Considering the Company's limited financial resources, the existing defaults
under the Credit Agreement and the 1998 Notes, and the potential for a credit
freeze under the current bank waiver, it is likely that such circumstances would
necessitate that the Company file for protection under Chapter 11 of the
Bankruptcy Code.
As previously reported, the Company has been informed by the DOJ that it is
the subject of ongoing investigations into various Medicare reimbursement
issues, including various hospital cost reporting issues, Vencare billing
practices and various quality of care issues in its hospitals and nursing
centers. The Company is engaged in active discussions with the DOJ which may
result in a resolution of some or all of the DOJ investigations. To the extent
that such a resolution would require a payment to the government, the Company
may not have the necessary resources to finance such an obligation. See Note 8
of the Notes to Condensed Consolidated Financial Statements.
The Company is continuing to negotiate with the Senior Lenders, Ventas, the
Noteholders and the DOJ in an effort to permanently restructure its financial
obligations and obtain a sustainable capital structure for the Company. Despite
the Company's efforts, there can be no assurance that these discussions will be
successful or that the Company will not elect to file for protection under
Chapter 11 of the Bankruptcy Code before the completion of these negotiations.
If an agreement is reached, then it is likely to result in the existing Vencor
common stock having little, if any, value.
Cash provided by operations for the first six months of the year aggregated
$29 million compared to $182 million in the same period of 1998. The decline
was attributable primarily to the 1999 operating loss, the payment of
approximately $12 million in connection with the settlement of a legal action in
the first quarter and certain working capital requirements associated with the
Company's financial difficulties in 1999.
Capital Resources
Capital expenditures (excluding acquisitions) for the first six months of
1999 aggregated $51 million compared to $143 million a year ago. Planned
capital expenditures in 1999 are expected to approximate $120 million to $140
million and include significant expenditures related to information systems and
completion of nursing center improvement projects. Management believes that its
capital expenditure program is adequate to expand, improve and equip existing
facilities.
Capital expenditures in both periods were financed primarily through
internally generated funds and borrowings under the Credit Agreement. At June
30, 1999, the estimated cost to complete and equip construction in progress
approximated $17 million. There can be no assurance that the Company will have
sufficient resources to finance its capital expenditure program in 1999.
In the first six months of 1998, the Company expended $16 million to
acquire its former information systems outsourcer and three previously leased
nursing centers. The Company does not intend to acquire any nursing centers,
hospitals or ancillary service businesses in 1999.
Healthcare Reform
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 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 has
affected adversely the revenues in each of the Company's operating divisions.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Healthcare Reform (Continued)
The Budget Act reduced 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 general acute care
hospital. The reductions in allowable costs for capital expenditures became
effective October 1, 1997. The reductions in the TEFRA incentive payments and
allowable costs for bad debts became effective between May 1, 1998 and September
1, 1998 with respect to the Company's hospitals. The reductions for payments for
services to patients transferred from a general acute care hospital became
effective October 1, 1998. These reductions are expected to have a material
adverse impact on hospital revenues in 1999 and may impact adversely the
Company's ability to develop additional long-term care hospitals in the future.
The Budget Act also established a prospective payment system for nursing
centers for cost reporting periods beginning on or after July 1, 1998. While
most nursing centers in the United States became subject to this new payment
system during the first quarter of 1999, all of the Company's nursing centers
were impacted by PPS on July 1, 1998. During the first three years, the per
diem rates for nursing centers are 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 in May
1998. The payments received under PPS cover all services for Medicare patients
including all ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered pharmaceuticals.
The revenues recorded by the Company under PPS in its nursing centers are
substantially less than the cost-based reimbursement it received before the
enactment of the Budget Act. Moreover, since the Company treats a greater
percentage of higher acuity patients than many nursing centers, the Company has
been impacted adversely since the Federal per diem rates for higher acuity
patients do not, in the Company's opinion, adequately compensate for the
additional expense and risks associated with caring for such patients.
As the nursing center industry transitions to PPS, the volume of ancillary
services provided per patient day to nursing center patients has declined and
continues to decline. As previously discussed, Medicare reimbursements to
nursing centers under PPS include substantially all services provided to
patients, including ancillary services. Management believes that the decline in
demand for its Vencare services, particularly respiratory therapy and
rehabilitation therapy, is mostly attributable to efforts by nursing center
customers to reduce operating costs. In addition, as a result of these changes,
many nursing centers may elect to provide ancillary services to their patients
through internal staff and may no longer contract with outside parties for
ancillary services. Given the importance of the ancillary services division to
the Company's profitability, there can be no assurance that the Company's
margins and its results of operations, liquidity and financial position will not
continue to be materially and adversely impacted by PPS.
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.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Healthcare Reform (Continued)
There can be no assurance that payments under governmental and private
third-party payor programs will remain at levels comparable to present levels or
will be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In addition, there can be no assurance
that facilities leased by the Company, or the provision of services and supplies
by the Company, will meet the requirements for participation in such programs.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have a material adverse effect on
the Company's results of operations, liquidity and financial position.
Medicare revenues as a percentage of total revenues were approximately 33%
and 35% for the six months ended June 30, 1999 and 1998, respectively, while
Medicaid percentages of total revenues were approximately 29% and 26% for the
respective periods.
Year 2000
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the applicable
year. Without corrective action, computer programs and embedded chips could
potentially recognize the date ending in "00" as the year 1900 rather than 2000,
causing many computer applications to fail or to create erroneous results.
Certain of the Company's information technology systems ("IT") and non-IT
systems such as building infrastructure components (e.g. alarm systems, HVAC,
equipment and phone systems) and medical devices are affected by the Y2K issue.
The Company has developed a comprehensive compliance program to manage the Y2K
issue.
In response to the Y2K issue, the Company established five teams to address
Y2K issues in the following specific areas: (i) IT software and hardware; (ii)
third party relationships; (iii) facility components; (iv) medical equipment;
and (v) telephone systems. Each team is responsible for all phases of the
Company's Y2K compliance program for both IT and non-IT systems in its
designated area.
The Company's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business
assessment phase identified potential Y2K issues confronting the Company. The
inventory and assessment phase consisted of a Company-wide assessment of all
facility systems and components, medical devices, and IT software and hardware.
During the remediation and testing phase, the Company is repairing, upgrading or
replacing any non-compliant IT and non-IT systems. Additionally, the Company is
performing verification and validation testing of IT and non-IT systems that
have been remediated and those the Company believes are Y2K compliant. For IT
and non-IT systems that are developed internally, the Company verifies
compliance status directly with the development staff and performs validation
testing to confirm its status. For IT and non-IT systems that are purchased
from outside vendors, the Company is requesting written assurances of compliance
directly from the vendors. When non-compliant systems are identified, the
Company will either replace, upgrade or remediate the system. The
implementation and rollout phase involves the installation of the new financial
information system Company-wide and a new patient accounting system for the
hospital division. Additionally, it includes any IT or non-IT systems that have
been remediated and tested to the Company's corporate office and its facilities.
The final phase, post-implementation, involves finalizing the documentation of
the Y2K program and any corrective efforts surrounding date issues associated
with the year 2000 being a leap year. The Company has employed and will
continue to employ external consultants to assist it through each of the phases.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
All phases of the compliance program are on schedule to meet target
completion dates with the exception of the remediation and testing phase. All
of the applications identified during the inventory and assessment phase have
been remediated and tested except for the patient accounting system for the
nursing center division. Initially, the Company planned to install the new
patient accounting system Company-wide. During the second quarter, management
determined that the new patient accounting system did not meet adequately the
needs of the nursing center division. Accordingly, the Company has chosen to
remediate rather than replace its existing patient accounting system for the
nursing center division. A project team has been formed and efforts are under
way to remediate the existing patient accounting system for the nursing center
division. A project plan has been established to complete the remediation,
testing and implementation of the existing patient accounting system for the
nursing center division by November 30, 1999.
The progress of each phase is being monitored by management and
periodically reported to the Audit and Compliance Committee of the Board of
Directors. The following chart depicts the Company's target completion dates and
the status of each phase as of June 30, 1999:
<TABLE>
<CAPTION>
Approximate Percentage
Phase Target Completion Date Completed
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Business assessment May 1998 100%
---------------------------------------------------------------------------------------------------
Inventory and assessment December 1998 100%
---------------------------------------------------------------------------------------------------
Remediation and testing June 1999 98%
---------------------------------------------------------------------------------------------------
Implementation and rollout November 1999 80%
---------------------------------------------------------------------------------------------------
Post-implementation April 2000 0%
---------------------------------------------------------------------------------------------------
</TABLE>
The following chart depicts, by designated area, the percentage of the
Company's IT and non-IT systems that have been tested and verified Y2K compliant
as of June 30, 1999:
<TABLE>
<CAPTION>
Approximate Percentage
Designated Area Tested Y2K Compliant
-------------------------------------------------------------------------------
<S> <C>
IT software and hardware 90%
-------------------------------------------------------------------------------
Facility components 100%
-------------------------------------------------------------------------------
Medical equipment 100%
-------------------------------------------------------------------------------
Telephone systems 100%
-------------------------------------------------------------------------------
</TABLE>
For Y2K issues involving third parties, the Company has separated these
issues between significant business partners (e.g. financial intermediaries and
insurance companies) and the Company's significant suppliers and vendors (e.g.
medical supplies, utilities, food, etc.). The Company has completed its
assessment of material third party relationships. The Company is using the
information from these assessments to develop and refine guidelines for
facilities to address the Y2K compliance status of local business partners and
suppliers.
At this stage in the Company's compliance program, the Company has
identified three critical risks caused by the Y2K issue: (i) unanticipated
delays in the implementation and rollout of the new financial information and
patient accounting systems; (ii) unanticipated system failures by third party
reimbursement sources including government payors and intermediaries; and (iii)
unanticipated system failures by third party suppliers and vendors which could
affect patient care.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
The failure by the Company to achieve the target completion dates of its
compliance program could cause a business interruption in its financial
information and other systems. As previously discussed, the Company instituted
a plan to replace substantially all of the Company's financial information and
patient accounting systems before the year 2000. This effort was initiated to
consolidate the Company's current systems and to respond to the changes created
by the Budget Act. The new systems configuration and development efforts have
been completed. The Company began installing the new systems in its facilities
during the first quarter of 1999. During the second quarter, management
determined to remediate rather than replace its existing patient accounting
system in the nursing center division. The Company plans to complete the
installation of the new financial information system and the new patient
accounting system for the hospital division by November 1999. Additionally, the
Company plans to complete the remediation and installation of the remediated
patient accounting system for the nursing center division by November 1999. If
these efforts experience unanticipated delays, the Company plans to deploy
additional teams to accelerate the process through the use of internal and, if
necessary and available, external personnel.
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. The Company relies on these entities for accurate and
timely reimbursement of claims, often through the use of electronic data
interfaces. The Company believes that while many commercial insurance carriers
will be Y2K compliant, Federal and state agencies are more likely to have system
failures caused by Y2K issues. The Company is contacting all of its significant
reimbursement sources to determine their Y2K compliance status in order to make
a determination of this potential risk. The Company has not received assurance
that systems used by Medicare and Medicaid will be Y2K compliant. The failure
of information systems of Federal and state governmental agencies and other
third party payors could have a material adverse effect on the Company's
liquidity and financial position.
The Company also has initiated communications with its critical suppliers
and vendors. The Company is evaluating information provided by third party
vendors and is conducting limited independent testing of critical systems and
applications. In most cases, the Company is relying on information being
provided to it by such third parties. While the Company is attempting to
evaluate the information provided, there can be no assurance that in all
instances accurate information is being provided. If third party suppliers and
vendors fail to respond to the Company's request for information, the Company
may seek to procure other sources of supplies.
The Company continues to develop contingency plans to address the most
critical risks raised by the Y2K issue. These contingency plans will cover all
IT and non-IT systems for each of the five designated areas. The implementation
of the Company's new financial information and patient accounting systems is
proceeding as planned. Accordingly, the Company does not intend to remediate
other financial information and patient accounting systems that are currently in
place other than the patient accounting system used by the nursing center
division. If the rollout of the new financial information and patient
accounting systems experiences unanticipated delays, the Company plans to deploy
additional implementation teams to accelerate the process through the use of
internal and, if necessary and available, external personnel. As the Company
contacts third party reimbursement sources, it is developing contingency plans
to receive temporary reimbursement in the event of system failures by these
entities. Such contingency plans may include arranging for interim payments
from Medicare and submitting written requests for Medicaid payments.
The Company's contingency plans also cover failures by suppliers and
vendors. The Company's data network employs a variety of techniques such as
alternative routing, redundant equipment and dual backup to avoid system
failures. Each of the Company's facilities has a facility-specific emergency
preparedness manual to handle emergency situations such as a loss of utility
services or supplies. Local emergency plans also are being updated as Y2K
related risks associated with the facility are identified.
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
Management is implementing a plan to replace or remediate substantially all
of the Company's financial information and patient accounting systems before the
year 2000 at a cost of approximately $45 million. A substantial portion of
these costs will be capitalized and amortized over seven years. Including the
costs of the new financial information and patient accounting systems, the total
Y2K program costs are currently estimated to be approximately $66 million, of
which the Company has expended approximately $53 million through June 30, 1999.
A majority of the costs related solely to Y2K compliance will be expensed as
incurred. As previously discussed, management determined during the second
quarter to remediate rather than replace its existing patient accounting system
in the nursing center division. Accordingly, the Company recorded a loss of
approximately $5.6 million associated with the costs incurred in implementing
the new system prior to determining to remediate the existing system. See Note
5 of the Notes to Condensed Consolidated Financial Statements. The costs of the
new financial information and patient accounting systems and the additional Y2K
costs are expected to be funded through operating cash flows. The Company does
not expect to incur any material information system costs other than the new
financial information and patient accounting systems and Y2K compliance program
during 1999.
Management's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or timely
assessed all Y2K issues or that the estimated costs to remediate the Y2K issues
will not be exceeded. While the Company believes it has substantially completed
its assessment of all Y2K issues, its estimate of the costs to address such
issues may change as it proceeds with the remediation and implementation of its
financial information and patient accounting systems. The Company's ability to
identify and remediate critical Y2K issues and the availability and cost of
external resources will impact the Company's total Y2K costs and the impact of
Y2K on the Company's results of operations.
Although the Company is assessing the readiness of the Medicare and
Medicaid programs and other third party payors and preparing contingency plans,
there can be no guarantee that the failure of these third parties to remediate
their systems to be Y2K compliant will not have a material adverse effect on the
Company.
Other Information
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. See Note 8 of the Notes to Condensed Consolidated
Financial Statements for a description of material litigation and regulatory
actions.
28
<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>
1998 Quarters 1999 Quarters
-------------------------------------------- --------------------
First Second Third Fourth First Second
--------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $823,316 $ 778,706 $718,115 $ 679,602 $700,232 $688,892
-------- --------- -------- ---------- --------- ---------
Salaries, wages and benefits............ 480,364 459,808 415,365 397,486 403,894 392,748
Supplies................................ 76,052 77,832 69,069 71,419 68,664 70,417
Rent.................................... 24,135 59,076 75,063 75,870 75,452 76,088
Other operating expenses................ 134,922 156,736 108,097 588,317 125,652 149,118
Depreciation and amortization........... 35,470 28,571 25,425 35,151 22,285 21,612
Interest expense........................ 37,195 28,394 22,294 19,125 19,536 20,032
Investment income....................... (1,180) (1,130) (990) (1,388) (631) (642)
-------- --------- -------- ---------- -------- --------
786,958 809,287 714,323 1,185,980 714,852 729,373
-------- --------- -------- ---------- -------- --------
Income (loss) before income taxes....... 36,358 (30,581) 3,792 (506,378) (14,620) (40,481)
Provision for income taxes.............. 17,477 (7,129) (33,790) 99,541 50 50
-------- --------- -------- ---------- -------- --------
Income (loss) from operations........... 18,881 (23,452) 37,582 (605,919) (14,670) (40,531)
Cumulative effect of change in
accounting for start-up costs........ - - - - (8,923) -
Extraordinary loss on
extinguishment of debt, net
of income tax benefit................ - (77,937) - - - -
-------- --------- -------- ---------- -------- --------
Net income (loss).............. 18,881 (101,389) 37,582 (605,919) (23,593) (40,531)
Preferred stock dividend
requirements.......................... - (177) (266) (254) (261) (262)
-------- --------- -------- ---------- -------- --------
Income (loss) available to
common stockholders......... $ 18,881 $(101,566) $ 37,316 $ (606,173) $(23,854) $(40,793)
======== ========= ======== ========== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) from operations..... $ 0.28 $ (0.35) $ 0.55 $ (8.68) $ (0.21) $ (0.58)
Cumulative effect of change in
accounting for start-up costs... - - - - (0.13) -
Extraordinary loss on
extinguishment of debt......... - (1.15) - - - -
-------- --------- -------- ---------- -------- --------
Net income (loss).............. $ 0.28 $ (1.50) $ 0.55 $ (8.68) $ (0.34) $ (0.58)
======== ========= ======== ========== ======== ========
Diluted:
Income (loss) from operations..... $ 0.28 $ (0.35) $ 0.54 $ (8.68) $ (0.21) $ (0.58)
Cumulative effect of change in
accounting for start-up costs.. - - - - (0.13) -
Extraordinary loss on
extinguishment of debt......... - (1.15) - - - -
-------- --------- -------- ---------- -------- --------
Net income (loss).............. $ 0.28 $ (1.50) $ 0.54 $ (8.68) $ (0.34) $ (0.58)
======== ========= ======== ========== ======== ========
Shares used in computing earnings
(loss) per common share:
Basic............................. 67,448 67,651 68,389 69,859 70,326 70,395
Diluted........................... 67,857 67,651 68,554 69,859 70,326 70,395
</TABLE>
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands, except statistics)
<TABLE>
<CAPTION>
1998 Quarters 1999 Quarters
-------------------------------------------------- ------------------------
First Second Third Fourth First Second
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Nursing centers...................... $ 434,190 $ 413,600 $ 389,414 $ 384,458 $ 382,041 $ 382,548
Hospitals............................ 246,365 239,312 226,846 207,324 238,522 234,868
Vencare.............................. 169,773 151,567 138,121 123,269 113,874 106,040
---------- ---------- ---------- ---------- ---------- ----------
850,328 804,479 754,381 715,051 734,437 723,456
Elimination.......................... (27,012) (25,773) (36,266) (35,449) (34,205) (34,564)
---------- ---------- ---------- ---------- ---------- ----------
$ 823,316 $ 778,706 $ 718,115 $ 679,602 $ 700,232 $ 688,892
========== ========== ========== ========== ========== ==========
Income (loss) from operations:
Operating income (loss):
Nursing centers................. $ 62,447 $ 49,964 $ 61,189 $ 42,975 $ 59,122 $ 59,186
Hospitals....................... 77,650 67,328 63,774 40,231 58,411 59,656
Vencare......................... 26,892 23,125 20,840 (6,753) 14,574 12,815
Corporate overhead.............. (27,347) (30,315) (26,399) (42,204) (27,773) (29,674)
Unusual transactions............ (7,664) (25,772) 6,180 (411,869) (2,312) (25,374)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)...... 131,978 84,330 125,584 (377,620) 102,022 76,609
Rent............................... 24,135 59,076 75,063 75,870 75,452 76,088
Depreciation and amortization...... 35,470 28,571 25,425 35,151 22,285 21,612
Interest, net...................... 36,015 27,264 21,304 17,737 18,905 19,390
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.. 36,358 (30,581) 3,792 (506,378) (14,620) (40,481)
Provision for income taxes......... 17,477 (7,129) (33,790) 99,541 50 50
---------- ---------- ---------- ---------- ---------- ----------
$ 18,881 $ (23,452) $ 37,582 $ (605,919) $ (14,670) $ (40,531)
========== ========== ========== ========== ========== ==========
Nursing Center Data:
End of period data:
Number of nursing centers......... 305 296 292 291 293 293
Number of licensed beds........... 39,960 39,094 38,578 38,362 38,585 38,387
Revenue mix %:
Medicare.......................... 34 31 26 26 28 26
Medicaid.......................... 41 43 47 48 47 48
Private and other................. 25 26 27 26 25 26
Patient days:
Medicare.......................... 408,002 374,244 354,285 362,437 380,748 366,272
Medicaid.......................... 1,949,544 1,939,521 1,935,464 1,921,872 1,867,554 1,911,111
Private and other................. 692,932 677,607 666,407 656,951 633,137 623,665
---------- ---------- ---------- ---------- ---------- ----------
3,050,478 2,991,372 2,956,156 2,941,260 2,881,439 2,901,048
========== ========== ========== ========== ========== ==========
Hospital Data:
End of period data:
Number of hospitals............... 62 61 58 57 57 56
Number of licensed beds........... 5,313 5,301 5,051 4,979 4,937 4,935
Revenue mix %:
Medicare.......................... 60 59 62 52 59 56
Medicaid.......................... 8 10 10 11 10 10
Private and other................. 32 31 28 37 31 34
Patient days:
Medicare.......................... 173,967 162,991 154,483 155,842 175,953 171,011
Medicaid.......................... 28,535 31,422 30,618 30,963 29,939 29,675
Private and other................. 45,747 43,974 43,100 45,846 49,924 49,165
---------- ---------- ---------- ---------- ---------- ----------
248,249 238,387 228,201 232,651 255,816 249,851
========== ========== ========== ========== ========== ==========
Ancillary Services Data:
Revenues:
Rehabilitation therapy............ $ 70,597 $ 60,161 $ 68,533 $ 50,719 $ 49,997 $ 45,860
Pharmacy.......................... 40,058 40,248 36,394 42,923 46,080 45,168
Respiratory therapy............... 44,135 39,803 30,161 27,069 12,604 11,014
Other............................. 14,983 11,355 3,033 2,558 5,193 3,998
---------- ---------- ---------- ---------- ---------- ----------
$ 169,773 $ 151,567 $ 138,121 $ 123,269 $ 113,874 $ 106,040
========== ========== ========== ========== ========== ==========
</TABLE>
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only significant exposure to market risk is changes in the
level of LIBOR interest rates. In this regard, changes in LIBOR interest rates
affect the interest paid on its borrowings. To mitigate the impact of
fluctuations in these interest rates, the Company generally maintains a
significant portion of its borrowings as fixed rate in nature either by
borrowing on a fixed rate long-term basis or entering into interest rate swap
transactions.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table
constitutes a forward-looking statement. For long-term debt, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. For interest rate swap agreements, the table presents notional
amounts and weighted average interest rates by contractual maturity dates.
Notional amounts are used to calculate the contractual cash flows to be
exchanged under the contract.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
(Dollars in thousands)
<TABLE>
<CAPTION>
Expected Maturities Fair
---------------------------------------------------------------------------- Value
1999 2000 2001 2002 2003 Thereafter Total 6/30/99
-------- -------- ------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt, including
amounts due within one year:
Fixed rate (a)................. $ 8,961 $ 16,937 $17,763 $ 19,630 $21,638 $311,260 $396,189 $138,842
Average interest rate.......... 10.75% 10.75% 10.75% 10.75% 10.75% 9.00%
Variable rate.................. $ 3,487 $ 19,474 $61,974 $128,640 $27,700 $252,917 $494,192 $494,192
Average interest rate (b)
Interest rate derivative
financial instruments related
to debt:
Interest rate swaps:
Pay fixed/receive variable..... $100,000 $100,000 $200,000 $ 1,537
Average pay rate............... 6.4% 6.4%
Average receive rate (c)
</TABLE>
- ----------------
(a) Fixed rate indebtedness includes amounts due HCFA approximating $86.8
million, approximately $15.5 million of which is due within one year and is
included in due to third party payors in the condensed consolidated balance
sheet. The remaining amount due after one year ($71.3 million) is included in
long-term debt in the condensed consolidated balance sheet. See Note 3 of the
Notes to Condensed Consolidated Financial Statements.
(b) Interest is payable, depending on certain leverage ratios and other
factors, at a rate of LIBOR plus 3/4% to 3 1/2%.
(c) The variable rate portion of the interest rate swap is 3-month LIBOR.
31
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Summary descriptions of various significant legal and regulatory activities
follow:
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. On March 31, 1999, the Company and
Ventas entered into the Standstill Agreement which provided that both companies
would postpone through April 12, 1999 any claims either may have against the
other, including any claims that Ventas would have for the Company's decision
not to pay rent due on April 1, 1999. The Standstill Agreement was entered into
in furtherance of the discussions between the Company and Ventas concerning
possible reductions in the rent payments and other concessions under the Master
Lease Agreements. On April 12, 1999, the Company and Ventas entered into the
Second Standstill which provided for the payment on various dates of the rent
payments initially due on April 1. The Second Standstill further provided that
neither party would pursue any claims against the other or any other third party
related to the Reorganization Transactions as long as the Company complied with
the payment terms. The Second Standstill was scheduled to terminate on May 5,
1999. Pursuant to the Tolling Agreement, the Company and Ventas also agreed
that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other would be extended and tolled from April 12, 1999 until May 5, 1999 or
until the termination of the Second Standstill. As a result of the Company's
failure to pay rent, Ventas served the Company with notices of nonpayment under
the Master Lease Agreements. Subsequently, the Company and Ventas have entered
into further amendments to the Second Standstill and the Tolling Agreement to
extend the time during which no remedies may be pursued by either party and to
extend the date by which the Company may cure its failure to pay rent. Under
the current arrangement, the Company has agreed to make the July 1999 rent
payments on various dates during August. The Second Standstill and the Tolling
Agreement have been extended to provide that Ventas cannot exercise any remedy
under the Master Lease Agreements through September 3, 1999 (or five days
following any failure by the Company to make any payment of July rent as
rescheduled) and neither party can bring any action against the other through
September 3, 1999 unless the Company fails to make the rescheduled rent payments
or unless the Company files for bankruptcy or a bankruptcy action is filed
against the Company. The Company will have until September 10, 1999 to cure any
default related to the nonpayment of the August rent. The Company has paid all
rent due under the Master Lease Agreements through June 1999. If the parties
are unable to resolve their disputes or maintain an interim resolution, the
Company's failure to pay the rent, in the absence of a temporary restraining
order or other interim relief, would result in an Event of Default under the
Master Lease Agreements. Upon an Event of Default under the Master Lease
Agreements, the remedies available to Ventas include terminating the Master
Lease Agreements, repossessing and reletting the leased properties and requiring
the Company to (1) remain liable for all obligations under the Master Lease
Agreements, including the difference between the rent under the Master Lease
Agreements and the rent payable as a result of reletting the leased properties
or (2) pay the net present value of the rent due for the balance of the terms of
the Master Lease Agreements.
The Company's subsidiary, TheraTx, is a plaintiff in a declaratory judgment
action entitled TheraTx, Incorporated v. James W. Duncan, Jr., et al. currently
pending in the United States District Court for the Northern District of
Georgia. The defendants have asserted counterclaims against TheraTx under
breach of contract, securities fraud, negligent misrepresentation and fraud
theories for allegedly not performing as promised under a merger agreement
related to TheraTx's purchase of a company called PersonaCare, Inc. and for
allegedly failing to inform the defendants/counterclaimants prior to the merger
that TheraTx's possible acquisition of Southern Management Services, Inc. might
cause the suspension of TheraTx's shelf registration under relevant rules of the
Securities and Exchange Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaims were entitled to damages and prejudgment interest in
the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both have appealed the court's rulings.
32
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 1. Legal Proceedings (Continued)
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 a Tampa nursing center operated by the
Company 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 action was dismissed without prejudice on July 5, 1999.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of Los
Angeles, California by Lenox asserting various causes of action arising out of
the Company's sale and lease of several nursing centers to Lenox in 1997. Lenox
subsequently removed certain of its causes of action and refiled these claims
before the United States District Court for the Western District of Kentucky in
a case entitled Lenox Healthcare, Inc. v. Vencor, Inc., et al., Case No. 3:99
CV-348-H. The Company has asserted counterclaims, including RICO claims,
against Lenox in the Kentucky action. The Company believes that the allegations
made by Lenox in both complaints are without merit and intends to defend these
actions vigorously.
The Company has been informed by the DOJ that it is the subject of ongoing
investigations into various Medicare reimbursement issues, including various
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in its hospitals and nursing centers. The Company is cooperating
fully in the investigations. The Company is engaged in active discussions with
the DOJ which may result in a resolution of some or all of the DOJ
investigations. Such a resolution could include a payment to the government
which could have a material adverse effect on the Company's liquidity and
financial position.
In connection with the Reorganization Transactions, liabilities arising
from various legal proceedings and other actions were assumed by the Company and
the Company agreed to indemnify Ventas against any losses, including any costs
or expenses, it may incur arising out of or in connection with such legal
proceedings and other actions. The indemnification provided by the Company also
covers losses, including costs and expenses, which may arise from any future
claims asserted against Ventas based on the former healthcare operations of
Ventas. In connection with its indemnification obligation, the Company has
assumed the defense of various legal proceedings and other actions.
The Company is a party to certain legal actions and regulatory
investigations arising in the normal course of its business. The Company is
unable to predict the ultimate outcome of pending litigation and regulatory
investigations. In addition, there can be no assurance that HCFA or other
regulatory agencies will not initiate additional investigations related to the
Company's business in the future, nor can there be any assurance that the
resolution of any litigation or investigations, either individually or in the
aggregate, would not have a material adverse effect on the Company's results of
operations, liquidity or financial position. In addition, the above litigation
and investigations (as well as future litigation and investigations) are
expected to consume the time and attention of senior management and may have a
disruptive effect upon the Company's operations.
33
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion Credit Agreement. Namely, the covenants regarding minimum net
worth, total leverage ratio, senior leverage ratio and fixed charge coverage
ratio were not satisfied at December 31, 1998. Following discussions with the
Company's lead banks, the Company sought a temporary waiver of these covenant
violations. On February 3, 1999, the Company announced that it had obtained the
necessary approval from its Senior Lenders to secure a covenant waiver related
to the Credit Agreement through March 31, 1999. The waiver included certain
borrowing limitations under the $300 million Revolving Credit Facility.
Aggregate borrowings under the Revolving Credit Facility initially were limited
to $37.5 million and subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million to $125 million. On May 28,
1999, the Senior Lenders granted a further waiver through July 30, 1999. Under
this waiver, the aggregate commitment under the Revolving Credit Facility was
permanently reduced from $125 million to $80 million. On July 30, 1999, the
Senior Lenders and the Company further extended the waiver through August 27,
1999. Each of the waivers has included, among other things, an aggregate
borrowing limitation of $55 million under the Revolving Credit Facility during
the respective waiver periods. At the close of business on August 12, 1999,
outstanding borrowings under the Revolving Credit Facility aggregated $55
million. The amounts of principal (including amounts due within one year) and
interest due under the Credit Agreement as of June 30, 1999 were $494 million
and $421,000, respectively.
The waiver also sets forth certain events which would terminate the
obligation of the Senior Lenders to fund the Revolving Credit Facility. If the
Company fails to pay rent to Ventas without the consent of Ventas or the
protection of injunctive relief granting a stay of termination under the Master
Lease Agreements, the obligation to continue funding under the Revolving Credit
Facility will be frozen. In addition, if the Company pays, or a right of setoff
is asserted by the appropriate third party payor seeking to recoup,
reimbursement overpayments in excess of $10 million, the obligation to continue
funding under the Revolving Credit Facility also will be frozen. The waiver also
places additional informational requirements and minimum daily census level
requirements on the Company's nursing centers and hospitals. The Company's
failure to comply with those covenants would result in the termination of the
waiver.
As previously reported, the Company was informed on April 9, 1999 by HCFA
that the Medicare program had made a demand for repayment of approximately $90
million of reimbursement overpayments by April 23, 1999. On April 21, 1999, the
Company reached an agreement with HCFA to extend the repayment of such amounts
over 60 monthly installments. Under the agreement, monthly payments of
approximately $1.5 million commenced on May 8, 1999. After November 1999, the
remaining balance of the overpayments will bear interest at a statutory rate
applicable to Medicare overpayments, as in effect on November 30, 1999.
Assuming that the current rate of 13.25% is in effect on November 30, 1999, the
monthly payment amount will be approximately $2.0 million through March 2004.
If the Company is delinquent with two consecutive payments under the repayment
plan, the plan will be defaulted and all subsequent Medicare reimbursement
payments to the Company will be withheld. Amounts due to HCFA after one year
aggregating $71.3 million have been classified as long-term debt in the
Company's condensed consolidated balance sheet at June 30, 1999.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The indenture under which
the 1998 Notes were issued provides for a 30-day grace period before an event
of default will occur due to the nonpayment of interest. Since the interest
payment was not made
34
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities (Continued)
within the grace period, the 1998 Notes may be declared immediately due and
payable. If the debt under the Credit Agreement has not been accelerated, the
1998 Notes may not be accelerated until five days after notice is given to the
Senior Lenders. The amounts of principal and interest due under the 1998 Notes
as of June 30, 1999 were $300 million and $20 million, respectively.
There can be no assurances that the Senior Lenders will approve any
amendment or restructuring of the Credit Agreement or will continue to provide
the Company with a covenant waiver or will not seek to declare an event of
default or credit freeze. In such an event, the Senior Lenders are entitled, at
their discretion, to exercise certain remedies including acceleration of the
outstanding borrowings under the Credit Agreement. In addition, the 1998 Notes
contain provisions which allow the Noteholders to accelerate their debt and seek
remedies if the Company has a payment default under the Credit Agreement or if
the obligations under the Credit Agreement have been accelerated. If the Senior
Lenders or the Noteholders elect to exercise their rights to accelerate the
obligations under the Credit Agreement and the 1998 Notes, or if the Senior
Lenders do not continue to provide a covenant waiver, such events would have a
material adverse effect on the Company's liquidity and financial position. Under
such circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults with respect
to the Credit Agreement and the 1998 Notes, there can be no assurance that the
Company would succeed in formulating and consummating an acceptable alternative
financial structure. Under such circumstances, the Company likely would be
forced to file for protection under Chapter 11 of the Bankruptcy Code.
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($490 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's condensed
consolidated balance sheet at June 30, 1999 and the Company has a deficit in
working capital aggregating $628 million. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of these uncertainties.
On April 30, 1999, the Company failed to make the dividend payment on its
6% Series A Non-Voting Cumulative Preferred Stock (the "Preferred Stock"). The
amount of dividends due on the Preferred Stock as of June 30, 1999 and in
arrears approximated $1.2 million.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. The Company is seeking a reduction in
rent and other concessions under the Master Lease Agreements. On March 31, 1999,
the Company and Ventas entered into the Standstill Agreement which provided that
both companies would postpone through April 12, 1999 any claims either may have
against the other, including any claims that Ventas would have for the Company's
decision not to pay rent due on April 1, 1999. On April 12, 1999, the Company
and Ventas entered into the Second Standstill which provided for the payment on
various dates of the rent payments initially due on April 1. The Second
Standstill further provided that neither party would pursue any claims against
the other or any other third party related to the Reorganization Transactions as
long as the Company complied with the payment terms. The Second Standstill was
scheduled to terminate on May 5, 1999. Pursuant to the Tolling Agreement, the
Company and Ventas also agreed that any statutes of limitations or other time-
related constraints in a bankruptcy or other proceeding that might be asserted
by one party against the other will be extended and tolled from April 12, 1999
until May 5, 1999 or until the termination of the Second Standstill.
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently, the
Company and Ventas entered into further amendments to the Second Standstill and
the Tolling Agreement to extend the time during which no remedies may be pursued
by either party and to extend the date by which the Company may cure its failure
to pay rent. Under the current arrangement, the Company has agreed to make
the July 1999 rent payments on various dates during August. The
35
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities (Continued)
Second Standstill and the Tolling Agreement have been extended to provide that
Ventas cannot exercise any remedy under the Master Lease Agreements through
September 3, 1999 (or five days following any failure by the Company to make any
payment of July rent as rescheduled) and neither party can bring any action
against the other through September 3, 1999 unless the Company fails to make the
rescheduled rent payments or unless the Company files for bankruptcy or a
bankruptcy action is filed against the Company. The Company will have until
September 10, 1999 to cure any default related to the nonpayment of the August
rent. The Company has paid all rent due under the Master Lease Agreements
through June 1999.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may serve Ventas with a demand for
arbitration pursuant to the Reorganization Agreement with respect to claims by
the Company against Ventas arising out of the Reorganization Transactions and
seek a temporary restraining order or other interim judicial or arbitral relief
barring Ventas from exercising any remedies based on the Company's failure to
pay some or all of the rent to Ventas, pending final resolution of such
arbitration. Under such circumstances, the Company's failure to pay rent, in the
absence of such temporary restraining order or other interim relief, would
result in an "Event of Default" under the Master Lease Agreements. Upon an Event
of Default under the Master Lease Agreements, the remedies available to Ventas
include terminating the Master Lease Agreements, repossessing and reletting the
leased properties and requiring the Company to (1) remain liable for all
obligations under the Master Lease Agreements, including the difference between
the rent under the Master Lease Agreements and the rent payable as a result of
reletting the leased properties or (2) pay the net present value of the rent due
for the balance of the terms of the Master Lease Agreements. Such a failure to
pay rent also would result in a credit freeze under the current bank waiver.
Considering the Company's limited financial resources, the existing defaults
under the Credit Agreement and the 1998 Notes, and the potential for a credit
freeze under the current bank waiver, it is likely that such circumstances would
necessitate that the Company file for protection under Chapter 11 of the
Bankruptcy Code.
As previously reported, the Company has been informed by the DOJ that it is
the subject of ongoing investigations into various Medicare reimbursement
issues, including various hospital cost reporting issues, Vencare billing
practices and various quality of care issues in its hospitals and nursing
centers. The Company is engaged in active discussions with the DOJ which may
result in a resolution of some or all of the DOJ investigations. To the extent
that such a resolution would require a payment to the government, the Company
may not have the necessary resources to finance such an obligation.
The Company is continuing to negotiate with the Senior Lenders, Ventas, the
Noteholders and the DOJ in an effort to permanently restructure its financial
obligations and obtain a sustainable capital structure for the Company. Despite
the Company's efforts, there can be no assurance that these discussions will be
successful or that the Company will not elect to file for protection under
Chapter 11 of the Bankruptcy Code before the completion of these negotiations.
If an agreement is reached, then it is likely to result in the existing Vencor
common stock having little, if any, value.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was initially held on May 12,
1999 in Louisville, Kentucky. The meeting was adjourned until May 17, 1999 in
order to accept additional votes that were properly tendered in conjunction with
the proxy materials distributed to stockholders. At the reconvened meeting,
stockholders elected two Class I directors to serve for a term of three years
pursuant to the following votes:
Director Votes in Favor Votes Withheld
-------- -------------- --------------
Ulysses L. Bridgeman, Jr.......... 30,696,907 4,982,955
William H. Lomicka................ 30,693,834 4,986,028
36
<PAGE>
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Waiver No. 3 dated as of May 28, 1999, under the $1,000,000
Credit Agreement dated as of April 29, 1998 among Vencor
Operating, Inc., Vencor, Inc., the Lenders, Swingline Bank and LC
Issuing Banks party thereto, the Senior Managing Agents, Managing
Agents and Co-Agents party thereto and Morgan Guaranty Trust
Company of New York, as Documentation Agent and Collateral Agent,
and NationsBank, N.A., as Administrative Agent. Exhibit 99.2 to
the Current Report on Form 8-K of the Company dated May 28, 1999
(Comm. File No. 001-14057) is hereby incorporated by reference.
10.2 Waiver No. 4 dated as of July 30, 1999, under the $1,000,000
Credit Agreement dated as of April 29, 1998 among Vencor
Operating, Inc., Vencor, Inc., the Lenders, Swingline Bank and LC
Issuing Banks party thereto, the Senior Managing Agents, Managing
Agents and Co-Agents party thereto and Morgan Guaranty Trust
Company of New York, as Documentation Agent and Collateral Agent,
and NationsBank, N.A., as Administrative Agent.
10.3 Form of Vencor, Inc. Retention Agreement.
10.4 Employment Agreement dated as of April 19, 1999 between Vencor
Operating, Inc. and Owen E. Dorsey.
10.5 Second Amendment to Master Lease Agreement No. 1 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.48 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.6 Second Amendment to Master Lease Agreement No. 2 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.49 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.7 Second Amendment to Master Lease Agreement No. 3 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.50 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.8 Second Amendment to Master Lease Agreement No. 4 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.51 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.9 Second Standstill Agreement dated April 12, 1999 between the
Company and Ventas, Inc. Exhibit 10.57 to the Company's Form 10-K
for the year ended December 31, 1998 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.10 Tolling Agreement dated April 12, 1999 between the Company and
Ventas, Inc. Exhibit 10.58 to the Company's Form 10-K for the
year ended December 31, 1998 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.11 Amendment Number 1 to the Second Standstill Agreement dated April
12, 1999 dated as of May 5, 1999 between the Company and Ventas,
Inc. Exhibit 10.12 to the Company's Form 10-Q for the quarterly
period ended March 31, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
37
<PAGE>
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K (Continued)
(a) Exhibits (Continued):
10.12 Amendment Number 2 to the Second Standstill Agreement dated April
12, 1999 and Amendment Number 1 to the Tolling Agreement dated
April 12, 1999 dated as of May 8, 1999 between the Company and
Ventas, Inc. Exhibit 10.13 to the Company's Form 10-Q for the
quarterly period ended March 31, 1999 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.13 Amendment Number 4 to the Second Standstill Agreement dated April
12, 1999 and Amendment Number 3 to the Tolling Agreement dated
April 12, 1999. Exhibit 99.2 to the Current Report on Form 8-K of
the Company dated June 7, 1999 (Comm. File No. 001-14057) is
hereby incorporated by reference.
10.14 Amendment Number 5 to the Second Standstill Agreement dated April
12, 1999 and Amendment Number 4 to the Tolling Agreement dated
April 12, 1999. Exhibit 99.2 to the Current Report on Form 8-K of
the Company dated July 7, 1999 (Comm. File No. 001-14057) is
hereby incorporated by reference.
10.15 Amendment Number 6 to the Second Standstill Agreement dated April
12, 1999 and Amendment Number 5 to the Tolling Agreement dated
April 12, 1999.
27 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 April 1, 1999 reporting
that its Senior Lenders had agreed to provide the Company with an additional
covenant waiver on the Credit Agreement through May 28, 1999. The report also
announced that the Company and Ventas had entered into the Standstill Agreement
and the Tolling Agreement. The report further announced that the Company would
delay filing its Annual Report on Form 10-K until it resolved various accounting
issues. The Company filed a Current Report on Form 8-K on April 22, 1999
announcing that it had reached an agreement with HCFA to extend the repayment of
approximately $90 million of Medicare reimbursement overpayments. The Company
filed a Current Report on Form 8-K on May 3, 1999 announcing that it had elected
not to make the interest payment due on the 1998 Notes. The Company filed a
Current Report on Form 8-K on May 10, 1999 announcing that it had extended the
Second Standstill and the Tolling Agreement. The Company filed a Current Report
on Form 8-K on May 28, 1999 announcing a further waiver of the defaults under
the Credit Agreement through July 3, 1999. The Company filed a Current Report
on Form 8-K on June 8, 1999 announcing that it and Ventas had entered into
further interim arrangements regarding the payment of May rentals and the
extension of the Second Standstill and the Tolling Agreement. The Company filed
a Current Report on Form 8-K on June 19, 1999 announcing that the Company's
common stock had been suspended from trading by the New York Stock Exchange.
38
<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 13, 1999 /s/ EDWARD L. KUNTZ
- ---------------------- ---------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
Date: August 13, 1999 /s/ RICHARD A. SCHWEINHART
- ---------------------- ---------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
39
<PAGE>
EXHIBIT 10.2
WAIVER NO. 4
Waiver No. 4 (this "Waiver No. 4") dated as of July 30, 1999, under
the $1,000,000,000 Credit Agreement dated as of April 29, 1998 (as
heretofore amended, the "Credit Agreement") among VENCOR OPERATING, INC.,
VENCOR, INC. (formerly named Vencor Healthcare, Inc.), the LENDERS,
SWINGLINE BANK AND LC ISSUING BANKS party thereto, the SENIOR MANAGING
AGENTS, MANAGING AGENTS AND CO-AGENTS party thereto and MORGAN GUARANTY
TRUST COMPANY OF NEW YORK, as Documentation Agent and Collateral Agent, and
NATIONSBANK, N.A., as Administrative Agent.
WITNESSETH:
WHEREAS, Vencor has advised the Lender Parties that due to its recent
results of operations and current financial condition it needs an extension
of certain waivers under the Credit Agreement granted in (a) the Waiver
dated January 29, 1999 by the Lenders party thereto (hereinafter "Waiver
No. 1"), (b) the Waiver dated as of March 31, 1999 by the Lenders party
thereto (hereinafter "Waiver No. 2") and (c) the Waiver dated as of May 28,
1999 by the Lenders party thereto (hereinafter "Waiver No. 3 and together
with Waiver No. 1 and Waiver No. 2, the "Prior Waivers"), and, subject to
the terms and conditions hereof, the Lenders party hereto are willing to
extend such waivers under the Credit Agreement under the terms more fully
set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. Unless otherwise specifically defined herein,
each term used herein that is defined in the Credit Agreement shall have
the meaning assigned to such term in the Credit Agreement. As used herein,
the following additional terms have the following meanings:
"Disclosure Materials" means (a) the March 10 Meeting Materials, (b)
the May 20 Meeting Materials, (c) the July 20 Meeting Materials, (d)
Vencor's Annual Report on Form 10-K for 1998 (the "1998 10-K") and (e)
Vencor's Quarterly Report on Form 10-Q for the first quarter of 1999 (the
"1st Quarter 10-Q").
"Freeze Period" means any period during which:
(a) any Vencor Company has failed to pay any rent or other sum payable
to a Ventas Company under any Master Lease Agreement when the same became
due and payable and any Ventas Company has given any Vencor Company a
notice pursuant to
<PAGE>
Section 16.1(b) of such Master Lease Agreement demanding payment thereof,
and by 11:30 A.M. on the fifth day after such notice none of the following
circumstances exists: (i) such rent or other sum has been paid in full,
(ii) a stay of any termination or notice of termination of such Master
Lease Agreement is in effect by order of a court or arbitral authority or
(iii) the relevant Ventas Company has agreed in writing to withdraw its
demand for payment or to a standstill, tolling or other suspension of its
rights to give a notice of termination of such Master Lease Agreement,
provided that if a Freeze Period does not exist on account of either clause
(ii) or (iii), a Freeze Period shall nonetheless subsequently and
immediately exist if (A) any such stay expires or is withdrawn or (B) any
such withdrawal, standstill or other suspension by its terms ceases to be
in effect or otherwise terminates, as the case may be; or
(b) any Ventas Company has given a notice to any Vencor Company
pursuant to the penultimate sentence of Section 16.1 of any Master Lease
Agreement terminating such Master Lease Agreement, for so long as none of
the following circumstances exists: (i) each event of default under such
Master Lease Agreement upon the basis of which such notice was given has
been cured and the relevant Ventas Company has confirmed in writing that
such notice is no longer effective and that such Master Lease Agreement
will not be terminated on account of such notice, (ii) a stay of any
termination of such Master Lease Agreement is in effect by order of a court
or arbitral authority or (iii) the relevant Ventas Company has agreed in
writing to withdraw such notice or to a standstill, tolling or other
suspension of the period of time fixed in such notice, provided that if a
Freeze Period does not exist on account of either clause (ii) or (iii), a
Freeze Period shall nonetheless subsequently and immediately exist if (A)
any such stay expires or is withdrawn or (B) any such withdrawal,
standstill, tolling or other suspension by its terms ceases to be in effect
or otherwise terminates; or
(c) the obligor of any Medicaid Receivable, Medicare Receivable
or VA Receivable (or any agent thereof) collects a payment of any PPS
Overpayment Amount by exercising a right of set-off or recoupment (or any
similar right) against its obligations on account of any such Receivable
or, on account of any demand by such an obligor or agent for payment by a
date certain of any PPS Overpayment Amount (after giving effect to any
negotiations with such obligor or agent prior to such date certain), any
Vencor Company pays or will be, on the day following any date of
determination, obligated to pay any PPS Overpayment Amount, and the
cumulative amount of all PPS Overpayment Amounts so collected by exercise
of the right of set-off, recoupment or similar right from or paid by the
Vencor Companies, in the aggregate, or that the Vencor Companies, in the
aggregate, are obligated to pay during the period from March 10, 1999 to
the date of determination (without duplication but including in all cases
any amounts paid or payable pursuant to the April 21, 1999 letter from
Mutual of Omaha Insurance Company (the "MOIC Letter")) exceeds $10,000,000;
or
(d) the trustee under the 1998 Subordinated Note Indenture or
Persons purporting to constitute the holders of at least 25% of the
outstanding 1998 Subordinated Notes give notice accelerating the maturity
of the 1998 Subordinated Notes or such
2
<PAGE>
trustee or Persons purporting to be the holders of 10% or more of the
principal amount of the 1998 Subordinated Notes commence legal proceedings
to collect any unpaid amount of principal of or interest on the 1998
Subordinated Notes and in any such case the Required Basic Lenders
determine (which they may do in their sole and absolute discretion) that a
Freeze Period is to exist, provided that any such determination may be
successively rescinded or re-instated by a subsequent determination of the
Required Basic Lenders (who need not be the same Basic Lenders and who may
do so in their sole and absolute discretion).
"Lease Accounting Issue" means the circumstance that, in the absence
of an amendment to the Master Lease Agreements of the nature described in
the last sentence of Section 2(a), under generally accepted accounting
principles, the Master Lease Agreements should have been treated as capital
leases in the preparation of Vencor's financial statements as a consequence
of the provisions in Section 16.4 thereof.
"March 10 Meeting Materials" means the written materials prepared by
or on behalf of Vencor and distributed to the Persons attending the lender
meeting held by Vencor on March 10, 1999 at such meeting.
"May 20 Meeting Materials" means the written materials prepared by or
on behalf of Vencor and distributed to the Persons attending the lender
meeting held by Vencor on May 20, 1999 at such meeting.
"July 20 Meeting Materials" means the written materials prepared by or
on behalf of Vencor and distributed to the Persons attending the lender
meeting held by Vencor on July 20, 1999 at such meeting.
"PPS Overpayment Amount" means any amount that constitutes a liability
of a Vencor Company to a federal or state governmental authority on account
of hospital and skilled nursing facility PIP overpayments made to it, as
described in the March 10 Meeting Materials (but including amounts accrued
after December 31, 1998).
Section 2. Certain Waivers. (a) The Lenders hereby waive (including
for purposes of Section 9.02 of the Credit Agreement but, in the case of
clauses (iv) and (v), subject to Section 9) any Default that:
(i) may have occurred or occurs as a result of Vencor failing to be
in compliance with the provisions of Article 6 of the Credit
Agreement;
(ii) occurs as a result of any Vencor Company failing to pay any
rent or other sum payable to any Ventas Company under or pursuant to
the terms of any Master Lease Agreement when the same becomes due and
payable;
3
<PAGE>
(iii) occurred as a result of the Borrower's failure to make the
interest payment on the 1998 Subordinated Notes due on May 1,1999
(including by way of an Event of Default described in clause (h) of
Section 9.03 of the Credit Agreement, but not including an Event of
Default arising under clause (p) of Section 9.02 of the Credit
Agreement on account of the Facility B Loans having been declared
immediately due and payable, even if such acceleration is based solely
or in part on such failure to pay);
(iv) may have occurred as a result of the Borrower at any time
prior to the date hereof having made or been deemed to have made the
representation and warranty set forth in Section 4.05(d) of the Credit
Agreement without qualification by reference to the circumstances
described in any of the Disclosure Materials and the Lease Accounting
Issue;
(v) may have occurred as a result of the Borrower at any time
prior to the date hereof having made or been deemed to have made the
representations and warranties set forth in Sections 4.05(b), 4.05(c),
4.06, 4.09 and 4.14 and such representations and warranties, in light
of the circumstances described in any of the Disclosure Materials or
the Lease Accounting Issue, having been incorrect in material respects
when made or deemed made; and
(vi) occurs by reason of Vencor failing timely to deliver any
financial statements or related certificates pursuant to Section 5.01
of the Credit Agreement.
The Lenders also agree that any amendment of any Master Lease Agreement to
delete Section 16.4 thereof would not constitute a violation of Section 7.11(b)
of the Credit Agreement.
(b) The foregoing waivers shall be effective solely during the
period ending 5:00 P.M. (Eastern time) on August 27, 1999 (the "Waiver
Period").
Section 3. Revolving Credit Facility. (a) The Revolving Credit
Commitments were permanently ratably reduced to an aggregate amount of
$125,000,000 pursuant to Waiver No. 2 and were further permanently
ratably reduced to an aggregate amount of $80,000,000 pursuant to
Waiver No. 3.
(b) The maximum Aggregate LC Exposure set forth in Section
2.07(b)(i) of the Credit Agreement was permanently reduced to
$30,000,000 pursuant to Waiver No. 2. In addition to the limit on
expiry dates set forth in Section 2.07(c) of the Credit Agreement, no
Letter of Credit issued or extended during the Waiver Period shall
have an expiry date when issued or so extended later than one year
from the date of issuance or the expiry date in effect immediately
prior to such extension, as the case may be.
4
<PAGE>
(c) The requirements of clause (d) of Section 3.02 of the Credit
Agreement are hereby waived during the Waiver Period to the limited
extent that (i) the representation and warranty set forth in Section
4.05(d) is not true solely on account of the circumstances described
in any of the Disclosure Materials or the Lease Accounting Issue or
(ii) the representations and warranties set forth in Sections 4.05(b),
4.05(c), 4.06, 4.09 and 4.14, in light of the circumstances described
in any of the Disclosure Materials or the Lease Accounting Issue, are
incorrect in material respects, and any representation or warranty
made or deemed made by the Borrower on or after the date hereof during
the Waiver Period pursuant to Section 3.02 of the Credit Agreement
shall be deemed qualified to such extent.
Section 4. Borrowings. (a) The Borrower agrees that during the period
from the date hereof until 5:30 P.M. (New York City time) on August 27,
1999, it will not give any Notice of Borrowing for Swingline Loans or
Revolving Credit Loans in an amount in excess of its actual cash needs in
the ordinary course of business (net of other sources of fluids available
or expected to be available to it, including previous Borrowings) during
the three-day period beginning with the related date of Borrowing, for
amounts it actually intends to pay and determined consistent with the
Borrower's historical cash management practices (it being agreed that such
practices may need to take into account any changes in fluids availability
made by the Vencor Companies' cash management banks as a result of Vencor'
5 current financial condition), as certified in reasonable detail
(including a breakdown by category of the expenses or other amounts to be
paid during such periods) by the Borrower's Chief Financial Officer or
Treasurer in a certificate accompanying such Notice of Borrowing, provided
that:
(i) if the amount so determined is less than $1,000,000, such
Borrowing may be in the amount of $1,000,000;
(ii) the Borrower will not make any Borrowing for the purpose of
making payment of any rent or other sum payable to any Ventas
Company under a Master Lease Agreement except on the date a
Vencor Company is actually going to make such payment (as
certified by the Borrower's Chief Financial Officer or
Treasurer in the certificate accompanying the related Notice
of Borrowing), and the requirement to make any such payment
shall be disregarded when determining the Borrower's actual
cash needs on any day prior to such day;
(iii) the maximum amount of Swingline Borrowings and Revolving
Credit Borrowings and Aggregate LC Exposure that may be
outstanding during the Waiver Period may not exceed
$55,000,000 (determined without including the Aggregate LC
Exposure on account of Letters of Credit outstanding on the
date of Waiver No. 1 (and any extensions or concurrent
replacements thereof that do not increase the amount
thereof)); and
5
<PAGE>
(iv) during any Freeze Period, the Borrower will not give any
Notice of Borrowing or request the issuance of any Additional
Letter of Credit other than for purposes of extending or
concurrently replacing, without any increase in the amount
thereof, any Letter of Credit that was outstanding on the date
of Waiver No. 1 (or any previous extension or concurrent
replacement thereof), and during any Freeze Period neither the
Revolving Credit Lenders nor the Swingline Bank nor any LC
Issuing Bank shall have any obligation to fund any Borrowing
or issue any Additional Letter of Credit (other than as so
qualified) (whether or not the related Notice of Borrowing or
notice of issuance was given before or during such Freeze
Period), provided that the foregoing does not affect the
rights of the Swingline Bank and the obligations of the
Revolving Credit Lenders under Section 2.08(i) of the Credit
Agreement.
(b) The Borrower further agrees that:
(i) all Borrowings made pursuant to this Section 4 shall be made
and remain outstanding solely as Base Rate Borrowings;
(ii) any Notice of Borrowing for a Borrowing of Revolving Credit
Loans during the Waiver Period shall be given not later than
Noon (Eastern time) on the date of such Borrowing and any
Notice of Swingline Borrowing during the Wavier Period shall
be given not later than 1:00 P.M. (Eastern time) on the date
of the related Swingline Borrowing;
(iii) during the Waiver Period and at any time thereafter when any
Default has occurred and is continuing, the Applicable Margin,
LC Fee Rate and Commitment Fee Rate shall always be determined
as if Level IX were applicable, regardless of the actual
Leverage Ratio;
(iv) during the Waiver Period and at any time thereafter when any
Default has occurred and is continuing, interest on all Base
Rate Loans shall be payable on the 22nd day of each month
rather than quarterly and letter of credit fees payable
pursuant to Section 2.07(h) of the Credit Agreement and
commitment fees payable pursuant to Section 2.09 of the Credit
Agreement shall be payable on the 22nd day of each month
instead of quarterly (and on each other date specified in the
applicable section); and
(v) during the Waiver Period and at any time thereafter when any
Default has occurred and is continuing, the Borrower may not
elect
6
<PAGE>
any Interest Period for a Fixed Rate Loan pursuant to Section
2.06 other than one month or 30 days, as the case may be.
(c) The provisions of Section 4(a) (and for purposes thereof of any defined
term used therein) may not be amended, waived, supplemented or modified
in any respect without the written consent of Lenders having
outstanding Revolving Credit Exposures and/or outstanding Facility A
Loans in an aggregate amount (excluding accrued interest) equal to at
least 75% of the sum of (x) the aggregate amount of the Revolving
Credit Exposures at such time and (y) the aggregate outstanding
principal amount of Facility A Loans at such time.
Section 5. Additional Covenants. Each of Vencor and the Borrower
agrees that, so long as any Lender has any Credit Exposure under the Credit
Agreement or any interest or fee accrued thereunder remains unpaid:
(a) Vencor will deliver the following information to the
Administrative Agent:
(i) notice by facsimile immediately, and in any event on the
same day, if any Vencor Company either pays or fails to pay any
rent or other amount payable to any Ventas Company under any
Master Lease Agreement when due (without regard for any grace
period);
(ii) notice by facsimile immediately, and in any event on the
same day, if the Borrower either makes or fails to make any
payment of principal of or interest on the 1998 Subordinated
Notes when due (without regard for any grace period);
(iii) notice by facsimile promptly, and in any event on the same
day, of receipt from any Ventas Company of(1) a notice pursuant
to Section 16.1(b) of any Master Lease Agreement demanding
payment of any rent or other sum payable under such Master Lease
Agreement that was not paid when due, or (2) a notice pursuant
to the penultimate sentence of Section 16.1 of any Master Lease
Agreement terminating such Master Lease Agreement, in each case
together with a copy of such notice;
(iv) notice by facsimile promptly, and in any event on the same
day, of receipt from the trustee under the 1998 Subordinated
Note Indenture or Persons purporting to constitute the holders
of at least 25% of the outstanding 1998 Subordinated Notes of
notice accelerating the maturity of the 1998 Subordinated Notes,
together with a copy of such notice, or of knowledge that such
trustee or Persons purporting to be the holders of 10% or more
of the principal amount of the 1998 Notes
7
<PAGE>
have commenced legal proceedings to collect any unpaid amount of
principal of or interest on the 1998 Subordinated Notes;
(v) notice by facsimile promptly, and in any event on the same
day, of (1) receiving notice or otherwise becoming aware that
the obligor of any Medicaid Receivable, Medicare Receivable or
VA Receivable (or any agent thereof) has collected a payment of
any PPS Overpayment Amount by exercising a right of set-off or
recoupment (or any similar right) against its obligations on
account of such Receivable, (2) receipt of a demand by such an
obligor or agent for payment by a date certain of any PPS
Overpayment Amount or (3) making of a payment pursuant to the
MOIC Letter, specifying the amount of such payment so collected
or made or amount demanded and the cumulative amount (without
duplication) of all such payments made by, or so demanded or so
collected from, the Vencor Companies, in the aggregate, during
the period from March 10, 1999 to the date of such notice and,
in any event, of determining that a Freeze Period exists
pursuant to clause (c) of the definition thereof;
(vi) by facsimile no later than 5:00 P.M. (Eastern time) on
each Tuesday (or, if such day is not a Domestic Business Day,
the next succeeding Domestic Business Day), a report setting
forth for each day (a "Census Measurement Day") during the
seven-day period ending on the day preceding such report the
10-day moving average of the daily census in (1) its hospitals
(the "Hospital Daily Census") and (2) its nursing homes (the
"Nursing Homes Daily Census") (all such calculations to be made
in a manner consistent with Vencor's historical practices in
compiling and reporting such data); and
(vii) for each month (with sufficient copies for each Lender) a
copy of Vencor's monthly management operating report (including
financial statements) for such month, to be in substantially the
same format and level of detail as the prior period report
delivered to the Agents in connection with the negotiation of
Waiver No. 2 (with such exclusions and variations as the Agents
may approve) and to be delivered within 45 days after the end of
such month if it is the last month of a fiscal quarter and in
all other cases within 30 days after the end of such month.
(b) For each Census Measurement Day, the Hospital Daily Census shall
be no less than 2,500 and the Nursing Home Daily Census shall be no less
than
29,000.
Section 6. Miscellaneous Other Provisions. (a) The rights of each
Lender Party pursuant to clause (ii) of Section 12.03(a) of the Credit
Agreement shall be determined
8
<PAGE>
without giving effect to this Waiver No. 4 or the Prior Waivers. Without
limiting the generality of Section 12.03(a), the Borrower agrees that it
will pay on demand all statements for fees and expenses (which may include
amounts on account) of any financial, accounting or valuation advisers or
special counsel retained by the Agents or the steering committee for the
Lenders, as well as all out-of-pocket expenses incurred by either Agent or
any member of the steering committee in connection with it acting as such.
(b) The right of the Borrower pursuant to Section 12.06(c) to consent
to any Assignee and the related assignment shall be determined without
giving effect to this Waiver No. 4, and any Assignee and the related
assignment shall always (including any time after expiration of the Waiver
Period) be subject to the consent of the Administrative Agent regardless of
whether any Event of Default has occurred and is continuing.
(c) The amount specified in Section 9.02(k) of the Credit Agreement
was permanently reduced from $20,000,000 to $1,000,000 pursuant to Waiver
No. 2.
(d) The Documentation Agent, in its capacity as Leasehold Mortgagee
with respect to the Master Lease Agreements, was authorized and directed by
Waiver No. 3 to confirm that the provisions of the May 8 Amendment No. 2 to
the Second Standstill Agreement between Vencor and Ventas, bearing on
certain cure rights of the Vencor Companies under the Master Lease
Agreements, shall neither shorten nor extend the cure period for the
Leasehold Mortgagee pursuant to Section 22.4 of the Master Lease
Agreements. The Documentation Agent, in such capacity, is authorized and
directed to deliver similar confirmations with respect to successive
similarly structured amendments to such Second Standstill Agreement.
Section 7. Lapse of Waiver. Vencor agrees that its failure to comply
with any provision of this Waiver No. 4 (which shall include the failure,
for whatever reason, of the Hospital Daily Census or the Nursing Home Daily
Census to be at or above the applicable level specified in Section 5(b))
shall cause the waivers granted hereby to cease to be in effect (i) in the
case of clauses (i) through (v) of Section 5(a), if such failure continues
for one Domestic Business Day (without the requirement of any notice from
the Administrative Agent or any Lenders), (ii) in the case of clause (vii)
of Section 5(a), if such failure continues for more than five days after
notice from the Administrative Agent given at the direction of the Required
Basic Lenders and (iii) in all other cases, immediately and without the
requirement of any prior notice from or further action on the part of any
Lender or the Agents.
Section 8. Representations Correct; No Default. Vencor represents and
warrants that, except as expressly waived hereby, on and as of the date
hereof (i) the representations and warranties contained in the Credit
Agreement are true as though made on and as of the date hereof and (ii) no
Default has occurred and is continuing. Vencor further represents and
warrants that:
9
<PAGE>
(a) the financial statements in the 1998 10-K fairly present in
all material respects, in conformity with generally accepted accounting
principles, the consolidated financial position of Vencor and its
consolidated subsidiaries at the end of such year and their consolidated
results of operations and cash flows for such year;
(b) the financial statements in the 1st Quarter 1O-Q fairly
present in all material respects, in conformity with generally accepted
accounting principles (subject to normal year-end adjustments and the
absence of footnotes), the consolidated financial position of Vencor and
its consolidated subsidiaries at the end of such quarter and their
consolidated results of operations for such quarter; and
(c) the information (other than projections and forecasts)
included in the July 20 Meeting Materials, when taken as a whole together
with the other Disclosure Materials, is true and accurate in all material
respects or based on reasonable estimates, and not incomplete by omitting
to state any fact necessary to make such information, when taken as a whole
together with the other Disclosure Materials, not misleading in any
material respect in light of the circumstances under which such information
was provided. The projections and forecasts included in the July 20 Meeting
Materials were based on reasonable assumptions and, when prepared,
represented a reasonable estimate of the future performance of the Vencor
Companies (subject to any express disclaimers set forth in the July 20
Meeting Materials).
Section 9. Counterparts; Effectiveness. (a) This waiver may be signed
in any number of counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
(b) This Waiver No. 4 shall become effective as of the date
hereof when the Documentation Agent shall have received duly executed
counterparts hereof signed by Vencor, the Borrower and the Required Basic
Lenders (or, in the case of any Lender as to which an executed counterpart
shall not have been received, the Documentation Agent shall have received
telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such Lender).
(c) Promptly after this Waiver No. 4 has become effective, the
Borrower shall pay to the Administrative Agent, in immediately available
funds, for the account of each Basic Lender that has evidenced its
agreement hereto as provided in Section 9(b) by 5:00 P.M. (Eastern time) on
the later of (i) July 29, 1999 and (ii) the date the Documentation Agent
issues a notice to the Basic Lenders saying that this Waiver No. 4 has
become effective, a waiver fee in an amount equal to 0.10% of the sum of
(A) the Revolving Credit Commitment of such Lender and (B) the aggregate
outstanding principal amount of the Facility A Loans of such Lender (as at
the opening of business on the date hereof).
(d) Except as expressly set forth herein, the waivers contained
herein shall not constitute a waiver or amendment of any term or condition
of the Credit
10
<PAGE>
Agreement or any other Financing Document, and all such terms and
conditions shall remain in full force and effect and are hereby ratified
and confirmed in all respects. Each of Vencor and the Borrower understands
and accepts the interim nature of the waivers provided hereby, and agrees
that no failure or delay by the Lender Parties, or any of them, in
exercising any right, power or privilege under this Waiver No. 4, any Prior
Waiver or any Financing Document, or any other action taken or not taken or
statement made during the period that any Prior Waiver was in effect or
this Waiver No. 4 is in effect shall operate as a waiver thereof or
obligate any Lender Party to agree to an extension of the waivers granted
hereby or any other waivers, nor shall any single or partial exercise of
any such right, power or privilege preclude any other or further exercise
of thereof or of any other right, power or privilege. The waivers set forth
in clauses (iv) and (v) of Section 2(a) are solely for the purpose of
clarifying the ability of the Borrower during the Waiver Period, subject to
the terms hereof, to continue to have available to it Revolving Credit
Loans, Swingline Loans and Additional Letters of Credit, and do not
constitute a waiver, release or other diminution of any claim, cause of
action or other right that any Lender Party may have against any Person on
account of or in any way based on any representation and warranty made
under any Financing Document having been incorrect in any respect when made
or deemed made, all of which claims, causes of action and other rights are
expressly preserved.
Section 10. Governing Law. THIS WAIVER NO. 4 SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver No. 4 to be
duly executed by their respective authorized officers as of the day and year
first above written.
VENCOR OPERATING, INC.
By:
---------------------------
Name:
Title:
VENCOR, INC.
By:
---------------------------
Name:
Title:
11
<PAGE>
LENDERS
-------
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By:
----------------------------
Name:
Title:
APPALOOSA INVESTMENT LIMITED PARTNERSHIP
By:
----------------------------
Name:
Title:
BANK OF AMERICA NT & SA
By:
----------------------------
Name:
Title:
BANK OF AMERICA, NA
By:
----------------------------
Name:
Title:
BANK OF NEW YORK
By:
----------------------------
Name:
Title:
12
<PAGE>
BANK OF NOVA SCOTIA
By:
----------------------------
Name:
Title:
BANKERS TRUST
By:
----------------------------
Name:
Title:
BANQUE PARIBAS
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
BEAR STERNS & CO INC
By:
----------------------------
Name:
Title:
CHASE MANHATTAN
By:
----------------------------
Name:
Title:
13
<PAGE>
COMERICA BANK
By:
----------------------------
Name:
Title:
COMERICA BANK
By:
----------------------------
Name:
Title:
CREDIT LYONNAIS NY BANK
By:
----------------------------
Name:
Title:
CREDITANSTALT
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
14
<PAGE>
FERNWOOD ASSOCIATES LP
By:
----------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By:
----------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
----------------------------
Name:
Title:
GENERAL ELECTRIC CAPITAL
By:
----------------------------
Name:
Title:
GOLDMAN SACHS CREDIT PARTNERS LP
By:
----------------------------
Name:
Title:
15
<PAGE>
HALCYON DISTRESSED SECURITIES LP
By:
----------------------------
Name:
Title:
INDUSTRIAL BANK OF JAPAN
By:
----------------------------
Name:
Title:
LEHMAN COMMERCIAL PAPER
By:
----------------------------
Name:
Title:
PNC BANK NA
By:
----------------------------
Name:
Title:
SUMITOMO BANK
By:
----------------------------
Name:
Title:
16
<PAGE>
T. ROWE PRICE RECOVERY FUND II LP
By:
----------------------------
Name:
Title:
VAN KAMPEN AMERICAN CAPITAL SENIOR INCOME TRUST
By:
----------------------------
Name:
Title:
WACHOVIA BANK OF GA
By:
----------------------------
Name:
Title:
DEPARTMENT OF PENSIONS
CITY OF LOS ANGELES
By:
----------------------------
Name:
Title:
17
<PAGE>
EXHIBIT 10.3
RETENTION AGREEMENT
-------------------
THIS RETENTION AGREEMENT ("Agreement") is made and entered into this 23/rd/
day of April 1999 by and between __________________ ("Employee") and VENCOR,
INC., a Delaware corporation ("Vencor" or "the Company").
RECITALS:
--------
A. Vencor recognizes the substantial contribution made by Employee to the
Company and desires to encourage Employee to remain employed by the Company for
a minimum period commencing on the date hereof and continuing through December
31, 1999 (the "Minimum Period").
B. Employee is willing to remain an employee of Vencor for the Minimum
Period in exchange for certain consideration, set forth below, the receipt and
sufficiency of which is hereby acknowledged.
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENT:
---------
1. Employment. Employee agrees to remain employed by the Company for the
----------
Minimum Period, subject to the provisions of Sections 5 and 6 below (the
"Employment Term").
2. Put Right. Vencor agrees that, effective the date hereof, Employee has
---------
the right to put the 6% Series A Non-Voting Convertible Preferred Stock (the
"Preferred Stock") owned by Employee back to the Company at par at any time
following the expiration of the fifth anniversary of the sale of the Preferred
Stock (the "Put Right").
3. Right of Offset. In the event that the Company is unable or unwilling
---------------
to discharge its obligation to purchase the Preferred Stock following Employee's
exercise of the Put Right, Vencor agrees that any amount due to Employee
pursuant to the Put Right shall be treated as an offset against any amounts owed
by Employee to the Company under his or her Promissory Note dated September 28,
1998 (the "Preferred Stock Loan").
4. Interest. Vencor further agrees that if the average closing price of
--------
the Company's common stock for the 90 days prior to any interest payment date
for interest due under the Preferred Stock Loan is less than $8.00, such
interest payment shall be forgiven. For purposes of this Section, the $8.00
stock price shall be equitably adjusted as required to reflect any changes in
the Company's capital structure on terms consistent with those adjustments
contemplated in the Company's Restated Certificate of Incorporation as of May 1,
1998.
5. Deemed Employment. Employee shall forfeit the Put Right if he or she
-----------------
leaves the employ of the Company prior to December 31, 1999; provided, however,
Employee shall be deemed to have satisfied the employment requirement of this
Agreement if prior to December 31, 1999, Employee's employment is terminated by
the Company for other than
<PAGE>
"Cause." For purposes of this Agreement, "Cause" shall be defined as the
Employee's (i) conviction of or plea of nolo contendere to a crime involving
moral turpitude; or (ii) willful and material breach by Employee of his duties
and responsibilities, which is committed in bad faith or without reasonable
belief that such breaching conduct is in the best interests of the Company and
its affiliates, but with respect to (ii) only if the Board adopts a resolution
by a vote of at least 75% of its members so finding after giving the Employee
and his attorney an opportunity to be heard by the Board.
6. Window Period. If any "Window Period," as defined in Employee's
-------------
Change-in-Control Severance Agreement (the "Severance Agreement"), occurs during
the "Employment Term," such "Window Period" shall be deemed to have occurred
immediately following the Employment Term for purposes of the Severance
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR, INC.
By:_________________________
_____________________________
Employee
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 19th day of April, 1999
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Owen E. Dorsey (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Executive will be employed by the Company, a wholly-owned
subsidiary of Vencor, Inc. ("Parent"), and the parties hereto desire to provide
for the terms of Executive's employment by the Company; and
WHEREAS, the Board of Directors of Parent (the "Board") have
determined that it is in the best interests of the Company to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and Executive agree as follows:
1. Employment. The Company hereby agrees to employ Executive and
----------
Executive hereby agrees to be employed by the Company on the terms and
conditions herein set forth. The initial term of this Agreement shall be for a
one-year period commencing on the Effective Date (the "Term"). The Term shall
be automatically extended by one additional day for each day beyond the
Effective Date that the Executive remains employed by the Company until such
time as the Company elects to cease such extension by giving written notice of
such election to the Executive. In such event, the Agreement shall terminate on
the first anniversary of the effective date of such election notice.
2. Duties. Executive is engaged by the Company as Chief
------
Administrative Officer. The Executive's responsibilities include the
administration of human resources, corporate communications, governmental and
public relations and all administrative support functions for the Company's
corporate office. Executive will report directly to the Chief Executive Officer
and President of the Company.
3. Extent of Services. Executive, subject to the direction and
------------------
control of the Board, shall have the power and authority commensurate with his
executive status and necessary to perform his duties hereunder. During the
Term, Executive shall devote his entire working time, attention, labor, skill
and energies to the business of the Company, and shall not, without the consent
of the Company, be actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or other pecuniary
advantage.
<PAGE>
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than Two Hundred Twenty
Five Thousand Dollars ($225,000.00) per year payable in equal installments
in accordance with the Company's normal payroll procedures. Executive may
receive increases in his Base Salary from time to time, as approved by the
Board.
(b) In addition to Base Salary, Executive will be eligible to receive
a minimum bonus of 30%, a target bonus of 60%, and a maximum bonus of 75%,
of Executive's Base Salary based upon goals established by the Executive
Compensation Committee of the Board. Executive's bonus for 1999 will be
prorated based upon the Effective Date. At a minimum, Executive will be
entitled to a 30% bonus of his Base Salary for 1999 prorated based on the
Effective Date. Executive also will be eligible to receive other incentive
compensation as the Board may approve from time to time.
(c) During Executive's first three months of employment, the Company
will reimburse Executive for the difference between the COBRA payments the
Executive makes to his former employer and the amount the Executive would
have paid under the Company's plans.
(d) The Company will reimburse Executive for all reasonable temporary
living expenses incurred by Executive for the first six months following
the Effective Date.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit, welfare benefit (including, without limitation,
medical, dental, disability and group life insurance coverages) and fringe
benefit plans from time to time in effect for Executives of the Company and
its affiliates following the Company's standard waiting periods.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacations in a
reasonable
2
<PAGE>
manner. The Executive may also be entitled to such other leave, with or
without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
(b) Cause. The Company may terminate Executive's employment during
-----
the Term for Cause. For purposes of this Agreement, "Cause" shall mean the
Executive's (i) conviction of or plea of nolo contendere to a crime
---- ----------
involving moral turpitude; or (ii) willful and material breach by Executive
of his duties and responsibilities, which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best
interests of the Company and its affiliates, but with respect to (ii) only
if the Board adopts a resolution by a vote of at least 75% of its members
so finding after giving the Executive and his attorney an opportunity to be
heard by the Board. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon advice of
counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best interests of
the Company.
(c) Good Reason. Executive's employment may be terminated by
-----------
Executive for Good Reason. "Good Reason" shall exist upon the occurrence,
without Executive's express written consent, of any of the following
events:
(i) the Company shall assign to Executive duties of a substantially
nonexecutive or nonmanagerial nature;
3
<PAGE>
(ii) an adverse change in Executive's status or position as an
executive officer of the Company, including, without limitation, an
adverse change in Executive's status or position as a result of a
diminution in Executive's duties and responsibilities (other than any
such change directly attributable to the fact that the Company is no
longer publicly owned);
(iii) the Company shall (A) materially reduce the Base Salary or
bonus opportunity of Executive, or (B) materially reduce his benefits
and perquisites (other than pursuant to a uniform reduction applicable
to all similarly situated executives of the Company);
(iv) the Company shall require Executive to relocate Executive's
principal business office more than 30 miles from its location on the
Effective Date; or
(v) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 9(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event
shall not constitute "Good Reason" provided that such event is remedied
within 60 days after receipt of such written notice.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by Executive for Good Reason, shall be communicated by Notice of
Termination given in accordance with this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the
provision so indicated and (iii) specifies the intended termination date
(which date, in the case of a termination for Good Reason, shall be not
more than thirty days after the giving of such notice). The failure by
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company, respectively,
hereunder or preclude Executive or the Company, respec-
4
<PAGE>
tively, from asserting such fact or circumstance in enforcing Executive's
or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
-------------------
Executive's employment is terminated by the Company for Cause, or by
Executive for Good Reason, the later of the date specified in the Notice of
Termination or the date that is one day after the last day of any
applicable cure period, (ii) if Executive's employment is terminated by the
Company other than for Cause or Disability, or Executive resigns without
Good Reason, the Date of Termination shall be the date on which the Company
or Executive notified Executive or the Company, respectively, of such
termination and (iii) if Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
Executive or the Disability Effective Date, as the case may be.
7. Obligations of the Company Upon Termination. Following any
-------------------------------------------
termination of Executive's employment hereunder, the Company shall pay Executive
his Base Salary through the Date of Termination and any amounts owed to
Executive pursuant to the terms and conditions of the Executive benefit plans
and programs of the Company at the time such payments are due. In addition,
subject to Executive's execution of a general release of claims in form
satisfactory to the Company, Executive shall be entitled to the following
additional payments:
(a) Death or Disability. If, during the Term, Executive's employment
-------------------
shall terminate by reason of Executive's death or Disability, the Company
shall pay to Executive (or his designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus (as defined below)
Executive would have received for the year of termination of employment.
Such amount shall be paid within 30 days of the date when such amounts
would otherwise have been payable to the Executive if Executive's
employment had not terminated.
(b) Good Reason; Other than for Cause. If, during the Term, the
---------------------------------
Company shall terminate Executive's employment other than for Cause (but
not for Disability), or the Executive shall terminate his employment for
Good Reason:
(1) Within 14 days of Executive's Date of Termination, the
Company shall pay to Executive (i) the prorated portion of the Target
Bonus and Performance Share Award for Executive for the year in which
the Date of Termination occurs, and (ii) an amount equal to 1.0 times
the sum of (x) the Executive's Base Salary and Target Bonus as of the
Date of Termination, and (y) the number of performance shares awarded
to the Executive pursuant to the Vencor, Inc. 1998 Incentive
Compensation Plan
5
<PAGE>
(the "1998 Plan") in respect of the year in which such Date of
Termination occurs (without regard to any acceleration of the award
for such year), assuming for such purpose that all performance
criteria applicable to such award with respect to the year in which
such Date of Termination occurs were deemed to be satisfied (the
"Performance Share Award").
For purposes of this Agreement: "fair market value" shall have the
meaning ascribed to such term under the 1998 Plan; and "Target Bonus"
shall mean the full amount of target bonus and/or performance
compensation (other than Base Salary and awards under the 1998 Plan)
that would be payable to the Executive, assuming all performance
criteria on which such bonus and/or performance compensation are based
were deemed to be satisfied, in respect of services for the calendar
year in which the date in question occurs.
(2) For a period of one year following the Date of Termination,
the Executive shall be treated as if he had continued to be an
Executive for all purposes under the Parent's Health Insurance Plan
and Dental Insurance Plan; or if the Executive is prohibited from
participating in such plan, the Company or Parent shall otherwise
provide such benefits. Following this continuation period, the
Executive shall be entitled to receive continuation coverage under
Part 6 of Title I or ERISA ("COBRA Benefits") treating the end of this
period as a termination of the Executive's employment if allowed by
law.
(3) For a period of one year following the Date of Termination,
Parent shall maintain in force, at its expense, the Executive's life
insurance in effect under the Vencor, Inc. Voluntary Life Insurance
Benefit Plan as of the Date of Termination.
(4) For a period of one year following the Date of Termination,
the Company or Parent shall provide short-term and long-term
disability insurance benefits to Executive equivalent to the coverage
that the Executive would have had he remained employed under the
disability insurance plans applicable to Executive on the Date of
Termination. Should Executive become disabled during such period,
Executive shall be entitled to receive such benefits, and for such
duration, as the applicable plan provides.
(5) To the extent not already vested pursuant to the terms of
such plan, the Executive's interests under the Vencor Retirement
Savings Plan shall be automatically fully (i.e., 100%) vested, without
regard to
6
<PAGE>
otherwise applicable percentages for the vesting of employer matching
contributions based upon the Executive's years of service with the
Company.
(6) Parent shall adopt such amendments to its Executive benefit
plans, if any, as are necessary to effectuate the provisions of this
Agreement.
(7) Executive shall be credited immediately with an additional
one year of vesting for purposes of all outstanding stock option
awards and restricted stock awards and Executive will have an
additional one year following the Date of Termination in which to
exercise such stock options.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
7
<PAGE>
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, or any
business of the Company for which Executive's services are principally
performed, to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor
to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
10. Other Severance Benefits. Executive hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Executive
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company or their respective affiliates that
provide for severance payments or benefits upon a termination of employment,
other than the Change in Control Severance Agreement between the Company and
Executive dated as of April 19, 1999 (the "Severance Agreement"); provided that
--------
any payments payable to Executive hereunder shall be offset by any payments
payable under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
8
<PAGE>
If to Executive:
---------------
Owen E. Dorsey
One Vencor Place
680 South Fourth Street
Louisville, KY 40202
If to Company:
-------------
Vencor Operating, Inc.
One Vencor Place
680 South Fourth Street
Louisville, KY 40202
Attn: General Counsel
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By:/s/ Edward L. Kuntz
-------------------
Edward L. Kuntz
Chief Executive Officer and
President
Solely for the purpose
of Section 7
VENCOR, INC.
By:/s/ Edward L. Kuntz
-------------------
Edward L. Kuntz
Chief Executive Officer and
President
/s/ Owen E. Dorsey
------------------
OWEN E. DORSEY
10
<PAGE>
Exhibit 10.15
AMENDMENT NUMBER 6 TO THE SECOND STANDSTILL AGREEMENT
-----------------------------------------------------
DATED APRIL 12, 1999 AND
------------------------
AMENDMENT NUMBER 5 TO THE TOLLING AGREEMENT
-------------------------------------------
DATED APRIL 12, 1999
--------------------
These Amendments dated as of August 5, 1999 are made and entered into among
Vencor, Inc., a corporation organized under the laws of Delaware, for and on
behalf of itself and its various subsidiaries and affiliates, including, without
limitation, Vencor Operating, Inc., and for and on behalf of any of their
respective successors including, without limitation, any debtor or debtor-in-
possession in a bankruptcy case commenced under Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") or any trustee appointed in any such
case (collectively, "Vencor"); and Ventas, Inc., a corporation organized under
the laws of Delaware, for and on behalf of itself and its various subsidiaries
and affiliates, including, without limitation, Ventas Realty, Limited
Partnership, and for and on behalf of any of their respective successors
including, without limitation, any debtor or debtor-in-possession in a
bankruptcy case commenced under the Bankruptcy Code or any trustee appointed in
any such case (collectively, "Ventas").
Morgan Guaranty Trust Company of New York (the "Collateral Agent") is a
signatory hereto for the sole purpose of providing the confirmations and
agreements referred to in paragraph 1 hereof.
WHEREAS, Vencor and Ventas are in the process of attempting to resolve any
and all existing and potential claims that Vencor has asserted or might in the
future assert against Ventas (the "Vencor Claims"), the validity of which Ventas
has disputed, and any and all existing and potential claims that Ventas has
asserted or might in the future assert against Vencor (the "Ventas Claims"), the
validity of which Vencor has disputed (the Vencor Claims and the Ventas Claims
are collectively referred to herein as the "Claims");
WHEREAS, to that end Vencor and Ventas are parties to that certain Second
Standstill Agreement dated April 12, 1999 (as modified and amended to date, the
"Second Standstill Agreement") and that certain Tolling Agreement dated April
12, 1999 (as modified and amended to date, the "Tolling Agreement");
WHEREAS, on Tuesday, July 6, 1999, by agreement of the parties, Ventas was
deemed to have delivered five notices of non-payment of rent (the "July Non-
Payment Notices") pursuant to paragraph 16.1(b) of the agreements referenced in
the first paragraph of each of the July Non-Payment Notices, such agreements
being collectively defined in the Second Standstill Agreement as the Five
Leases;
WHEREAS, the parties hereto wish to extend the cure period referred to in
Section 16.1 of the Five Leases with respect to the July Non-Payment Notices, to
extend certain other deadlines, to specify the cure period referred to in the
August Non-Payment Notices (as defined
<PAGE>
below), and to agree to certain other matters to permit continued discussions
concerning a consensual resolution of their differences, subject to the
conditions set forth below;
NOW, THEREFORE, in consideration of the premises and other good cause and
adequate consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Extension of the Second Standstill Period and the Cure Period in the Five Leases
1. The fifth numbered paragraph of the Second Standstill Agreement shall
be deleted and replaced with the following paragraph:
(a) Other than (i) Ventas' delivery on Friday May 7, 1999, after 5:00
p.m., by letters of T. Richard Riney, Vice President and General
Counsel of Ventas, of five notices of non-payment of rent (the
"May Non-Payment Notices") (which are now moot as a result of
Vencor's payment of Rent for the month of May 1999, in the manner
agreed to by the parties); (ii) the deemed delivery by Ventas of
notices of non-payment of rent as a result of Vencor's non-
payment or late payment of rent under the Five Leases for the
month of June 1999 (the "June Non-Payment Notices") (which are
now moot as a result of Vencor's payment of Rent for the month of
June 1999, in the manner agreed to by the parties); (iii) the
deemed delivery by Ventas of similar notices of non-payment of
rent as a result of Vencor's nonpayment or late payment of rent
under the Five Leases for the month of July 1999 (the "July Non-
Payment Notices"); and (iv) the deemed delivery by Ventas of
similar notices of non-payment of rent as a result of Vencor's
non-payment or late payment of rent under the Five Leases for the
month of August 1999 (the "August Non-Payment Notices"), during
the period from the date of the Second Standstill Agreement,
April 12, 1999, through and including the earlier of (A) the
commencement by or against Vencor, as debtor, of a voluntary or
involuntary bankruptcy case under Title 11 of the United States
Code, or (B) 5:00 p.m. Eastern Daylight Savings Time on September
3, 1999 (such period being referred to herein as the "Second
Standstill Period"), neither Vencor nor Ventas will file,
commence, serve, or otherwise initiate any civil action,
arbitration proceeding, or other similar action, litigation,
case, or proceeding of any kind, character, or nature whatsoever
(an "Action") against the other or any third party, including,
without limitation, any of Vencor's or Ventas' current or former
officers, directors, or employees, arising from or relating to
the Reorganization Agreement, any Ancillary Agreement, or any of
the Five Leases, or with respect to the various disputes
identified in Vencor's March 18, 1999 letter; nor shall Ventas
exercise any rights or remedies it may have against Vencor under
any of the Five Leases (including the giving of notices of
termination pursuant to Section 16.1 of the Five Leases or any of
them) based on Vencor's late
2
<PAGE>
payment of the Rent (as that term is defined in the Five Leases)
due under the Five Leases, or based on any default arising from
or related to the disclosures made by Vencor to Ventas commencing
on or about March 30 and March 31, 1999 and continuing to the
date hereof.
(b) Notwithstanding the foregoing, the Second Standstill Period shall
immediately terminate, and Vencor and Ventas may proceed to file
such Actions as either may choose, and Ventas may proceed to
exercise such rights or remedies as it may choose under any of
the Five Leases (including the giving of notices of termination
pursuant to Section 16.1 of the Five Leases or any of them) in
the event that:
(i) prior to 5:00 p.m. Eastern Daylight Savings Time on each
date set forth on Schedule I hereto, Vencor has not paid to
Ventas, in immediately available funds, the amount set forth
on Schedule I, representing a portion of the Rent due to
Ventas under the Five Leases for the month of July 1999; or
(ii) prior to 5:00 p.m. Eastern Daylight Savings Time on August
26, 1999 and on each Business Day thereafter to and
including August 31, 1999, Vencor has not paid to Ventas the
amount, if any, by which the sum of (x) Vencor's "total cash
on hand and availability" as set forth on Vencor's receipts
and disbursement reports determined in good faith and in
accordance with Vencor's past reporting practices to Ventas
and (y) to the extent not included in (x), Vencor's
available revolving credit borrowings, exceeds $12 million
as of the end of the immediately preceding Business Day;
provided, however, that this subparagraph (ii) shall be of
no further force and effect at such time as the total
payments made by Vencor pursuant to this subparagraph (ii)
equals $3,682,525.77 (the "Final Payment Amount"); for
purposes of this agreement, "Business Day" means a day,
other than a Saturday or a Sunday, on which commercial banks
are not required or authorized to close in the City of New
York; Ventas and Vencor acknowledge that Vencor has asserted
certain claims in excess of $1 million related to the Final
Payment Amount against Ventas, and that the parties will use
their commercially reasonable efforts to resolve such
claims, and that if, but only if, such claims are resolved,
any adjustment to the Final Payment Amount in favor of
Vencor shall reduce the amount of the Final Payment Amount;
provided, however, that such adjustment shall not exceed $1
million; and provided further, that if such claims are not
so resolved or if the adjustment exceeds $1 million, the
parties shall reserve their rights with respect to such
claims; or
3
<PAGE>
(iii) prior to 5:00 p.m. Eastern Daylight Savings Time on August
31, 1999, Vencor has not paid to Ventas, in immediately
available funds, an amount equal to the Final Payment
Amount (as adjusted pursuant to subparagraph (ii) above)
less all payments made pursuant to subparagraph (ii)
above; or
(iv) prior to 5:00 p.m. Eastern Daylight Savings Time on each
Business Day of the Second Standstill Period occurring
after August 5, 1999, Vencor has not provided to Ventas a
daily cash flow statement for the month of August 1999
reflecting Vencor's daily and cumulative cash receipts,
daily and cumulative cash disbursements and cash position
and outstanding aggregate borrowings and availability
under Vencor's Revolving Credit Facility, all as of the
prior Business Day, and such failure continues for more
than one Business Day after written demand therefor by
Ventas, unless such required delivery is expressly waived
in writing by Ventas within one Business Day of the time
the report was otherwise due.
(c) Ventas further agrees that, subject to the acceleration
provisions provided for hereinbelow, if Vencor or the Leasehold
Mortgagee (as defined in the Five Leases) pays the Rent for the
month of July 1999 in the installment amounts and within five (5)
days of the installment dates provided for herein, then such
payment shall be deemed to be a timely cure, within the meaning
of Section 16.1 of the Five Leases and the July Non-Payment
Notices, and that, in such event, no Event of Default (as that
term is used in the July Non-Payment Notices and defined in the
Five Leases) shall have occurred with respect to the late payment
or non-payment of Rent for the month of July 1999.
Notwithstanding anything to the contrary contained herein, Ventas
shall not send a notice of termination pursuant to paragraph 16.1
of the Five Leases, or any of them, based upon Vencor's non-
payment or late payment of Rent for the month of July 1999 so
long as Vencor or the Leasehold Mortgagee has a right to cure or
has cured such nonpayment or late payment of Rent for the month
of July 1999. In addition, and notwithstanding anything to the
contrary contained herein, in the event Vencor shall fail to pay
any installment amount hereunder on the original installment date
specified herein, then that installment amount together with the
balance of the unpaid Rent for July 1999 shall become immediately
due and payable on and as of such date, without need for any
further notice or demand, and Vencor's and the Leasehold
Mortgagee's right to cure the non-payment or late payment of Rent
for July 1999 is and shall be limited solely to the right during
the five days after such installment date to pay the full amount
of the total unpaid Rent for July 1999. This subparagraph 5(c)
shall only apply to the July Non-Payment Notices and to the non-
payment or late payment of the July 1999 Rent under the Five
Leases.
4
<PAGE>
(d) The Collateral Agent hereby confirms to Ventas and Vencor that it
is the collateral agent for the Leasehold Mortgagee and that it
is authorized to make the confirmations and agreements contained
herein. Ventas, Vencor, and the Collateral Agent (for and on
behalf of the Leasehold Mortgagee) confirm and agree that the
period of time within which Vencor or the Leasehold Mortgagee is
entitled to cure the failure of Vencor to pay Rent for the month
of July 1999 under this agreement and the Five Leases in order to
prevent a termination of the Five Leases will expire at 5:00 p.m.
Eastern Daylight Savings Time on the fifth day after the first to
occur, if any, of the installment dates set forth above on which
the prescribed installment amount of Rent is not timely paid.
(e) Ventas, Vencor and the Collateral Agent hereby agree that (i) the
June Non-Payment Notices, copies of which are attached hereto as
Exhibits A through E, are hereby deemed for all purposes to have
been given by Ventas and received by Vencor and the Collateral
Agent as of June 6, 1999 without need for any further act or
delivery by Ventas, (ii) the July Non-Payment Notices, copies of
which are attached hereto as Exhibits F through J, are hereby
deemed for all purposes to have been given by Ventas and received
by Vencor and the Collateral Agent on and as of July 6, 1999, and
(iii) the August Non-Payment Notices, which will be provided by
Ventas and be substantially in the form of the July Non-Payment
Notices, are to be attached hereto as Exhibits K through O, are
hereby deemed for all purposes to have been given by Ventas and
received by Vencor and the Collateral Agent on and as of August
5, 1999, without need for any further act or delivery by Ventas
(except for delivery of Exhibits K through O).
(f) Ventas further agrees that if Vencor or the Leasehold Mortgagee
pays the Rent for the month of August 1999 on or before September
10, 1999, at 5:00 p.m. Eastern Daylight Savings Time, then such
payment shall be deemed to be a timely cure, within the meaning
of Section 16.1 of the Five Leases and the August Non-Payment
Notices, and that, in such event, no Event of Default (as that
term is used in the August Non-Payment Notices and defined in the
Five Leases) shall have occurred with respect to the late payment
or non-payment of Rent for the month of August 1999.
Notwithstanding anything to the contrary contained herein, Ventas
shall not send a notice of termination pursuant to paragraph 16.1
of the Five Leases, or any of them, based upon Vencor's non-
payment or late payment of Rent for the month of August 1999 so
long as Vencor or the Leasehold Mortgagee has a right to cure or
has cured such non-payment or late payment of Rent for the month
of August 1999. This subparagraph 5(f) shall only apply to the
August Non-Payment Notices and to the non-payment or late payment
of the August 1999 Rent under the Five Leases.
5
<PAGE>
(g) Ventas, Vencor, and the Collateral Agent (for and on behalf of
the Leasehold Mortgagee) confirm and agree that the period of
time by which Vencor or the Leasehold Mortgagee is entitled to
cure the failure of Vencor to pay Rent for the month of August
1999 under this Amendment and the Five Leases in order to prevent
a termination of the Five Leases will expire at 5:00 p.m. Eastern
Daylight Savings Time on September 10, 1999.
Amendment to Tolling Agreement
2. The first numbered paragraph of the Tolling Agreement shall be deleted
and replaced with the following paragraph:
Any Vencor Claim, including, without limitation, those arising or
available under the Bankruptcy Avoidance Provisions (defined below)
that Vencor could otherwise assert against Ventas if Vencor were a
debtor in a case under the Bankruptcy Code commenced on April 12,
1999, and whether arising under the Bankruptcy Code or under other
applicable federal or state law, shall not be prejudiced, impaired, or
waived by Vencor's failure to commence such a bankruptcy case, and any
and all statutes of limitations, repose, or other legal or equitable
constraints on the time by which such a bankruptcy case or pleading
initiating any Vencor Claim (including, without limitation, a cause of
action under (S) 548 of the Bankruptcy Code) shall be tolled during
the period of time from April 12, 1999 to and including the earlier of
(i) 5:00 p.m. Eastern Daylight Savings Time on September 3, 1999, or
(ii) the earlier time and date on which the Second Standstill Period
(as defined in the Second Standstill Agreement) shall automatically
terminate as a result of Vencor's nonpayment or late payment of rent
or failure to deliver certain reports (as provided for in paragraph S
of the Second Standstill Agreement, the provisions of which are hereby
incorporated by reference) (the "Tolling Period"). For all purposes
herein, both the first and last day of the Tolling Period shall be
deemed to be contained in the Tolling Period.
[Remainder of Page Intentionally left blank].
6
<PAGE>
Counterparts
3. These Amendments may be executed in one or more counterparts and by
facsimile, each of which counterparts shall be deemed an original hereof, but
all of which together shall constitute one agreement.
Choice of Law
4. These Amendments adopt the ninth numbered paragraph of the Second
Standstill Agreement as the choice of law provision for these Amendments.
CONFIRMED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN BY:
VENCOR, INC. VENTAS, INC.
By:_______________________ By:________________________
Name: Name:
Title: Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Collateral Agent for the
Leasehold Mortgagee
By:_______________________
Name:
Title:
7
<PAGE>
Schedule I
Schedule of Payments
Date Amount of Payment
August 5,1999 $5,000,000
August 13, 1999 $5,000,000
August 19, 1999 $5,200,000
8
<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,
1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,537
<SECURITIES> 0
<RECEIVABLES> 454,556
<ALLOWANCES> (111,391)
<INVENTORY> 32,055
<CURRENT-ASSETS> 601,171
<PP&E> 793,640
<DEPRECIATION> (301,513)
<TOTAL-ASSETS> 1,650,145
<CURRENT-LIABILITIES> 1,229,279
<BONDS> 76,395
1,743
0
<COMMON> 17,598
<OTHER-SE> 229,867
<TOTAL-LIABILITY-AND-EQUITY> 1,650,145
<SALES> 0
<TOTAL-REVENUES> 1,389,124
<CGS> 0
<TOTAL-COSTS> 1,087,263
<OTHER-EXPENSES> 262,760
<LOSS-PROVISION> 12,010
<INTEREST-EXPENSE> 39,568
<INCOME-PRETAX> (55,101)
<INCOME-TAX> 100
<INCOME-CONTINUING> (55,201)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,923)
<NET-INCOME> (64,124)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
