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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14057
VENCOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1323993
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Vencor Place
680 South Fourth Street
Louisville, Kentucky 40202-2412
(Address of principal executive (Zip Code)
offices)
(502) 596-7300
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
<S> <C>
Common Stock, par value $.25 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10-K. [X]
As of February 26, 1999, there were 70,338,530 shares of the Registrant's
Common Stock, $.25 par value, outstanding. The aggregate market value of the
shares of the Registrant held by non-affiliates of the Registrant, based on
the closing price of such stock on the New York Stock Exchange on February 26,
1999, was approximately $134,355,000. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1999 are incorporated by reference into
Part III of this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
PART I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 36
Item 3. Legal Proceedings............................................ 36
Item 4. Submission of Matters to a Vote of Security Holders.......... 40
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 43
Item 6. Selected Financial Data...................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 61
Item 8. Financial Statements and Supplementary Data.................. 62
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrant........... 62
Item 11. Executive Compensation....................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 62
Item 13. Certain Relationships and Related Transactions............... 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 62
</TABLE>
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PART I
Item 1. Business
General
Vencor, Inc. ("Vencor" or the "Company") is one of the largest providers of
long-term healthcare services in the United States. At December 31, 1998, the
Company's operations included 57 long-term acute care hospitals containing
4,979 licensed beds, 291 nursing centers containing 38,362 licensed beds, and
the Vencare ancillary services business which provides respiratory and
rehabilitation therapies and medical and pharmacy management services under
approximately 2,800 contracts to nursing centers and other healthcare
providers. The Company currently operates in 46 states. Healthcare services
provided through this network include long-term hospital care, nursing care,
contract respiratory therapy services, post-operative care, in-patient and
out-patient rehabilitation therapy, specialized care for Alzheimer's disease
and pharmacy services.
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
hospital, nursing center 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 as a Delaware corporation 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 (the "Distribution") to stockholders of record of Ventas as of
April 27, 1998. The Distribution was completed on May 1, 1998 (the
"Distribution Date"). In connection with the Reorganization Transactions, the
Company continues to manage and operate the real property which it leases from
Ventas pursuant to four master lease agreements. See "--Master Lease
Agreements," and "--Recent Developments."
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 by Ventas prior to
the Reorganization Transactions.
On September 28, 1995, The Hillhaven Corporation ("Hillhaven") merged with
and into the Company (the "Hillhaven Merger"). On March 21, 1997, the Company
acquired TheraTx, Incorporated ("TheraTx"), a provider of subacute
rehabilitation and respiratory therapy program management services to nursing
centers and an operator of 26 nursing centers (the "TheraTx Merger"). On June
24, 1997, the Company acquired a controlling interest in Transitional
Hospitals Corporation ("Transitional"), an operator of 19 long-term acute care
hospitals located in 13 states. The Company completed the merger of its wholly
owned subsidiary with and into Transitional on August 26, 1997 (the
"Transitional Merger").
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. See
"Cautionary Statements."
Recent Developments
The recent developments described below have led to uncertainties as to the
Company's ability to continue operations as a going concern.
On January 26, 1999, the Company announced that it expected earnings for the
fourth quarter, exclusive of unusual transactions, to be substantially lower
than the third quarter of 1998 and that the operating results for the fourth
quarter in each of the Company's three operating divisions were expected to be
below management's expectations. The Company also announced that it expected
that reported 1998 results would be impacted adversely by certain recurring
year-end adjustments, the most significant of which related to an increase in
the
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provision for bad debts for its nursing center and ancillary services
businesses. Adjustments to other accruals, as well as balance sheet
adjustments related to the Hillhaven Merger, the TheraTx Merger and the
Transitional Merger also were expected to impact negatively fourth quarter
results. The Company further stated that certain additional adjustments would
be recorded in connection with asset valuations in the fourth quarter,
including a write-down of its investment in a nursing center in Wisconsin and
the previously announced write-down of its investment in Behavioral Healthcare
Corporation ("BHC"). The Company also indicated that it may record a fourth
quarter charge based on the expected recoverability of recorded amounts of
goodwill and deferred tax assets at year end. Such adjustments, as well as the
Company's operating results, are discussed in the Company's financial
statements and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Annual Report on Form
10-K.
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. The
current waiver includes, among other things, an aggregate borrowing limitation
of $55 million under the Revolving Credit Facility during the waiver period.
At the close of business on April 14, 1999, there were $10.7 million of
outstanding borrowings under the Revolving Credit Facility.
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 (as defined), 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. As discussed below, the Company and Ventas have entered into a
structured payment plan for the payment of rent due under the Master Lease
Agreements for April. In addition, the Company was informed on April 9, 1999
by the Health Care Financing Administration ("HCFA") that the Medicare program
has made a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. In addition, HCFA has indicated that all
reimbursement payments to the Company will be suspended if the overpayment is
not received by April 23. The Company is in discussions with HCFA regarding
extending the repayment terms. The amount demanded by HCFA is included in
amounts due to third party payors in the Company's consolidated balance sheet
at December 31, 1998. The waiver also places additional informational
requirements and minimum daily census level requirements on the Company's
hospitals and nursing centers. The Company's failure to comply with those
covenants would result in the termination of the waiver.
The Company is continuing discussions with its Senior Lenders regarding an
amendment or restructuring of the Credit Agreement. 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 after May 28, 1999 or will not seek to declare an event of default or
credit freeze prior to such date. In the event the Company is unable to obtain
the necessary amendment or comply with or maintain a covenant waiver, 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 Company's $300 million 9 7/8% Guaranteed Senior
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Subordinated Notes due 2005 (the "1998 Notes") contain provisions which allow
those creditors 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. The Company's Master Lease Agreements
with Ventas do not contain similar cross-default provisions.
If the Senior Lenders or other creditors 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, there can
be no assurance that the Company would succeed in formulating and consummating
an acceptable alternative financial restructure. 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 and the principal amount of the 1998 Notes are presented as
current liabilities on the Company's consolidated balance sheet at December
31, 1998 and the Company has a deficit in working capital which is more fully
described below. 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. See "Cautionary
Statements--Risks Associated with Defaults under the Credit Agreement" and
"Cautionary Statements--Consequences of Failing to Amend or Restructure the
Credit Agreement and Other Obligations."
The Company had a working capital deficit of $683 million at December 31,
1998 as compared to a working capital surplus of $431 million at December 31,
1997. The deficit includes $461 million of outstanding borrowings under the
Credit Agreement and $300 million of the 1998 Notes that have been classified
as current liabilities.
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. In view of ongoing discussions, 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 provides for the structured payment of
approximately $18.5 million of rental payments initially due on April 1. The
Company agreed to pay $8.0 million on April 13, 1999, $4.3 million on each of
April 20 and April 27, and $1.9 million on April 30, 1999. The Second
Standstill further provides that neither party will pursue any claims against
the other or any other third party related to the Reorganization Transactions
as long as the Company complies with the structured payment terms. The Second
Standstill will terminate on May 5, 1999 or on any date that a voluntary or
involuntary bankruptcy proceeding is commenced by or against the Company. In
addition, the Company and Ventas amended the Master Lease Agreements to delete
the right of Ventas to require the Company to purchase leased properties from
Ventas upon certain events of default under the Master Lease Agreements. In
connection with these agreements, 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.
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
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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
continued failure to pay rent due in April or thereafter, in the absence of
such temporary restraining order or other interim relief, would result in an
"Event of Default" under the Master Lease Agreements providing Ventas with
various remedies. 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 a
credit freeze under the current bank waiver, it is likely that such
circumstances would necessitate that the Company file for protection under the
Bankruptcy Code. See "--Master Lease Agreements--Events of Default" and
"Cautionary Statements--Potential Consequences of Failing to Pay Rent Under
Master Lease Agreements."
The Company is continuing to negotiate with the Senior Lenders, Ventas and
other creditors in an effort to develop a sustainable capital structure for
the Company. The Company also has retained an investment banking firm and
legal counsel to review strategic alternatives available to the Company.
Despite the Company's efforts, there can be no assurance that these
discussions will produce a sustainable capital structure. See "Cautionary
Statements."
Operational Strategy
The Company believes that the demand for long-term care is increasing.
Improved medical care and advances in medical technology continue to increase
the survival rates for victims of disease and trauma. Many of these patients
never fully recover and require long-term care. The incidence of chronic
medical complications increases with age, particularly in connection with
certain degenerative conditions. As the average age of the United States
population increases, the Company believes that there will be an increase in
the demand for long-term care at all levels of the continuum of care.
At the same time, the healthcare system of the United States is experiencing
a period of significant change. Factors affecting the healthcare system
include the implementation of a Medicare prospective payment system ("PPS")
for nursing centers and other cost containment measures, the expansion of
managed care, improved medical technology, an increased focus on measurable
clinical outcomes, a growing public awareness of healthcare spending by
governmental agencies at Federal and state levels, and heightened regulatory
scrutiny by Federal and state regulators. Payors increasingly are requiring
providers to move patients from high-acuity care environments to lower-acuity
care settings as quickly as is medically appropriate.
In November 1998, the Company organized its operations into three
operational divisions coinciding with its primary lines of business: hospital
division, nursing center division and ancillary services division. Within each
division, the Company has established a divisional president and chief
financial officer to manage the operations of the division. The Company
believes that this structure will better focus each division on the strategies
and operational functions necessary to provide quality care and services to
its patients, residents and customers.
The Company also believes that the independent focus of each division on the
unique aspects and quality concerns of their respective businesses will
enhance the Company's ability to attract patients and improve its operations.
In addition, this focus will enhance the ability of each division to achieve
the cost containment objectives required by government and private payors
without impairing the standard of care provided to the Company's patients,
residents and customers. The divisional structure also will more closely align
management accountability and incentives with the financial performance and
quality objectives of the respective lines of business.
Within these divisions, the Company will continue to focus on the long-term
care continuum. As a result of its strategic focus on long-term care, the
Company believes it benefits from economies of scale and is positioned as a
leader in various local and regional markets. The Company has positioned
itself to provide a full compliment of services, thereby providing payors with
the cost savings and consistent quality associated with contracting with one
provider.
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HOSPITAL DIVISION
The Company's hospitals primarily provide long-term acute care to medically
complex, chronically ill patients. The Company's hospitals have the capability
to treat patients who suffer from multiple systemic failures or conditions
such as neurological disorders, head injuries, brain stem and spinal cord
trauma, cerebral vascular accidents, chemical brain injuries, central nervous
system disorders, developmental anomalies and cardiopulmonary disorders.
Chronic patients are often dependent on technology for continued life support,
such as mechanical ventilators, total parental nutrition, respiration or
cardiac monitors and dialysis machines. Generally, approximately 60% of the
Company's chronic patients are ventilator-dependent for some period of time
during their hospitalization. The Company's patients suffer from conditions
which require a high level of monitoring and specialized care, yet may not
necessitate the continued services of an intensive care unit. Due to their
severe medical conditions, the Company's hospital patients generally are not
clinically appropriate for admission to a nursing center or rehabilitation
hospital. The medical condition of most of the Company's hospital patients is
periodically or chronically unstable. By combining general acute care services
with the ability to care for chronic patients, the Company believes that its
long-term care hospitals provide its patients with high quality, cost-
effective care. During 1998, the average length of stay for chronic patients
in the long-term care hospitals operated by the Company was approximately 41
days. Although the Company's patients range in age from pediatric to
geriatric, typically more than 70% of the Company's chronic patients are over
65 years of age. The Company's hospital operations are subject to regulation
by a number of government and private agencies. See "--Governmental
Regulation--Hospitals."
Services Provided by Hospitals
Chronic. The Company has devised a comprehensive program of care for its
chronic patients that draws upon the talents of interdisciplinary teams,
including licensed pulmonary specialists. The teams evaluate chronic patients
upon admission to determine treatment programs. Where appropriate, the
treatment programs may involve the services of several disciplines, such as
pulmonary and physical therapy. Individual attention to patients who have the
cognitive and physical abilities to respond to therapy is emphasized. Patients
who successfully complete treatment programs are discharged to nursing
centers, rehabilitation hospitals or home care settings.
General Acute Care. The Company operates two general acute care hospitals.
Certain of the Company's long-term care hospitals also provide general acute
care and outpatient services in support of their long-term care services.
General acute care and outpatient services may include inpatient services,
diagnostic services, emergency services, CT scanning, one-day surgery,
laboratory, X-ray, respiratory therapy, cardiology and physical therapy. The
Company may expand its general acute care and outpatient services.
Hospital Strategy
The hospital division differentiates its hospitals as a result of its
ability to care for chronic care patients in a high quality, cost-effective
setting. The hospital division is committed to maintaining its quality of care
by dedicating appropriate resources to each of its hospitals. In addition, the
hospital division is focusing its efforts on containing and reducing costs to
operate competitively under the reduced Medicare reimbursement established by
the Balanced Budget Act of 1997 (the "Budget Act") while maintaining quality
care. The hospital division intends to market aggressively its quality of care
standards and broaden its expertise beyond respiratory care to increase
patient census and establish a greater census band of admissions.
The Company believes that the hospital division's emphasis on long-term
hospital care allows it to provide high quality care to chronic patients on a
cost-effective basis. The Company also believes that the following factors may
contribute to growth in demand for long-term hospital care.
Increased Patient Population. Improved medical care and advancements in
medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital
care. The incidence
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of chronic respiratory problems increases with age, particularly in connection
with certain degenerative conditions. As the average age of the United States
population increases, the Company believes there will be an increase in the
need for long-term hospital care.
Medically Displaced Patients. The Company's hospital patients require a high
level of monitoring and specialized care, yet may not require the continued
services of an intensive care unit. Due to their extended recovery period, the
Company's hospital patients generally would not receive specialized multi-
disciplinary treatment focused on the unique aspects of a long-term recovery
program in a general acute care hospital, and yet are not appropriate for
admission to a nursing center or rehabilitation hospital.
Economically Displaced Patients. Historically, reimbursement policies and
practices designed to control healthcare costs have made it difficult to place
medically complex, chronically ill patients in an appropriate healthcare
setting. Under the Medicare program, general acute care hospitals are
reimbursed under a prospective payment system or a fixed payment system which
provides an economic incentive to general acute care hospitals to minimize the
length of a patient's stay. As a result, these hospitals generally receive
less than full cost for providing care to patients with extended lengths of
stay. Furthermore, the prospective payment system does not provide for
reimbursement more frequently than once every 60 days, placing an additional
economic burden on a general acute care hospital providing long-term care. The
Company's long-term care hospitals, however, are excluded from the prospective
payment system and generally receive reimbursement on a more favorable basis
for providing long-term hospital care to Medicare patients. Commercial
reimbursement sources, such as insurance companies and health maintenance
organizations ("HMOs"), some of which pay based on established hospital
charges, typically seek the most economical source of care available.
Selected Hospital Operating Data
The following table sets forth certain operating data for the Company's
hospital division (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
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1998 1997 1996
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<S> <C> <C> <C>
Revenues.......................................... $919,847 $ 785,829 $551,268
Operating income.................................. $259,874 $ 246,653 $155,015
Assets (including ancillary services division).... $852,567 $1,572,722 $632,780
Hospitals in operation at end of period........... 57 60 38
Number of licensed beds at end of period.......... 4,979 5,273 3,325
Patient days...................................... 947,488 767,810 586,144
Average daily census.............................. 2,596 2,104 1,601
Occupancy %....................................... 54.0 52.9 53.7
</TABLE>
As used in the above table, the term "operating income" is defined as
earnings before interest, income taxes, depreciation, amortization, rent,
corporate overhead and unusual transactions. The term "licensed beds" refers
to the maximum number of beds permitted in the hospital under its license
regardless of whether the beds are actually available for patient care.
"Patient days" refers to the total number of days of patient care provided by
the Company's hospitals for the periods indicated. "Average daily census" is
computed by dividing each hospital's patient days by the number of calendar
days the respective hospital is in operation. "Occupancy %" is computed by
dividing average daily census by the number of licensed beds, adjusted for the
length of time each facility was in operation during each respective period.
Sources of Hospital Revenues
The Company receives payment for hospital services from third-party payors,
including government reimbursement programs such as Medicare and Medicaid and
nongovernment sources such as commercial insurance companies, HMOs, preferred
provider organizations ("PPOs") and contracted providers. Patients
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covered by non-government payors generally will be more profitable to the
Company than those covered by Medicare and Medicaid programs. The following
table sets forth the approximate percentages of the hospital patient days and
revenues derived from the payor sources indicated:
<TABLE>
<CAPTION>
Medicare Medicaid Private and Other
---------------- ---------------- ---------------------
Patient Patient Patient
Year Days Revenues Days Revenues Days Revenues
- ---- ------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998................ 68% 59% 13% 10% 19% 31%
1997................ 68 63 12 8 20 29
1996................ 64 59 17 12 19 29
</TABLE>
For the year ended December 31, 1998, hospital revenues totaled
approximately $919.8 million, or 29.4% of the Company's total revenues (before
eliminations). Changes caused by the Budget Act have reduced Medicare payments
made to the Company's hospitals related to incentive payments under the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), allowable costs for
capital expenditures and bad debts, and payments for services to patients
transferred from a prospective payment system hospital. See "--Governmental
Regulation--Healthcare Reform" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Hospital Facilities
The following table lists by state the number of hospitals and related
licensed beds owned by the Company or leased from Ventas and other third
parties as of December 31, 1998:
<TABLE>
<CAPTION>
Number of Facilities
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Licensed Owned by Leased from Leased from
State Beds the Company Ventas (2) Other Parties Total
- ----- -------- ----------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Arizona.................... 109 - 2 - 2
California................. 543 2 6 - 8
Colorado................... 68 - 1 - 1
Florida(1)................. 564 - 6 1 7
Georgia(1)................. 72 - - 1 1
Illinois(1)................ 616 - 4 1 5
Indiana.................... 159 - 2 1 3
Kentucky(1)................ 374 - 1 - 1
Louisiana.................. 168 - 1 - 1
Massachusetts(1)........... 86 - 2 - 2
Michigan(1)................ 400 - 2 - 2
Minnesota.................. 111 - 1 - 1
Missouri(1)................ 227 - 2 - 2
Nevada..................... 52 - 1 - 1
New Mexico................. 61 - 1 - 1
North Carolina(1).......... 124 - 1 - 1
Oklahoma................... 59 - 1 - 1
Pennsylvania............... 115 - 2 - 2
Tennessee(1)............... 49 - 1 - 1
Texas...................... 642 1 6 3 10
Virginia(1)................ 206 - 1 - 1
Washington(1).............. 80 1 - - 1
Wisconsin.................. 94 - 1 1 2
----- --- --- --- ---
Totals................... 4,979 4 45 8 57
===== === === === ===
</TABLE>
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(1) These states have Certificate of Need ("CON") regulations. See "--
Governmental Regulation--Hospitals."
(2) See "--Master Lease Agreements."
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Hospital Patient Admissions
Substantially all of the acute and medically complex patients admitted to
the Company's hospitals are transfers from other healthcare providers.
Patients are referred from general acute care hospitals, rehabilitation
hospitals, nursing centers and home care settings. Referral sources include
discharge planners, case managers of managed care plans, social workers,
physicians, third party administrators, HMOs and insurance companies.
The Company employs case managers who educate healthcare professionals from
other hospitals as to the unique nature of the services provided by the
Company's long-term care hospitals. The case managers develop an annual
admission plan for each hospital with assistance from the hospital's
administrator. To identify specific service opportunities, the admission plan
for each hospital is based on a variety of factors, including population
characteristics, physician characteristics and incidence of disability
statistics. The admission plans involve ongoing education of local physicians,
utilization review and case management personnel, acute care hospitals, HMOs
and PPOs. The Company maintains a pre-admission assessment system at its
regional referral centers to evaluate certain clinical and other information
in determining the appropriateness of each patient referred to its hospitals.
Professional Staff
Each of the Company's hospitals is staffed with a multi-disciplinary team of
healthcare professionals. A professional nursing staff trained to care for the
long-term acute patient is on duty 24 hours each day in the Company's
hospitals. Other professional staff includes respiratory therapists, physical
therapists, occupational therapists, speech therapists, pharmacists,
registered dietitians and social workers.
The physicians at the Company's hospitals generally are not employees of the
Company and may be members of the medical staff of other hospitals. Each of
the Company's hospitals has a fully credentialed, multi-specialty medical
staff to meet the needs of the medically complex, long-term acute patient.
Typically, each patient is visited at least once a day by a physician. A broad
range of physician services is available including, but not limited to,
pulmonology, internal medicine, infectious diseases, neurology, nephrology,
cardiology, radiology and pathology. Generally, the Company does not enter
into exclusive contracts with physicians to provide services to its hospital
patients.
The hospital division believes that its future success will depend in part
upon its continued ability to hire and retain qualified personnel.
Accordingly, the hospital division seeks the highest quality of professional
staff within each market.
Hospital Management and Operations
The hospital division is headed by a divisional president and a chief
financial officer. The operations of the division are divided into five
geographic regions with each region headed by an operational vice president,
each of whom reports to the divisional president. A hospital administrator
supervises and is responsible for the day-to-day operations at each of the
Company's hospitals. Each hospital also employs a controller who monitors the
financial matters of each hospital, including the measurement of actual
operating results compared to budgets established by the Company. In addition,
each hospital employs an assistant administrator to oversee the clinical
operations of the hospital and a quality assurance manager to direct an
integrated quality assurance program. The Company's corporate headquarters
also provides services in the areas of information systems design and
development, training, human resource management, reimbursement expertise,
legal advice, technical accounting support, purchasing and facilities
management. Financial control is maintained through fiscal and accounting
policies that are established at the corporate level for use at each hospital.
The Company has standardized operating procedures and monitors its hospitals
to assure consistency of operations.
Quality Assessment and Improvement
The Company maintains a strategic outcome program which includes a
centralized pre-admission evaluation program and concurrent review of all of
its patient population against utilization and quality screenings, as well
10
<PAGE>
as quality of life outcomes data collection and patient and family
satisfaction surveys. In addition, each hospital has an integrated quality
assessment and improvement program administered by a quality review manager
which encompasses utilization review, quality improvement, infection control
and risk management. The objective of these programs is to ensure that
patients are appropriately admitted to the Company's hospitals and that
quality healthcare is provided in a cost-effective manner.
The Company has implemented a program whereby its hospitals will be reviewed
annually by internal quality auditors for compliance with standards of the
Joint Commission on Accreditation of Health Care Organizations ("JCAHO"). The
purposes of this internal review process are to (i) ensure ongoing compliance
with industry recognized standards for hospitals, (ii) assist management in
analyzing each hospital's operations and (iii) provide consulting and
educational programs for each hospital to identify opportunities to improve
patient care.
Hospital Competition
As of December 31, 1998, the hospitals operated by the Company were located
in 45 geographic markets in 23 states. In each geographic market, there are
general acute care hospitals which provide services comparable to those
offered by the Company's hospitals. In addition, the Company believes that as
of December 31, 1998 there were approximately 280 hospitals in the United
States certified by Medicare as general long-term hospitals, some of which
provide similar cardiopulmonary services to those provided by the Company's
hospitals. Many of these general acute care hospitals and long-term hospitals
are larger and more established than the Company's hospitals. Certain
hospitals that compete with the Company's hospitals are operated by not-for-
profit, nontaxpaying or governmental agencies, which can finance capital
expenditures on a tax-exempt basis, and which receive funds and charitable
contributions unavailable to the Company's hospitals. Cost containment efforts
by Federal and state governments and other third-party payors designed to
encourage more efficient utilization of hospital services generally have
resulted in lower hospital industry occupancy rates in recent years. As a
result of these efforts, a number of acute care hospitals have converted to
specialized care facilities. Some hospitals are developing step-down units
which attempt to serve the needs of patients who require care at a level
between that provided by an intensive care unit and a general medical/surgical
floor. This trend is expected to continue due to the current oversupply of
acute care hospital beds and the increasing consolidation and affiliation of
free-standing hospitals into larger systems. As a result, the Company may
experience increased competition from existing hospitals and converted
facilities.
Competition for patients covered by non-government reimbursement sources is
intense. The primary competitive factors in the long-term intensive care
business include quality of services, charges for services and responsiveness
to the needs of patients, families, payors and physicians. Other companies
have entered the long-term intensive care market with licensed hospitals that
compete with the Company's hospitals.
Some nursing centers, while not licensed as hospitals, have developed units
which provide a greater intensity of care than typically provided by a nursing
center. The condition of patients in these nursing centers is less acute than
the condition of patients in the Company's hospitals.
The competitive position of any hospital, including the Company's hospitals,
also is affected by the ability of its management to negotiate contracts with
purchasers of group healthcare services, including private employers, PPOs and
HMOs. Such organizations attempt to obtain discounts from established hospital
charges. The importance of obtaining contracts with PPOs, HMOs and other
organizations which finance healthcare, and its effect on a hospital's
competitive position, vary from market to market, depending on the number and
market strength of such organizations.
11
<PAGE>
NURSING CENTER DIVISION
At December 31, 1998, the Company provided long-term care and subacute
medical and rehabilitation services in 291 nursing centers containing 38,362
licensed beds located in 31 states. At December 31, 1998, the Company owned
five nursing centers, leased 273 nursing centers from third parties and
managed 13 nursing centers. During 1998, the Company sold 15 nursing centers,
closed two nursing centers and cancelled two management agreements. One
nursing center was opened during 1998.
The Company's nursing centers provide rehabilitation services, including
physical, occupational and speech therapies. The majority of patients in
rehabilitation programs stay for eight weeks or less. Patients in
rehabilitation programs generally provide higher revenues than other nursing
center patients because they require a higher level of ancillary services. In
addition, management believes that the Company is a leading provider of care
for patients with Alzheimer's disease. The Company offers specialized programs
at more than 80 nursing centers for patients suffering from Alzheimer's
disease. Most of these patients reside in separate units within the nursing
centers and are cared for by teams of professionals specializing in the unique
problems experienced by Alzheimer's patients.
Nursing Center Strategy
The factors which affect consumers' selection of a nursing center vary by
community and include a nursing center's competitive position and its
relationships with local referral sources. Competition creates the standards
against which nursing centers in a given market are judged by various referral
sources, which include physicians, hospital discharge planners, community
organizations and families. The strategy of the nursing center division is to
improve its patient census by providing quality services and offering
specialty care programs. The nursing center division is focused on qualitative
and quantitative performance indicators with the goal of providing quality
care under the cost containment objectives imposed by government and private
payors. The nursing center division continues to refine and examine its method
of delivering services to create the optimal strategy of providing quality
care within the constraints of PPS.
Nursing center marketing efforts are conducted at the local market level by
the nursing center administrators, admissions coordinators and others. Nursing
center personnel are assisted in carrying out their marketing strategies by
regional marketing staffs. The marketing efforts of the nursing center
division will focus on the quality of care provided at its facilities with the
goal of increasing patient census levels. In addition, the Company believes
there will be an increase in the need for nursing center services as the
average age of the United States population increases.
Selected Nursing Center Operating Data
The following table sets forth certain operating data for the Company's
nursing center division (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................... $1,621,662 $1,722,416 $1,615,141
Operating income............................. $ 245,569 $ 273,280 $ 260,885
Assets....................................... $ 537,388 $1,236,202 $ 931,253
Number of nursing centers in operation at end
of period................................... 291 309 313
Number of licensed beds at end of period..... 38,362 40,383 39,619
Patient days................................. 11,939,266 12,622,238 12,566,763
Average daily census......................... 32,710 34,581 34,335
Occupancy %.................................. 87.3 90.5 91.9
</TABLE>
12
<PAGE>
Sources of Nursing Center Revenues
Nursing center revenues are derived principally from Medicare and Medicaid
programs and from private payment patients. Consistent with the nursing center
industry, changes in the mix of the Company's patient population among these
three categories significantly affect the profitability of the Company's
operations. Although Medicare and high acuity patients generally produce the
most revenue per patient day, profitability with respect to higher acuity
patients is reduced by the costs associated with the higher level of nursing
care and other services required by such patients. The Company believes that
private payment patients generally constitute the most profitable category and
Medicaid patients generally constitute the least profitable category.
The following table sets forth the approximate percentages of nursing center
patient days and revenues derived from the payor sources indicated:
<TABLE>
<CAPTION>
Medicare Medicaid Private and Other
---------------- ---------------- ---------------------
Patient Patient Patient
Year Days Revenues Days Revenues Days Revenues
- ---- ------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998................ 13% 29% 65% 45% 22% 26%
1997................ 13 32 65 43 22 25
1996................ 12 30 65 44 23 26
</TABLE>
For the year ended December 31, 1998, nursing center revenues totaled
approximately $1.6 billion, or 51.9% of the Company's total revenues (before
eliminations).
Both governmental and private third-party payors employ cost containment
measures designed to limit payments made to healthcare providers. Those
measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage
criteria which limit the services that will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all
of which may materially increase or decrease the rate of program payments to
the Company for its services.
Medicare. The Medicare Part A program provides reimbursement for extended
care services furnished to Medicare beneficiaries who are admitted to nursing
centers after at least a three-day stay in an acute care hospital. Covered
services include supervised nursing care, room and board, social services,
physical and occupational therapies, pharmaceuticals, supplies and other
necessary services provided by nursing centers.
Prior to the implementation of PPS, nursing center reimbursement was based
upon reasonable direct and indirect costs of services provided to patients.
The Budget Act established PPS for nursing centers for cost reporting periods
beginning on or after July 1, 1998. All of the Company's nursing centers were
subject to 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 Medicare revenues recorded by the Company under PPS in
its nursing centers are substantially less than the cost-based reimbursement
received before the enactment of the Budget Act. See "--Governmental
Regulation--Nursing Centers," "--Governmental Regulation--Healthcare Reform"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Medicaid. Medicaid is a state-administered program financed by state funds
and matching Federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
Federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. Accordingly, these
programs differ from state to state in many respects.
13
<PAGE>
Prior to the Budget Act, Federal law, generally referred to as the "Boren
Amendment," required Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically
operated nursing center providing quality care and services in conformity with
all applicable laws and regulations. Despite the Federal requirements,
disagreements frequently arose between nursing centers and states regarding
the adequacy of Medicaid payments. By repealing the Boren Amendment, the
Budget Act eases the restrictions on the states' ability to reduce their
Medicaid reimbursement levels for such services. In addition, Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and certain
government funding limitations, all of which may materially increase or
decrease the level of program payments to nursing centers operated by the
Company. Management believes that the payments under many of these programs
may not be sufficient on an overall basis to cover the costs of serving
certain residents participating in these programs. Furthermore, the Omnibus
Budget Reconciliation Act of 1987, as amended ("OBRA"), mandates an increased
emphasis on ensuring quality patient care, which has resulted in additional
expenditures by nursing centers. The Company provides to eligible individuals
Medicaid-covered services consisting of nursing care, room and board and
social services. In addition, states may at their option cover other services
such as physical, occupational and speech therapies and pharmaceuticals.
Private Payment. The Company's nursing centers seek to maximize the number
of private payment patients admitted to its nursing centers, including those
covered under private insurance and managed care health plans. Private payment
patients typically have financial resources (including insurance coverage) to
pay for their monthly services and do not rely on government programs for
support.
There can be no assurance that payments under governmental and private
third-party payor programs will remain at levels comparable to present levels
or will be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In addition, there can be no
assurance that facilities operated by the Company, or the provision of
services and supplies by the Company, will meet the requirements for
participation in such programs. 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.
14
<PAGE>
Nursing Center Facilities
The following table lists by state the number of nursing centers and related
licensed beds owned by the Company or leased from Ventas and other third
parties as of December 31, 1998:
<TABLE>
<CAPTION>
Number of Facilities
---------------------------------------------------
Licensed Owned by Leased from Leased from
State Beds the Company Ventas (2) Other Parties Managed Total
----- -------- ----------- ----------- ------------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama(1).............. 592 - 3 1 - 4
Arizona................. 823 - 6 - - 6
California.............. 2,305 1 11 5 2 19
Colorado................ 695 - 4 1 - 5
Connecticut(1).......... 983 - 8 - - 8
Florida(1).............. 2,713 1 15 2 2 20
Georgia(1).............. 1,223 - 5 4 - 9
Idaho................... 903 1 8 - - 9
Indiana................. 4,146 - 14 12 - 26
Kentucky(1)............. 2,080 1 12 4 - 17
Louisiana(1)............ 485 - - 1 2 3
Maine(1)................ 787 - 10 - - 10
Massachusetts(1)........ 4,039 - 31 3 2 36
Mississippi(1).......... 125 - - 1 - 1
Montana(1).............. 446 - 2 1 - 3
Nebraska(1)............. 163 - 1 - - 1
Nevada(1)............... 180 - 2 - - 2
New Hampshire(1)........ 622 - 3 - 1 4
North Carolina(1)....... 2,764 - 19 4 - 23
Ohio(1)................. 2,155 - 11 4 1 16
Oregon(1)............... 358 - 2 1 - 3
Pennsylvania............ 200 - 1 1 - 2
Rhode Island(1)......... 201 - 2 - - 2
Tennessee(1)............ 2,551 - 4 11 - 15
Texas................... 623 - 1 1 1 3
Utah.................... 848 - 5 1 1 7
Vermont(1).............. 310 - 1 - 1 2
Virginia(1)............. 632 - 4 - - 4
Washington(1)........... 1,433 1 9 3 - 13
Wisconsin(1)............ 2,526 - 12 2 - 14
Wyoming................. 451 - 4 - - 4
------ --- --- --- --- ---
Totals................ 38,362 5 210 63 13 291
====== === === === === ===
</TABLE>
- --------
(1) These states have CON regulations. See "--Governmental Regulation--
Nursing Centers."
(2) See "--Master Lease Agreements."
Nursing Center Management and Operations
The nursing center division is managed by a divisional president and a chief
financial officer. The operations of the division are divided into five
geographic regions with each region headed by an operational vice president,
each of whom reports to the divisional president. Each nursing center is
managed by a state-licensed administrator who is supported by other
professional personnel, including a director of nursing, staff development
professional (responsible for employee training), activities director, social
services director, licensed dietitian, business office manager and, in
general, physical, occupational and speech therapists. The directors of
nursing are state-licensed nurses who supervise nursing staff which include
registered nurses, licensed practical nurses
15
<PAGE>
and nursing assistants. Staff size and composition vary depending on the size
and occupancy of each nursing center and on the level of care provided by the
nursing center. The nursing centers contract with physicians who serve as
medical directors and serve on quality assurance committees.
The nursing centers are supported by district and/or regional staff in the
areas of nursing, dietary and rehabilitation services, maintenance, sales and
financial services. In addition, corporate staff provide other services in the
areas of sales assistance, information systems, human resource management,
state and Federal reimbursement, state licensing and certification, legal,
finance and accounting support. Financial control is maintained principally
through fiscal and accounting policies established at the corporate level for
use at the nursing centers.
Quality Assessment and Improvement
Quality of care is monitored and enhanced by quality assurance committees
and family satisfaction surveys. The quality assurance committees oversee
patient healthcare needs and patient and staff safety. Additionally,
physicians serve on the quality assurance committees as medical directors and
advise on healthcare policies and practices. Regional nursing professionals
visit each nursing center periodically to review practices and recommend
improvements where necessary in the level of care provided and to assure
compliance with requirements under applicable Medicare and Medicaid
regulations. Surveys of patients' families are conducted from time to time in
which the families are asked to rate various aspects of service and the
physical condition of the nursing centers. These surveys are reviewed by
nursing center administrators to help ensure quality patient care.
The Company provides training programs for nursing center administrators,
managers, nurses and nursing assistants. These programs are designed to
maintain high levels of quality patient care.
Substantially all of the nursing centers currently are certified to provide
services under Medicare and Medicaid programs. A nursing center's
qualification to participate in such programs depends upon many factors, such
as accommodations, equipment, services, safety, personnel, physical
environment and adequate policies and procedures.
Nursing Center Competition
The Company's nursing centers compete on a local and regional basis with
other nursing centers. The Company's competitive position varies within each
community served. The Company believes that the quality of care provided,
reputation, location and physical appearance of its nursing centers and, in
the case of private patients, the charges for services, are significant
competitive factors. Although there is limited, if any, price competition with
respect to Medicare and Medicaid patients (since revenues received for
services provided to such patients are based on fixed rates or cost
reimbursement principles), there is significant competition for private
payment patients.
The long-term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, assisted living facilities, home health
agencies and similar institutions. The industry includes government-owned,
church-owned, secular not-for-profit and for-profit institutions.
16
<PAGE>
ANCILLARY SERVICES DIVISION
Through its Vencare ancillary services division, the Company has expanded
the scope of its cardiopulmonary care provided in its hospitals by providing
rehabilitation therapy and respiratory care services and supplies to nursing
and subacute care centers. In November 1996, the Company consolidated its
pharmacy operations under its ancillary services division. In the third
quarter of 1998, the Company sold or closed its hospice and homecare
businesses. In addition, the rehabilitation, respiratory and other healthcare
services previously provided by TheraTx have been integrated into the
ancillary services division. For the year ended December 31, 1998, revenues
from the ancillary services division totaled approximately $582.7 million
which represented 18.7% of the Company's total revenues (before eliminations).
Vencare Strategy
During 1997, the Company initiated the sale of its Vencare full-service
ancillary services contracts to provide a full range of ancillary services to
nursing centers not operated by the Company. Under PPS, ancillary services
provided by nursing centers are subject to fixed payments. In this new
environment, the Company believed that its full-service ancillary services
contract would enhance the ability of nursing center operators to manage
effectively the cost of providing quality patient care. 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.
Management believes that the decline in the 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. Accordingly, in
the fourth quarter of 1998, management determined that the full service
contract strategy was not meeting effectively the needs of its customers under
PPS and, consequently, discontinued pursuing such strategy.
The majority of the nursing centers in the United States will convert to PPS
during the first quarter of 1999. In this new environment, the Company is
offering single service contracts while client nursing centers adjust to PPS.
The Company believes that Vencare's reputation of providing quality, cost-
efficient services will appeal to third party providers. The ancillary
services division intends to promote aggressively the quality and pricing of
its services to capture new accounts and customers and to take advantage of
new growth areas for its pharmacy services business. The ancillary services
division also continues to examine and refine its staffing levels and delivery
of services to ensure that its services remain competitive under the cost
constraints of PPS.
Selected Ancillary Services Operating Data
The following table sets forth certain operating data for the Company's
ancillary services division (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $582,730 $642,471 $399,068
Revenues from Company-operated nursing centers... $124,500 $ 65,911 $ 39,540
Operating income................................. $ 64,104 $114,545 $ 69,958
</TABLE>
Respiratory Care Services
The Company provides respiratory care services and supplies to nursing and
subacute care center patients pursuant to contracts between the Company and
the nursing center or subacute center. The services are provided by
respiratory therapists based at the Company's hospitals. These respiratory
therapists perform a wide variety of procedures, including oxygen therapy,
bronchial hygiene, nebulizer and aerosol treatments, tracheostomy care,
ventilator management and patient respiratory education. Pulse oximeters and
arterial blood gas machines are
17
<PAGE>
used to evaluate the patient's condition, as well as the effectiveness of the
treatment. The Company also provides respiratory equipment and supplies to
nursing and subacute centers.
The Company receives payments from the nursing centers and subacute care
centers for services rendered and these facilities, in turn, receive payments
from the appropriate third-party payor. Respiratory therapy and supplies
generally are covered under the Medicare program as part of the fixed payment
under PPS. Many commercial insurers and managed care providers continually are
seeking hospital discharge options for lower acuity respiratory patients.
Management believes that the Company's pricing and successful clinical
outcomes make its respiratory care program attractive to commercial insurers
and managed care providers.
At December 31, 1998, the Company had entered into contracts to provide
respiratory therapy services and supplies to approximately 1,250 nursing and
subacute care centers, which includes substantially all of the nursing centers
operated by the Company.
Rehabilitation Therapy Services
The Company provides physical, occupational and speech therapies to nursing
and subacute care center patients, as well as home health patients and public
school systems. At December 31, 1998, the Company had entered into contracts
to provide rehabilitation services to patients at 700 facilities, including
285 nursing centers operated by the Company.
Pharmacies
The ancillary services division provides institutional and other pharmacy
services. In November 1996, the Company consolidated its Medisave Pharmacies
into its ancillary services division and now provides its hospital-based
clinical pharmacy services as part of its ancillary services division.
The institutional pharmacy business focuses on providing a full array of
pharmacy services to over 500 nursing centers and specialized care centers,
including 250 nursing centers operated by the Company. Institutional pharmacy
sales encompass a wide variety of products including prescription medication,
prosthetics, respiratory services, infusion services and enteral therapies. In
addition, the Company provides a variety of pharmaceutical consulting services
designed to assist hospitals, nursing centers and home health agencies in
program administration.
Mobile Diagnostic Services
The Company is a hospital based provider of on-call mobile X-ray services.
These services primarily are provided to nursing centers, but the Company also
provides services to correctional facilities, rehabilitation hospitals and
dialysis centers. These services are provided 24 hours a day, 365 days a year
to approximately 400 facilities, including 160 nursing centers operated by the
Company.
Ancillary Services Management and Operations
The ancillary services division is managed by a division president and chief
financial officer. Each of the product lines within the ancillary services
division is headed by one or more operational vice presidents, each of whom
reports to the divisional president. The ancillary services division is
supported by the corporate staff which provides services in the areas of sales
assistance, information systems, human resource management, state and Federal
reimbursement, state licensing and certification, legal, finance and
accounting support. Financial control is maintained principally through fiscal
and accounting policies established at the corporate level.
Competition in the Ancillary Services Market
Although the respiratory therapy services and rehabilitation services
markets are fragmented, significant competition exists for the Company's
ancillary services. The primary competitive factors for the ancillary
18
<PAGE>
services business are quality of services, charges for services and
responsiveness to the needs of patients, families and the facilities in which
the services are provided. Certain hospitals are establishing and managing
their own step-down and subacute facilities. Other hospital companies have
entered the ancillary services market through affiliation agreements and
management contracts. In addition, many nursing centers are developing
internal staff to provide those services, particularly in response to the
implementation of PPS for nursing centers.
MASTER LEASE AGREEMENTS
As part of the Reorganization Transactions, the Company and Ventas entered
into four master lease agreements (collectively, as amended, the "Master Lease
Agreements") that set forth the material terms governing the lease of
substantially all of the real property, buildings and other improvements
(primarily long-term acute care hospitals and nursing centers) used by the
Company (the "Leased Properties"). The Leased Properties are divided into
groups of properties and a Master Lease Agreement was entered into with
respect to each such group of properties (each a "Lease"). The following
description of the Master Lease Agreements does not purport to be complete but
contains a summary of the material provisions of the Master Lease Agreements.
Each Lease includes land, buildings, structures and other improvements on
the land, easements and similar appurtenances to the land and improvements,
and permanently affixed equipment, machinery and other fixtures relating to
the operation of the Leased Properties. The Leases have primary terms ranging
from 10 to 15 years (the "Base Term"). At the option of the Company, the
Leases may be extended for one five-year renewal term beyond the Base Term
(the "First Renewal Term") at the then existing rental rate plus 2% per annum.
At the option of the Company, the Leases may be extended for two additional
five-year renewal terms beyond the First Renewal Term (together with the First
Renewal Term, the "Renewal Term") at the then fair market value rental rate.
The Base Term and Renewal Term of each Lease are subject to termination upon
default by either party and certain other conditions described in the Leases.
Rental Amounts
The Master Lease Agreement is what is commonly known as a triple-net lease
or an absolute-net lease. The Annual Base Rent (as defined in the Master Lease
Agreements) for the twelve-month period commencing on the Distribution Date
for the Leased Properties is approximately $222 million, with a 2% per annum
escalator over the previous twelve-month period if certain lessee revenue
parameters are obtained. In addition, the Company is required to pay for (i)
all insurance required in connection with the Leased Properties and the
business conducted on the Leased Properties, (ii) all taxes levied on or with
respect to the Leased Properties (other than taxes on the net income of
Ventas) and (iii) all utilities and other services necessary or appropriate
for the Leased Properties and the business conducted on the Leased Properties.
Use of the Leased Property
The Master Lease Agreements require that the Company utilize the Leased
Properties solely for the provision of healthcare services and related uses
and as Ventas may otherwise consent (which consent may be granted or withheld
in its discretion). The Company is responsible for maintaining or causing to
be maintained all licenses, certificates and permits necessary for it to
comply with various healthcare regulations. The Company is obligated to
operate continuously each Leased Property as a provider of healthcare
services.
Events of Default
An "Event of Default" will be deemed to have occurred under any Lease if,
among other things, the Company fails to pay rent or other amounts within five
days after notice; the Company fails to comply with covenants continuing for
30 days or, so long as diligent efforts to cure such failure are being made,
such longer period (not over 180 days) as is necessary to cure such failure;
certain bankruptcy or insolvency events occur, including filing a petition of
bankruptcy or a petition for reorganization under the Bankruptcy Code; the
19
<PAGE>
Company ceases to operate any Leased Property as a provider of healthcare
services; the Company loses any required healthcare license, permit or
approval; the Company fails to maintain insurance; the Company creates or
allows to remain certain liens; a reduction occurs in the number of licensed
beds in excess of 10% of the number of licensed beds in the applicable
facility on the date the applicable facility was leased; certification for
reimbursement under Medicare with respect to a participating facility is
revoked; or a tenant becomes subject to regulatory sanctions and has failed to
cure or satisfy such regulatory sanctions within its specified cure period in
any material respect with respect to any facility.
Upon an Event of Default under a particular Master Lease Agreement, Ventas
may, at its option, exercise the following remedies: (i) after not less than
ten (10) days' notice to the Company, terminate the Master Lease Agreement,
repossess the leased property and relet the leased property to a third party
and require the Company pay Ventas, as liquidated damages, the net present
value of the rent for the balance of the term, discounted at the prime rate;
(ii) without terminating the Master Lease Agreement, repossess the leased
property and relet the leased property with the Company remaining liable under
the Master Lease Agreement for all obligations to be performed by the Company
thereunder, including the difference, if any, between the rent under the
Master Lease Agreement and the rent payable as a result of the reletting of
the leased property; and (iii) seek any and all other rights and remedies
available under law or in equity. See "--Recent Developments."
If an Event of Default is caused by (i) the loss of any required healthcare
license, permit or approval, (ii) a reduction in the number of licensed beds
in excess of 10% of the number of licensed beds in the applicable facility or
a revocation of certification for reimbursement under Medicare with respect to
any facility that participates in such programs, or (iii) the tenant becoming
subject to regulatory sanctions and failing to cure or satisfy such regulatory
sanctions within its specified cure period, Ventas may, if it so desires,
terminate the lease with respect to the applicable facility that is the
subject of the Event of Default and collect liquidated damages attributable to
such facility multiplied by the number of years remaining on the lease;
provided, however, that after the occurrence of four Events of Default as set
forth in this paragraph, determined on a cumulative basis, Ventas would be
permitted to exercise all of the rights and remedies set forth in the Master
Lease Agreement with respect to all facilities covered under the Master Lease
Agreement, without regard to the facility from which the Event of Default
emanated.
Maintenance, Modification and Capital Additions
The Company is required to maintain the Leased Properties in good repair and
condition, making all repairs, modifications and additions required by law,
including any Capital Addition (as defined). The Company is required to pay
for all capital expenditures and other expenses for the maintenance, repair,
restoration or refurbishment of a Leased Property (and any Capital Addition).
The Company also is required to maintain all personal property at each of the
Leased Properties in good order, condition and repair, as is necessary to
operate the Leased Property in compliance with all applicable licensure and
certification requirements, in compliance with all applicable legal
requirements and insurance requirements and otherwise in accordance with
customary practice in the industry. The Company may undertake any capital
addition that materially adds to or improves a Leased Property (a "Capital
Addition") subject to the approval of Ventas of the plans and specifications,
and the Company's compliance with customary construction requirements.
Insurance
The Company is required to maintain liability, all risk property and
workers' compensation insurance for the Leased Properties at a level at least
comparable to those in place with respect to the Leased Properties as of the
Distribution Date.
Environmental Matters
The Master Lease Agreements provide that the Company will indemnify Ventas
(and its officers, directors and stockholders) against any environmental
claims (including penalties and clean up costs) resulting from any
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condition arising on or under, or relating to, the Leased Properties at any
time on or after the date of the Master Lease Agreements. The Company also
will indemnify Ventas (and its officers, directors and stockholders) against
any environmental claim (including penalties and clean up costs) resulting
from any condition permitted to deteriorate, on or after the date of the
Master Lease Agreements. Ventas has agreed to indemnify the Company (and its
officers, directors and stockholders) against any environmental claims
(including penalties and clean-up costs) resulting from any condition arising
on or under, or relating to, the Leased Properties at any time before the date
of the Master Lease Agreements.
Assignment and Subletting
The Master Lease Agreements provide that the Company may not assign,
sublease or otherwise transfer any Lease or any portion of a Leased Property
as a whole (or in substantial part), including upon a Change of Control (as
defined in the Master Lease Agreements), without the consent of Ventas, which
may not be unreasonably withheld if the proposed assignee is a creditworthy
entity with sufficient financial stability to satisfy its obligations under
the Lease, has not less than four years experience in operating health care
facilities, has a favorable business and operational reputation and character
and agrees to comply with the use restrictions in the Master Lease Agreements.
The obligation of Ventas to consent to a subletting or assignment is subject
to the reasonable approval rights of any mortgagee and/or the lenders under
its credit agreement. The Company may sublease up to 20% of each Leased
Property for restaurants, gift shops and other stores or services customarily
found in hospitals or nursing centers without the consent of Ventas, subject,
however, to there being no material alteration in the character of the Leased
Property or in the nature of the business conducted on such Leased Property.
Right of First Refusal to Purchase
The Master Lease Agreement provides that if Ventas receives a bona fide
offer from a third party to purchase any Leased Property during the first
three years of the Base Term and Ventas wishes to accept the offer, prior to
entering into a contract of sale with the third party, Ventas must first offer
the Company the right to purchase the Leased Property on substantially the
same terms and conditions as are contained in the third party offer.
MANAGEMENT INFORMATION SYSTEMS
The financial information for each of the Company's facilities is
centralized at the corporate headquarters through its management information
systems. The Company uses a comprehensive financial reporting system which
enables it to monitor certain key financial data at each facility such as
payor mix, admissions and discharges, cash collections, net revenues and
staffing. In addition, the financial reporting system provides monthly budget
analysis, financial comparisons to prior periods and comparisons among the
Company's facilities.
In 1998, the Company instituted a plan to replace substantially all of the
Company's financial information and patient accounting systems. This plan has
been incorporated into the Company's Year 2000 ("Y2K") compliance program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
The Company's hospitals utilize VenTouch(TM), an internally developed
electronic patient medical record system. VenTouch(TM) is a software
application which allows nurses, physicians and other clinicians to manage
clinical information utilized in the patient care delivery process. Among the
features of VenTouch(TM) are on-line access and update of an electronic
patient chart, an on-line trend analysis using electronic flowsheets and
graphs, and remote access for authorized users. The system is designed to
decrease administrative time, reduce paper and support the delivery of quality
patient care. VenTouch(TM) has been certified as Y2K compliant by an external
consultant.
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The Company's nursing centers currently use an internally developed
application named Resident Care System ("RCS") for data entry of resident
clinical information. RCS includes state-specific Minimum Data Set ("MDS")
assessment forms, and is integrated with an internally developed resource
utilization group ("RUGs") tool. The combination of these applications allows
for the timely and accurate electronic data transfer of MDS forms to HCFA in
each state. A Y2K compliant version of RCS has been developed and is expected
to be implemented in all of the Company's nursing centers by November 1999.
During 1997, the Company began the installation of a customized version of
VenTouch(TM) in several of its nursing centers. During this pilot process, the
Company determined that VenTouch(TM) did not support effectively the nursing
center operational processes, especially in facilities with lower acuity
patients. Accordingly, the Company determined in the fourth quarter of 1998 to
remove VenTouch(TM) from these facilities in 1999 and continue to standardize
the RCS application for all nursing centers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GOVERNMENTAL REGULATION
Hospitals
Medicare and Medicaid. Medicare is a Federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over and certain
disabled persons. Medicaid is a medical assistance program administered by
each state pursuant to which hospital benefits are available to certain
indigent patients. Within the Medicare and Medicaid statutory framework, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under Medicare and Medicaid. A
substantial portion of the Company's hospital revenues are derived from
patients covered by Medicare and Medicaid. See "--Hospital Division--Sources
of Hospital Revenues."
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by the Department of Health
and Human Services ("HHS") relating to the type of hospital, its equipment,
personnel and standard of medical care, as well as comply with state and local
laws and regulations. The Company has developed a management system to ensure
compliance with the various standards and requirements. Each of the Company's
hospitals employs a person who is responsible for an on-going quality
assessment and improvement program. Hospitals undergo periodic on-site
Medicare certification surveys, which generally are limited if the hospital is
accredited by JCAHO. As of December 31, 1998, all of the Company's hospitals
were certified as Medicare providers and 54 of such hospitals also were
certified by their respective state Medicaid programs. Applications are
pending for certification with respect to the Company's other three hospitals.
A loss of certification could affect adversely a hospital's ability to receive
payments from Medicare and Medicaid programs.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS as a means of controlling healthcare costs.
Under PPS, Medicare inpatient costs are reimbursed based upon a fixed payment
amount per discharge using diagnosis related groups ("DRGs"). The DRG payment
under PPS is based upon the national average cost of treating a Medicare
patient's condition. Although the average length of stay varies for each DRG,
the average stay for all Medicare patients subject to PPS is approximately six
days. An additional outlier payment is made for patients with unusually
extended lengths of stay or higher treatment costs. Outlier payments are only
designed to cover marginal costs. Additionally, it takes 60 days or more for
PPS payments to be made. Thus, PPS creates an economic incentive for general
short-term hospitals to discharge chronic Medicare patients as soon as
clinically possible. Hospitals that are certified by Medicare as general long-
term hospitals are excluded from PPS. Management believes that the incentive
for short-term hospitals to discharge chronic medical patients as soon as
clinically possible creates a substantial referral source for the Company's
long-term hospitals.
The Social Security Amendments of 1983 excluded psychiatric, rehabilitation,
cancer, children's and general long-term hospitals from PPS. A general long-
term hospital is defined as a hospital which has an average
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length of stay greater than 25 days. Inpatient operating costs for general
long-term hospitals are reimbursed under the cost-based reimbursement system,
subject to a computed target rate (the "Target") per discharge for inpatient
operating costs established by TEFRA. As discussed below, the Budget Act made
significant changes to the TEFRA provisions.
Prior to the Budget Act, Medicare operating costs per discharge in excess of
the Target were reimbursed at the rate of 50% of the excess up to 10% of the
Target. Hospitals whose operating costs were lower than the Target were
reimbursed their actual costs plus an incentive. This incentive was equal to
50% of the difference between their actual costs and the Target and may not
exceed 5% of the Target. For cost report periods beginning on or after October
1, 1997, the Budget Act reduced the incentive payments to an amount equal to
15% of the difference between the actual costs and the Target, but not to
exceed 2% of the Target. Costs in excess of the Target are still being
reimbursed at the rate of 50% of the excess up to 10% of the Target but the
threshold to qualify for such payments was raised from 100% to 110% of the
Target. The Budget Act also capped the Targets based on the 75th percentile
for each category of hospitals using 1996 data.
Prior to October 1, 1997, new hospitals could apply for an exemption from
the TEFRA Target provisions. For hospitals certified prior to October 1, 1992,
the exemption was optional and, if granted, lasted for three years. For
certifications since October 1, 1992, the exemption is automatic and is
effective for two years. Under the Budget Act, a new provider will no longer
receive unlimited cost-based reimbursement for its first few years in
operation. Instead, for the first two years, it will be paid the lower of its
costs or 110% of the median TEFRA Target for 1996 adjusted for inflation.
During this two year period, providers remain subject to the TEFRA penalty and
incentive payments discussed in the previous paragraph.
As of December 31, 1998, 54 of the hospitals operated by the Company were
subject to TEFRA Target provisions. The Company's three other long-term
hospitals were not subject to TEFRA because they had qualified for the new
hospital exemptions described above. During 1999, one additional hospital will
become subject to TEFRA Target provisions. The reduction in TEFRA incentive
payments had a material adverse effect on the hospital division's operating
results in 1998. These reductions, which began between May 1, 1998 and
September 1, 1998 with respect to the Company's hospitals, 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.
Medicare and Medicaid reimbursements generally are determined from annual
cost reports filed by the Company which are subject to audit by the respective
agency administering the programs. Management believes that adequate
provisions for loss have been recorded to reflect any adjustments which could
result from audits of these cost reports.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for
services provided to a patient. Such review is subject to administrative and
judicial appeal. Each of the Company's hospitals employs a clinical
professional to administer the hospital's integrated quality assurance and
improvement program, including its utilization review program. PRO denials
have not had a material adverse effect on the hospital division's operating
results.
Medicare and Medicaid antikickback, antifraud and abuse amendments codified
under Section 1128(B)(b) of the Social Security Act (the "Antikickback
Amendments") prohibit certain business practices and relationships that might
affect the provision and cost of healthcare services reimbursable under
Medicare and Medicaid. Sanctions for violating the Antikickback Amendments
include criminal and civil penalties and exclusion from the Medicare and
Medicaid programs. Pursuant to the Medicare and Medicaid Patient and Program
Protection Act of 1987, HHS and the Office of the Inspector General ("OIG")
specified certain Safe Harbors (as hereinafter defined) which describe conduct
and business relationships permissible under the
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Antikickback Amendments. These Safe Harbor regulations have resulted in more
aggressive enforcement of the Antikickback Amendments by HHS and the OIG.
Section 1877 of the Social Security Act (commonly known as "Stark I") states
that a physician who has a financial relationship with a clinical laboratory
generally is prohibited from referring patients to that laboratory. The
Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to expand greatly the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (collectively referred to as the
"Stark Provisions"), a "financial relationship" is defined as an ownership
interest or a compensation arrangement. If such a financial relationship
exists, the entity generally is prohibited from claiming payment for such
services under the Medicare or Medicaid programs. Compensation arrangements
generally are exempted from the Stark Provisions if, among other things, the
compensation to be paid is set in advance, does not exceed fair market value
and is not determined in a manner that takes into account the volume or value
of any referrals or other business generated between the parties. These laws
and regulations, however, are extremely complex and the industry has the
benefit of little judicial or regulatory interpretation. The Company believes
that business practices of providers and financial relationships between
providers have become subject to increased scrutiny as healthcare reform
efforts continue on the Federal and state levels.
The Budget Act provides a number of new antifraud and abuse provisions. The
Budget Act contains new civil monetary penalties for violations of the
Antikickback Amendments and imposes an affirmative duty on providers to ensure
that they do not employ or contract with persons excluded from the Medicare
program. The Budget Act also provides a minimum ten year period for exclusion
from participation in Federal healthcare programs for persons convicted of a
prior healthcare offense.
JCAHO Accreditation. Hospitals receive accreditation from JCAHO, a
nationwide commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of medical staffs
of hospitals. Generally, hospitals and certain other healthcare facilities are
required to have been in operation at least six months in order to be eligible
for accreditation by JCAHO. After conducting on-site surveys, JCAHO awards
accreditation for up to three years to hospitals found to be in substantial
compliance with JCAHO standards. Accredited hospitals are periodically
resurveyed, at the option of JCAHO, upon a major change in facilities or
organization and after merger or consolidation. As of December 31, 1998, all
of the hospitals operated by the Company were accredited by JCAHO. The Company
intends to seek and obtain JCAHO accreditation for any additional facilities
it may purchase or lease and convert into long-term hospitals. The Company
does not believe that the failure to obtain JCAHO accreditation at any
hospital would have a material adverse effect on the Company's results of
operations.
State Regulatory Environment. The Company operates seven hospitals and a
chronic unit in Florida, a state which regulates hospital rates. These
operations contribute a significant portion of the Company's revenues and
operating income from its hospitals. Accordingly, the Company's hospital
revenues and operating income could be materially adversely affected by
Florida rate setting laws or other cost containment efforts. The Company also
operates ten hospitals in Texas, eight hospitals in California, and five
hospitals in Illinois which contribute a significant portion of the Company's
revenues and operating income from its hospitals. Although Texas, California
and Illinois do not currently regulate hospital rates, the adoption of such
legislation or other cost containment measures in these or other states could
have a material adverse effect on the hospital division's revenues and
operating income. The Company is unable to predict whether and in what form
such legislation may be adopted. Moreover, the repeal of the Boren Amendment
by the Budget Act eases the restrictions on the states' ability to reduce
their Medicaid reimbursement levels. Certain other states in which the Company
operates hospitals require disclosure of specified financial information. In
evaluating markets for expansion, the Company will consider the regulatory
environment, including but not limited to, any mandated rate setting.
Certificates of Need and State Licensing. CON regulations control the
development and expansion of healthcare services and facilities in certain
states. CON laws generally provide that approval must be obtained from the
designated state health planning agency prior to the expansion of existing
facilities, construction of new
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facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The stated objective of the CON process is to
promote quality healthcare at the lowest possible cost and avoid unnecessary
duplication of services, equipment and facilities. Some states (including
Florida, Massachusetts and Tennessee) have amended their CON regulations to
require CON approval prior to the conversion of a hospital from a general
short-term facility to a general long-term facility. Of the 23 states in which
the Company's hospitals were located as of December 31, 1998, Florida,
Georgia, Illinois, Kentucky, Massachusetts, Michigan, Missouri, North
Carolina, Tennessee, Virginia and Washington have CON programs. With one
exception, the Company was not required to obtain a CON in connection with
previous acquisitions due to the relatively low renovation costs and the
absence of the need for additional licensed beds or changes in services. CONs
may be required in connection with the Company's future hospital and ancillary
services expansion. There can be no assurance that the Company will be able to
obtain the CONs necessary for any or all future projects. If the Company is
unable to obtain the requisite CONs, its growth and businesses could be
affected adversely.
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with Federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the Company's hospitals in operation have obtained the necessary
licenses to conduct business.
Nursing Centers
The nursing center division is subject to various Federal and state
regulations. In particular, the development and operation of nursing centers
and the provision of healthcare services are subject to Federal, state and
local laws relating to the adequacy of medical care, equipment, personnel,
operating policies, fire prevention, rate-setting and compliance with building
codes and environmental laws. Nursing centers are subject to periodic
inspection by governmental and other authorities to assure continued
compliance with various standards, their continued licensing under state law,
certification under the Medicare and Medicaid programs and continued
participation in the Veterans Administration program. The failure to obtain,
retain or renew any required regulatory approvals or licenses could affect
adversely nursing center operations.
Effective October 1, 1990, OBRA increased the enforcement powers of state
and Federal certification agencies. Additional sanctions were authorized to
correct noncompliance with regulatory requirements, including fines, temporary
suspension of admission of new patients to nursing centers and, in extreme
circumstances, decertification from participation in the Medicare or Medicaid
programs.
The nursing centers managed and operated by the Company are licensed either
on an annual or bi-annual basis and certified annually for participation in
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with Federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided, the
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers. From time to time
the nursing centers receive statements of deficiencies from regulatory
agencies. In response, the Company will implement plans of correction with
respect to these nursing centers to address the alleged deficiencies. The
Company believes that substantially all of its nursing centers are currently
in material compliance with all applicable regulations or laws. See "Legal
Proceedings."
In certain circumstances, Federal law mandates that conviction for certain
abusive or fraudulent behavior with respect to one nursing center may subject
other facilities under common control or ownership to disqualification for
participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all nursing centers under common control or ownership
within a state are subject to delicensure if any one or more of such
facilities are delicensed.
Revised Federal regulations under OBRA, which became effective in 1995,
affect the survey process for nursing centers and the authority of state
survey agencies and HCFA to impose sanctions on facilities based upon
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noncompliance with requirements. Available sanctions include imposition of
civil monetary penalties, temporary suspension of payment for new admissions,
appointment of a temporary manager, suspension of payment for eligible
patients and suspension or decertification from participation in the Medicare
and/or Medicaid programs. The Company is unable to project how these
regulatory changes and their implementation will affect the Company.
In addition to license requirements, many states have statutes that require
a CON to be obtained prior to the construction of a new nursing center, the
addition of new beds or services or the incurrence of certain capital
expenditures. Certain states also require regulatory approval prior to certain
changes in ownership of a nursing center. Certain states have eliminated their
CON programs and other states are considering alternatives to their CON
programs. Of the 31 states in which the Company's nursing centers are located
as of December 31, 1998, Alabama, Connecticut, Florida, Georgia, Kentucky,
Louisiana, Maine, Massachusetts, Mississippi, Montana, Nebraska, Nevada, New
Hampshire, North Carolina, Ohio, Oregon, Rhode Island, Tennessee, Vermont,
Virginia, Washington and Wisconsin have CON programs. To the extent that CONs
or other similar approvals are required for expansion of the Company's
operations, either through facility acquisitions, expansion or provision of
new services or other changes, such expansion could be affected adversely by
the failure or inability to obtain the necessary approvals, changes in the
standards applicable to such approvals or possible delays and expenses
associated with obtaining such approvals.
The nursing center division also is subject to Federal and state laws which
govern financial and other arrangements between healthcare providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between healthcare providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the Antikickback
Amendments. These provisions prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The nursing center division also is subject
to additional antifraud and abuse provisions contained in the Budget Act. In
addition, some states restrict certain business relationships between
physicians and pharmacies, and many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs as
well as civil and criminal penalties. These laws vary from state to state.
A substantial portion of the Company's nursing center revenues is derived
from patients covered by Medicare and Medicaid. See "--Nursing Center
Division--Sources of Nursing Center Revenues." The Budget Act established a
prospective payment system for nursing centers for cost reporting periods
beginning on or after July 1, 1998. See "--Healthcare Reform."
Ancillary Services
The ancillary services division also is subject to Federal and state laws
which govern financial and other arrangements between healthcare providers.
These laws often prohibit certain direct and indirect payments or fee-
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Such laws include the
Antikickback Amendments. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. These operations also are
subject to additional antifraud and abuse provisions contained in the Budget
Act. In addition, some states restrict certain business relationships between
physicians and pharmacies, and many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs as
well as civil and criminal penalties. These laws vary from state to state.
The pharmaceutical operations within the ancillary services division are
subject to regulation by the various states in which it conducts business as
well as by the Federal government. The pharmacies are regulated under the
Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are
administered by the
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United States Food and Drug Administration. Under the Comprehensive Drug Abuse
Prevention and Control Act of 1970, which is administered by the United States
Drug Enforcement Administration ("DEA"), dispensers of controlled substances
must register with the DEA, file reports of inventories and transactions and
provide adequate security measures. Failure to comply with such requirements
could result in civil or criminal penalties.
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 by $115 billion and $13 billion,
respectively, over the next five years. Under the Budget Act, annual growth
rates for Medicare will be reduced from over 10% to approximately 7.5% for the
next five years based on specific program baseline projections from the last
five years. Virtually all spending reductions will come from providers and
changes in program components. The Budget Act has affected adversely the
revenues in each of the Company's operating divisions.
The Budget Act reduced payments made to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a PPS
hospital. The reductions in allowable costs for capital expenditures became
effective October 1, 1997. The reductions in the TEFRA incentive payments and
allowable costs for bad debts 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 PPS 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 will be 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 expenses 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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy
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services and revised limits for physical and respiratory therapy services. The
limits are based on a blend of data from wage rates for hospitals and nursing
centers and include salary, fringe benefit and expense factors. Rates are
defined by specific geographic market areas, based upon a modified version of
the hospital wage index. The new limits became effective for services provided
on or after April 10, 1998 and negatively impacted operating results of the
ancillary services division in 1998. The Company will continue to charge
client nursing centers in accordance with the revised guidelines until such
nursing centers transition to PPS. Under PPS for nursing centers, the
reimbursement for these services provided to nursing center patients is a
component of the total reimbursement allowed per nursing center patient and
the salary equivalency guidelines are not applicable. Most of the Company's
client nursing centers are expected to transition to PPS on or about January
1, 1999.
There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and
to make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that 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.
ADDITIONAL COMPANY INFORMATION
Employees
As of December 31, 1998, the Company had approximately 42,600 full-time and
15,300 part-time and per diem employees. The Company has approximately 3,300
unionized employees under 30 collective bargaining agreements as of December
31, 1998.
Liability Insurance
The Company's hospitals, nursing centers and ancillary services are insured
by the Company's wholly owned captive insurance company, Cornerstone Insurance
Company ("Cornerstone"). Cornerstone insures the first $2 million of losses.
Coverages for losses in excess of $2 million are maintained through unrelated
commercial insurance carriers to provide $130 million of coverage limits per
claim and in the aggregate.
The Company believes that its insurance is adequate in amount and coverage.
There can be no assurance that in the future such insurance will be available
at a reasonable price or that the Company will be able to maintain adequate
levels of malpractice insurance coverage.
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CAUTIONARY STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding the Company's expected future financial
position, results of operations, cash flows, liquidity, financing plans,
business strategy, budgets, projected costs and capital expenditures,
competitive position, growth opportunities, plans and objectives of management
for future operations and words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ
materially from the Company's expectations as a result of a variety of
factors, including, without limitation, those discussed below.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this "Cautionary Statements"
section and elsewhere in this Annual Report on Form 10-K. Factors that may
affect the plans or results of the Company include, without limitation, (i)
the Company's ability to amend or refinance its existing debt and lease
obligations or otherwise adjust its current financial structure, (ii) the
Company's success in implementing its business strategy, (iii) the nature and
extent of future competition, (iv) the extent of future healthcare reform and
regulation, including cost containment measures and changes in reimbursement
policies and procedures, (v) the Company's ability to manage and operate its
leased properties, (vi) increases in the cost of borrowing for the Company,
(vii) the ability of the Company to deliver high quality care and to attract
patients, (viii) the ability of the Company and its significant vendors,
suppliers and payors to timely identify and correct all relevant computer
codes and date sensitive chips prior to the year 2000 or replace noncompliant
equipment with year 2000 compliant equipment and (ix) changes in the general
economic conditions and/or in the markets in which the Company competes. Many
of these factors are beyond the control of the Company and its management.
Risks Associated with Defaults under the Credit Agreement
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under its 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. On February 3, 1999, the Company secured a
covenant waiver related to the Credit Agreement through March 31, 1999 from
its Senior Lenders. The waiver included certain borrowing limitations under
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.
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. The current waiver includes, among
other things, an aggregate borrowing limitation of $55 million under the
Revolving Credit Facility during the waiver period. At the close of business
on April 14, 1999, there were $10.7 million of outstanding borrowings under
the Revolving Credit Facility.
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. As
previously discussed, the Company and Ventas have entered into a structured
payment plan for the payment of rent due under the Master Lease Agreements for
April. In addition, the Company was informed on April 9, 1999 by HCFA that the
Medicare program has made a demand for repayment of approximately $90 million
of reimbursement overpayments by April 23, 1999. In addition, HCFA has
indicated
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that all reimbursement payments to the Company will be suspended if the
overpayment is not received by April 23. The Company is in discussions with
HCFA regarding extending the repayment terms. The amount demanded by HCFA is
included in amounts due to third party payors in the Company's consolidated
balance sheet at December 31, 1998. The waiver also places additional
informational requirements and minimum daily census level requirements on the
Company's hospitals and nursing centers. The Company's failure to comply with
those covenants would result in the termination of the waiver.
There can be no assurances that the Senior Lenders will approve the
amendment or restructuring of the Credit Agreement or will continue to provide
the Company with a covenant waiver after May 28, 1999 or will not seek to
declare an event of default or credit freeze prior to such date. In the event
the Company is unable to obtain the necessary amendment or comply with or
maintain a covenant waiver, 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 $300
million of outstanding principal on the 1998 Notes contain provisions which
allow those creditors 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. The Master Lease Agreements
do not contain similar cross-default provisions.
If the Senior Lenders or other creditors 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, 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. In addition, it is possible that certain creditors of the
Company could file an involuntary petition seeking to place the Company in
bankruptcy. There can be no assurance that a bankruptcy proceeding would
result in a reorganization of the Company rather than a liquidation. If a
liquidation or a protracted reorganization were to occur, there is a
substantial risk that there would be no cash or property available for
distribution to holders of the 1998 Notes and the holders of the Company's
common stock and that the Senior Lenders could incur a significant loss on
their claims under the Credit Agreement. See "Business--Recent Developments."
Consequences of Failing to Amend or Restructure the Credit Agreement and Other
Obligations
If the Company is unable to amend or restructure the Credit Agreement and
other payment obligations, including the rents under the Master Lease
Agreements, outstanding amounts under the 1998 Notes, and the reimbursement
overpayments owed Medicare, the Company's highly leveraged financial position
will result in the continuation of the defaults previously described and may
result in a number of other serious financial and operational difficulties,
including the following: (i) the Company's liquidity may be inadequate;
(ii) the Company may be unable to make the required payments under the Master
Lease Agreements; (iii) the Company may be unable to repay amounts currently
owed to third party payors including the Medicare program; (iv) the Company
may be unable to invest adequate capital in its business to maintain its
current facilities or to finance costs of Y2K compliance; (v) the Company may
have little, if any, ability to access capital markets; (vi) the Company's
senior management may be required to spend an excessive amount of time and
effort dealing with the Company's financial problems instead of focusing on
the operation of its business; (vii) the Company may be unable to retain top
management and other key personnel; (viii) the Company may experience a
reduction in the census at its hospitals and nursing centers if patients and
referral sources become concerned about the Company's ability to provide
quality care, and (ix) 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. These difficulties, if they were to occur, would have a
material adverse effect on the Company's liquidity, financial position and
results of operations. See "Business--Recent Developments" and "Business--
Master Lease Agreements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Substantial Leverage and Ability to Meet Debt Service and Rent Requirements
The Company is highly leveraged and a substantial portion of its cash flow
from operations is dedicated to the payment of principal and interest on
outstanding indebtedness as well as rents related to its leased properties. As
of December 31, 1998, the Company had outstanding indebtedness of
approximately $466 million on its Credit Agreement (including amounts due
within one year) and $300 million of outstanding 1998 Notes under the terms of
the Indenture dated April 30, 1998 (the "Indenture"). In addition, the Company
is obligated under its operating lease agreements, including the Master Lease
Agreements, to pay rents aggregating approximately $3.2 billion over the next
24 years. The consolidated balance sheet of the Company at December 31, 1998
also includes a current obligation to repay approximately $99 million of
reimbursement overpayments to third party payors, including the Medicare
program. Moreover, the Company was informed on April 9, 1999 by HCFA that the
Medicare program has made a demand for repayment of approximately $90 million
of the reimbursement overpayments by April 23, 1999.
Subject to certain limitations, the Credit Agreement and the Indenture may
permit the Company and its subsidiaries to incur additional indebtedness. The
Company has been current with respect to its payment obligations under its
debt agreements and operating leases except for the rental payments due on
April 1, 1999 under the Master Lease Agreements. See "--Risks Associated with
Defaults under the Credit Agreement" and "Business--Recent Developments."
The ability of the Company to service its financial obligations, in addition
to its ability to comply with the financial and restrictive covenants
contained in the Credit Agreement and the Indenture, is dependent upon, among
other things, its ability to obtain a sustainable capital structure and its
future performance which is subject to financial, economic, competitive,
regulatory and other factors. Many of these factors are beyond the Company's
control. As currently structured, it is unlikely that the Company will be able
to generate sufficient cash flow to cover required financial obligations,
including its debt service obligations, rent obligations and other obligations
due third parties. If the Company is unable to generate sufficient funds to
meet its obligations, the Company may be required to refinance, restructure or
otherwise amend some or all of such obligations, sell assets or raise
additional equity. There is no assurance that such restructuring activities,
sales of assets or issuances of equity can be accomplished or, if
accomplished, would raise sufficient funds to meet these obligations. The
Company's high degree of leverage and related financial covenants also could
have a material adverse effect on its ability to withstand competitive
pressures or adverse economic conditions (including adverse regulatory
changes), make material capital expenditures or acquisitions, obtain future
financing or take advantage of business opportunities that may arise. In
addition, a downturn in general economic conditions or in its business could
have a material adverse effect on the Company's ability to meet debt service,
rent and other obligations or to conduct its business in the ordinary course.
See "Business--Recent Developments" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Credit Agreement contains financial covenants which, among other things,
require the Company to maintain certain financial ratios and restrict the
ability of the Company and its subsidiaries to incur indebtedness, make
acquisitions or investments, create or permit liens and make capital
expenditures. The Indenture also contains covenants which restrict the Company
from incurring additional indebtedness, creating liens on its assets, making
certain asset dispositions and entering into transactions with affiliates. If
the Company is unable to generate sufficient cash flows or otherwise obtain
the funds necessary to make required payments of principal and interest under
the Credit Agreement or the Indenture, the Company could be in default under
the terms thereof, which would permit the lenders to accelerate the maturity
of the debt created pursuant to the Credit Agreement and the 1998 Notes. See
"--Risks Associated with Defaults under the Credit Agreement."
Potential Consequences of Failing to Pay Rent Under 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. The
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Standstill Agreement was entered into in furtherance of the discussions
between the Company and Ventas concerning possible reductions in the rental
payments and other concessions under the Master Lease Agreements. On April 12,
1999, the Company and Ventas entered into the Second Standstill which provides
for the structured payment of approximately $18.5 million of rental payments
initially due on April 1. The Company agreed to pay $8.0 million on April 13,
1999, $4.3 million on each of April 20 and April 27, and $1.9 million on April
30, 1999. The Second Standstill further provides that neither party will
pursue any claims against the other or any third party related to the
Reorganization Transactions as long as the Company complies with the
structured payment terms. The Second Standstill will terminate on May 5, 1999
or on any date that a voluntary or involuntary bankruptcy proceeding is
commenced by or against the Company. If the parties are unable to resolve
their disputes or maintain an interim resolution, the Company's failure to pay
the rent due in April or thereafter, 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 (i) 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 (ii) pay the net present value of the rent due for the
balance of the terms of the Master Lease Agreements. The failure to pay rent,
in the absence of a temporary restraining order or other interim relief, also
would result in a credit freeze under the current bank waiver. Considering the
Company's limited financial resources, the existence of certain defaults under
the Credit Agreement, and 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. See "Business--Recent
Developments" and "Business--Master Lease Agreements--Events of Default."
Healthcare Industry Risks
Dependence on Reimbursement; Medicare and Medicaid as Material Sources of
Revenues
The Company derives a substantial portion of its net operating revenues from
third-party payors, including the Medicare and Medicaid programs. In 1998, the
Company derived approximately 60% of its total revenues from the Medicare and
Medicaid programs. Such programs are highly regulated and subject to frequent
and substantial changes. The Budget Act is intended to reduce the increase in
Medicare payments by $115 billion over the next five years and made extensive
changes in the Medicare and Medicaid programs. In addition, private payors,
including managed care payors, increasingly are demanding discounted fee
structures and the assumption by healthcare providers of all or a portion of
the financial risk. Efforts to impose greater discounts and more stringent
cost controls by private payors are expected to continue. There can be no
assurances that adequate reimbursement levels will continue to be available
for the services provided by the Company which are currently being reimbursed
by Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on the Company's liquidity, financial condition and results of
operations.
Extensive Regulation
In the ordinary course of its business, the Company is subject regularly to
inquiries, investigations and audits by Federal and state agencies that
oversee the Healthcare Regulations (as defined). The Company is currently the
subject of certain significant investigations and inquiries. See "Legal
Proceedings." The Company believes that the regulatory environment surrounding
the long-term care industry has intensified. Accordingly, the Company may be
subject to increased regulatory scrutiny in the future.
The extensive Federal, state and local regulations affecting the healthcare
industry include, but are not limited to, regulations relating to licensure,
conduct of operations, ownership of facilities, addition of facilities,
services and prices for services (collectively, the "Healthcare Regulations").
In particular, Antikickback Amendments prohibit certain business practices and
relationships that might affect the provisions and cost of
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healthcare services reimbursable under Medicare and Medicaid, including the
payment or receipt of remuneration for the referral of patients whose care
will be paid by Medicare or other governmental programs. Sanctions for
violating the Antikickback Amendments include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs
such as the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, HHS has issued regulations that describe some of the conduct and
business relationships permissible under the Antikickback Amendments ("Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal. Business
arrangements of healthcare service providers that fail to satisfy the
applicable Safe Harbors criteria, however, risk increased scrutiny and
possible sanctions by enforcement authorities.
The Health Insurance Portability and Accountability Act of 1997, which
became effective January 1, 1997, amends, among other things, Title XI (42
U.S.C. 1301 et seq.) to broaden the scope of current fraud and abuse laws to
include all health plans, whether or not they are reimbursed under Federal
programs.
In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective
January 1, 1995, to broaden significantly the scope of prohibited physician
referrals under the Medicare and Medicaid programs to providers with which
they have ownership or certain other financial arrangements (the "Self-
Referral Prohibitions"). Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program to
prohibit the payment or receipt of remuneration for the referral of patients
and physician self-referrals regardless of the source of the payment for the
care. These laws and regulations are extremely complex and little judicial or
regulatory interpretation exists. The Company does not believe its
arrangements are in violation of the Self-Referral Prohibitions. There can be
no assurance, however, that governmental officials charged with responsibility
for enforcing the provisions of the Self-Referral Prohibitions will not assert
that one or more of the Company's arrangements are in violation of such
provisions.
The Budget Act also provides a number of new antifraud and abuse provisions.
The Budget Act contains additional civil monetary penalties for violations of
the Antikickback Amendments and imposes an affirmative duty on providers to
insure that they do not employ or contract with persons excluded from the
Medicare program. The Budget Act also provides a minimum ten year period for
exclusion from participation in Federal healthcare programs for persons
convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional
or expanded healthcare facilities or services. CONs, which are issued by
governmental agencies with jurisdiction over healthcare facilities, are at
times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The Company operates hospitals in 11 states and
nursing centers in 22 states that require state approval for the expansion of
its facilities and services under CON programs. There can be no assurance that
the Company will be able to obtain a CON for any or all future projects. If
the Company is unable to obtain the requisite CON, its growth and business
could be affected adversely.
The Company is unable to predict the future course of Federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the Company's liquidity, financial condition and results of
operations.
Healthcare Reform
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contains extensive changes to the Medicare
and Medicaid programs intended to reduce the projected amount of increase in
payments under those
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programs by $115 billion and $13 billion, respectively, over the next five
years. Under the Budget Act, annual growth rates for Medicare will be reduced
from over 10% to approximately 7.5% for the next five years based on specific
program baseline projections from the last five years. Virtually all spending
reductions will come from providers and changes in program components. The
Budget Act has affected adversely the revenues in each of the Company's
operating divisions.
The Budget Act reduced payments made to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a PPS
hospital. The reductions in allowable costs for capital expenditures became
effective October 1, 1997. The reductions in the TEFRA incentive payments and
allowable costs for bad debts 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 PPS 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 will be 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 expenses 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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The limits are based on a blend of data from
wage rates for hospitals and nursing centers and include salary, fringe
benefit and expense factors. Rates are defined by specific geographic market
areas, based upon a modified version of the hospital wage index. The new
limits became effective for services provided on or after April 10, 1998 and
negatively impacted operating results of the ancillary services division in
1998. The Company will continue to charge client nursing centers in accordance
with the revised guidelines until such nursing centers transition to PPS.
Under PPS for nursing centers, the reimbursement for these services provided
to nursing center patients is a component of the total reimbursement allowed
per nursing center patient and the salary equivalency guidelines are not
applicable. Most of the Company's client nursing centers are expected to
transition to PPS on or about January 1, 1999.
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There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and
to make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that 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.
Risks Relating to State Regulation
The Company operates seven hospitals and a chronic unit in Florida, a state
which regulates hospital rates. These operations contribute a significant
portion of the Company's revenues and operating income from its hospitals.
Accordingly, the Company's hospital revenues and operating income could be
materially adversely affected by Florida's rate setting laws or other cost
containment efforts. The Company also operates ten hospitals in Texas, eight
hospitals in California, and five hospitals in Illinois which contribute a
significant portion of the Company's revenues and operating income from its
hospitals. Although Texas, California and Illinois do not currently regulate
hospital rates, the adoption of such legislation or other cost containment
measures in these or other states could have a material adverse effect on the
hospital division's revenues and operating income. Moreover, the repeal of the
Boren Amendment by the Budget Act provides the states with greater flexibility
to reduce their Medicaid reimbursement levels. The Company is unable to
predict whether and in what form such legislation will be adopted. Certain
other states in which the Company operates hospitals require disclosure of
specified financial information. In evaluating markets for expansion, the
Company considers the regulatory environment including, but not limited to,
any mandated rate setting.
Highly Competitive Industry
The healthcare services industry is highly competitive. The Company faces
competition from general acute care hospitals and long-term care hospitals
which provide services comparable to those offered by the Company's hospitals.
Many general acute care hospitals are larger and more established than the
Company's hospitals. The Company may experience increased competition from
existing hospitals as well as hospitals converted, in whole or in part, to
specialized care facilities. The Company's nursing centers compete on a local
and regional basis with other nursing centers, and competition also exists for
the operations of the ancillary services division. The long-term care industry
is divided into a variety of competitive areas which market similar services.
These competitors include nursing centers, hospitals, extended care centers,
assisted living facilities, home health agencies and similar institutions.
Certain of the Company's competitors are operated by not-for-profit,
nontaxpaying or governmental agencies, which can finance capital expenditures
on a tax-exempt basis, and which receive funds and charitable contributions
unavailable to the Company. The Company will compete with other healthcare
companies for the future acquisition and development of additional hospitals,
nursing centers and other healthcare assets and businesses.
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Year 2000 Issue
Management's analysis of the Y2K issues affecting the Company and its
development of a comprehensive compliance program to address its Y2K issues
are 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 new financial 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's results of operations, liquidity and financial position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Item 2. Properties
For information concerning the hospitals and nursing centers operated by the
Company, see "Business--Hospital Division--Hospital Facilities," "Business--
Nursing Center Division--Nursing Center Facilities," and "Business--Master
Lease Agreements." The Company believes that its facilities are adequate for
the Company's future needs in such locations. In December 1998, the Company
purchased an approximately 287,000 square foot building located in Louisville,
Kentucky as its Company headquarters ("One Vencor Place") to consolidate
corporate employees from several locations. The Company intends to relocate
all of its corporate employees to One Vencor Place by the third quarter of
1999.
Item 3. Legal Proceedings
Summary descriptions of various significant legal and regulatory activities
follow:
On March 31, 1999, the Company and Ventas entered into a Standstill
Agreement which provided that both companies would postpone through April 12,
1999 any claims either may have against the other, 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 rental payments and other concessions under the Master Lease Agreements.
On April 12, 1999, the Company and Ventas entered into the Second Standstill
which provides for the structured payment of approximately $18.5 million of
rental payments initially due on April 1. The Company agreed to pay $8.0
million on April 13, 1999, $4.3 million on each of April 20 and April 27, and
$1.9 million on April 30, 1999. The Second Standstill further provides that
neither party will pursue any claims against the other or any third party
related to the Reorganization Transactions as long as the Company complies
with the structured payment terms. The Second Standstill will terminate on May
5, 1999 or on any date that a voluntary or involuntary bankruptcy proceeding
is commenced by or against the Company. If the parties are unable to resolve
their disputes or maintain an interim resolution, the Company's failure to pay
the rent due in April or thereafter, 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 (i) 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 (ii) pay the net present value of the rent due for the
balance of the terms of the Master Lease Agreements. See "Business--Recent
Developments," "Business--Master Lease Agreements--Events of Default" and
"Cautionary Statements--Potential Consequences of Failing to Pay Rent Under
Master Lease Agreements."
36
<PAGE>
On October 21, 1998, the Company was notified by the HCFA Administrator in
Chicago, Illinois and the State of Wisconsin that the Medicare and Medicaid
certification for its 657-bed skilled nursing facility known as Mt. Carmel
Health & Rehabilitation Center in Milwaukee, Wisconsin (the "Facility") would
be terminated effective November 6, 1998. The State of Wisconsin Department of
Health and Family Services also informed the Company that the Facility's
license would be terminated as of February 13, 1999. The Facility appealed
that termination. These actions resulted from the Facility's failure to attain
substantial compliance with Federal and state requirements by an October 12,
1998 deadline. On November 6, 1998, the Company filed an action against HCFA
in Federal district court in Washington, D.C. and obtained an order enjoining
HCFA and its agents, including the State of Wisconsin, from terminating the
Facility's certification and from relocating any of the Facility's residents.
That case was dismissed after the Company reached agreements with state and
Federal authorities to settle all fines and penalties and extend the
threatened certification termination date to January 29, 1999. The Company has
paid state and Federal fines totaling $500,000. On January 29, 1999, the
Facility was determined to be in substantial compliance with Federal and state
requirements, which removed the threat of Medicare and Medicaid
decertification. On January 29, 1999, the Facility's license and operations
were transferred to Benedictine Health Dimensions, an unrelated entity.
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 on February 18, 1999 after trial
that defendants/counterclaims were entitled to damages and prejudgment
interest in the amount of approximately $1.3 million and to an undetermined
amount of attorneys' fees and other litigation expenses. The Company intends
to appeal the court's rulings against TheraTx upon receipt of a final
judgment.
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 the 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.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition,
HCFA imposed a fine of $113,000. The Company appealed both the AHCA and HCFA
fines and has settled both appeals for a total of $370,000. The Company
submitted an acceptable plan of correction at the Tampa nursing center and was
informed by AHCA that "immediate jeopardy" no longer existed. The threatened
termination of the Tampa nursing center's Medicare provider agreement also was
reversed. The temporary injunction order has been dissolved, and that legal
action has been dismissed.
37
<PAGE>
The Tampa Prosecuting Attorney's office has indicated to the Company that it
is conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. The Company cooperated fully with
this investigation and has been informed that no action will be taken against
the Company.
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.
The HCFA Administrator of the Medicare and Medicaid programs indicated in
April 1998 that the Company's facilities in other states also are being
monitored.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide. The complaint alleges
various breaches of contract, and statutory and regulatory violations
including violations of Federal and state RICO statutes. The original
complaint has been amended to delineate several purported subclasses. The
plaintiffs seek class certification, unspecified damages, attorneys' fees and
costs. The Company is defending this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning 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 Company is defending
this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of the Company and
Ventas. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the Company and Ventas have an effective remedy. The
Company believes that the allegations in the complaint are without merit and
intends to defend this action vigorously.
38
<PAGE>
A class action lawsuit entitled Jules Brody v. Transitional Hospital
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 common stock
during the period from February 26, 1997 through May 4, 1997, inclusive. The
complaint alleges that Transitional purchased shares of its common stock from
members of the investing public after it had received a written offer to
acquire all of Transitional's common stock and without making the required
disclosure that such an offer had been made. The complaint further alleges
that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had
reached an advanced stage with actual firm offers at substantial premiums to
the trading price of Transitional's stock having been made which were actively
being considered by Transitional's Board of Directors. The complaint asserts
claims pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and
common law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. On June 18, 1998, the court granted the Company's
motion to dismiss with leave to amend the Section 10(b) claim and the state
law claims for misrepresentation. The court denied the Company's motion to
dismiss the Section 14(e) and Section 20(a) claims, 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'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 United States Department of Justice has intervened in the suit which
was brought under the Federal Civil False Claims Act. AXR provided portable X-
ray services to nursing facilities (including those operated by the Company)
and other healthcare providers. The Company acquired an interest in AXR when
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.
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 partnerships' former
Medicare billing practices. The Company intends to defend vigorously the
action.
The Company's subsidiary, TheraTx, was a defendant and counterclaimant in an
action pending in state court in Jacksonville, Florida entitled Highland Pines
Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al. The plaintiffs
claimed that they were entitled to up to $40.0 million in earnout compensation
from TheraTx's purchase of several businesses from the plaintiffs in 1995 and
to damages from related tort claims. TheraTx had asserted fraud counterclaims
against the plaintiffs relating to the original purchase. This case, along
with other pending claims between TheraTx and the various plaintiffs, was
settled in January 1999, resulting in a payment of $16.2 million in cash and
other consideration by TheraTx to the plaintiffs. All legal actions between
the parties have been dismissed pursuant to the settlement.
39
<PAGE>
The Company has been informed by the U.S. Department of Justice that it is
the subject of ongoing investigations into various aspects of its Medicare
billing practices. The Company is cooperating fully in the investigations.
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 other 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
liquidity, financial position or results of operations. 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
40
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages (as of January 1, 1999) and present and
past positions of the persons who are the current executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Edward L. Kuntz.............. 53 Chairman of the Board, Chief Executive
Officer and President
Richard A. Schweinhart....... 49 Senior Vice President and Chief Financial
Officer
Frank J. Battafarano......... 48 President, Hospital Division
Donald D. Finney............. 51 President, Nursing Center Division
Frank W. Anastasio........... 53 President, Ancillary Services Division
Richard E. Chapman........... 50 Senior Vice President and Chief Information
Officer
Jill L. Force................ 46 Senior Vice President, General Counsel and
Secretary
James H. Gillenwater, Jr. ... 41 Senior Vice President, Planning and
Development
Richard A. Lechleiter........ 40 Vice President, Finance, Corporate Controller
and Treasurer
</TABLE>
Edward L. Kuntz, an attorney, has served as Chairman of the Board, Chief
Executive Officer and President of the Company since January 1999. He served
as President, Chief Operating Officer and director of the Company from
November 1998 to January 1999. Mr. Kuntz was Chairman and Chief Executive
Officer of Living Centers of America, Inc. ("Living Centers"), a leading
provider of long-term healthcare, from 1992 to 1997. After leaving Living
Centers, he served as an advisor and consultant to a number of healthcare
services and investment companies and was affiliated with Austin Ventures, a
venture capital firm. In addition, Mr. Kuntz served as Associate General
Counsel and later as Executive Vice President of ARA Living Centers until the
formation of Living Centers in 1992.
Richard A. Schweinhart, a certified public accountant, has served as Senior
Vice President and Chief Financial Officer of the Company since September
1998. Mr. Schweinhart was Senior Vice President--Columbia Sponsored Networks
for Columbia/HCA Healthcare Corp. ("Columbia") from March 1996 through
September 1998. From April 1995 until March 1996, he served as Senior Vice
President--Nonhospital Operations and from September 1993 until April 1995 as
Senior Vice President--Finance of Columbia. Mr. Schweinhart served as Senior
Vice President--Finance for both Galen Health Care, Inc. ("Galen") and Humana
Inc. ("Humana") from November 1991 to September 1993.
Frank J. Battafarano has served as President, Hospital Division of the
Company since November 1998. He served as Vice President of Operations from
April 1998 to November 1998. He held the same position with the Company's
predecessor from February 1998 to April 1998. From May 1996 to January 1998,
he served as Senior Vice President of the central regional office of the
Company's predecessor. From January 1992 to April 1996, he served as an
executive director and hospital administrator for the Company's predecessor.
Donald D. Finney has served as President, Nursing Center Division of the
Company since January 1999. During 1998, Mr. Finney was Chief Executive
Officer of HCMF Corporation, a privately held post-acute and assisted living
provider. From January 1997 to December 1997, he served as Chief Operating
Officer of Summerville Healthcare Group, Inc., an operator of assisted living
facilities. He served as President of the Facilities Division of GranCare,
Inc. from July 1995 to January 1997. From October 1990 to July 1995, Mr.
Finney served as Chief Operating Officer of Evergreen Healthcare, Inc., an
operator of long-term care and assisted living facilities.
Frank W. Anastasio has served as President, Ancillary Services Division of
the Company since November 1998. He served as Vice President of Vencare Health
Services from April 1998 to November 1998. Mr. Anastasio held the same
position in the Company's predecessor from February 1996 to April 1998. From
September 1995 to February 1996, he served as Regional Vice President of
hospital operations for the
41
<PAGE>
Company's predecessor. Mr. Anastasio served as Regional Director of hospital
operations from November 1992 to September 1995.
Richard E. Chapman has served as Senior Vice President and Chief Information
Officer of the Company since April 1998. Mr. Chapman served as Senior Vice
President and Chief Information Officer of the Company's predecessor from
October 1997 to April 1998. From March 1993 to October 1997, he was Senior
Vice President of Information Systems of Columbia, Vice President of Galen
from March 1993 to August 1993, and of Humana from September 1990 to February
1993.
Jill L. Force, a certified public accountant and attorney, has served as
Senior Vice President and General Counsel of the Company since April 1998. She
also has served as Secretary since February 1999. From January 1998 to April
1998, she served as Senior Vice President, General Counsel and Assistant
Secretary of the Company's predecessor. Ms. Force served as Vice President,
General Counsel and Secretary of the Company's predecessor from November 1995
through December 1996. From November 1995 through December 1996, she served as
Vice President, General Counsel and Secretary of the Company's predecessor and
was General Counsel and Secretary from 1989 to 1995. Ms. Force is a director
of Healthcare Recoveries, Inc., a provider of health insurance subrogation and
related recovery services.
James H. Gillenwater, Jr. has served as Senior Vice President, Planning and
Development of the Company since April 1998. Mr. Gillenwater served as Senior
Vice President, Planning and Development of the Company's predecessor from
December 1996 to April 1998. From November 1995 through December 1996, he
served as Vice President, Planning and Development of the Company's
predecessor and was Director of Planning and Development from 1989 to November
1995.
Richard A. Lechleiter, a certified public accountant, has served as Vice
President, Finance and Corporate Controller of the Company since April 1998
and also has served as Treasurer since July 1998. Mr. Lechleiter served as
Vice President, Finance and Corporate Controller of the Company's predecessor
from November 1995 to April 1998. From June 1995 to November 1995, he was
Director of Finance for the Company's predecessor. Mr. Lechleiter was Vice
President and Controller of Columbia from September 1993 to May 1995, of Galen
from March 1993 to August 1993, and of Humana from September 1990 to February
1993.
42
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
MARKET PRICE FOR COMMON STOCK
AND DIVIDEND HISTORY
The Common Stock began trading on the New York Stock Exchange (NYSE) under
the ticker symbol of VC on the Distribution Date. The Company has
approximately 42,000 stockholders based on the number of record holders of
common stock and an estimate of the number of individual participants
represented by security position listings. The prices in the table below, for
the calendar quarters indicated, represent the high and low sales prices for
the common stock as reported by the NYSE Composite Tape since the Distribution
Date. No cash dividends have been paid on the common stock during such period.
The Company does not intend to pay cash dividends on its common stock for
the foreseeable future so that it may reinvest in the development of its
business and reduce indebtedness. The payment of dividends in the future will
be at the discretion of the Board of Directors. Restrictions imposed by the
Company's existing debt obligations also limit the ability of the Company to
pay dividends.
<TABLE>
<CAPTION>
Sales Price of
Common Stock
----------------
High Low
--------- ------
<S> <C> <C>
1998
----
Distribution Date (May 1, 1998) through June 30,
1998............................................ $12 7/8 $ 6 9/16
Third Quarter.................................... 7 1/4 2 15/16
Fourth Quarter................................... 5 3/4 3 1/2
</TABLE>
43
<PAGE>
Item 6. Selected Financial Data
VENCOR, INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(In thousands, except for per share amounts and statistics)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $2,999,739 $3,116,004 $2,577,783 $2,323,956 $2,032,827
---------- ---------- ---------- ---------- ----------
Salaries, wages and
benefits............... 1,753,023 1,788,053 1,490,938 1,360,018 1,167,181
Supplies................ 294,372 303,140 261,621 233,066 216,587
Rent.................... 234,144 89,474 77,795 79,476 79,371
Other operating
expenses............... 988,072 490,327 530,997 482,080 307,547
Depreciation and
amortization........... 124,617 123,865 99,533 89,478 79,519
Interest expense........ 107,008 102,736 45,922 60,918 62,828
Investment income....... (4,688) (6,057) (12,203) (13,444) (13,126)
---------- ---------- ---------- ---------- ----------
3,496,548 2,891,538 2,494,603 2,291,592 1,899,907
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (496,809) 224,466 83,180 32,364 132,920
Provision for income
taxes.................. 76,099 89,338 35,175 24,001 46,781
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (572,908) 135,128 48,005 8,363 86,139
Extraordinary loss on
extinguishment of debt,
net of income taxes.... (77,937) (4,195) - (23,252) (241)
---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ (650,845) $ 130,933 $ 48,005 $ (14,889) $ 85,898
========== ========== ========== ========== ==========
Earnings (loss) per
common share:
Basic:
Income (loss) from
operations............ $ (8.39) $ 1.96 $ 0.69 $ 0.22 $ 1.41
Extraordinary loss on
extinguishment of
debt.................. (1.14) (0.06) - (0.38) -
---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ (9.53) $ 1.90 $ 0.69 $ (0.16) $ 1.41
========== ========== ========== ========== ==========
Diluted:
Income (loss) from
operations............ $ (8.39) $ 1.92 $ 0.68 $ 0.29 $ 1.28
Extraordinary loss on
extinguishment of
debt.................. (1.14) (0.06) - (0.32) -
---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ (9.53) $ 1.86 $ 0.68 $ (0.03) $ 1.28
========== ========== ========== ========== ==========
Shares used in computing
earnings (loss) per
common share:
Basic.................. 68,343 68,938 69,704 61,196 55,522
Diluted................ 68,343 70,359 70,702 71,967 69,014
Financial Position:
Working capital
(deficit).............. $ (682,569) $ 431,113 $ 316,615 $ 229,536 $ 124,770
Assets.................. 1,717,890 3,334,739 1,968,856 1,912,454 1,656,205
Long-term debt.......... 6,600 1,919,624 710,507 778,100 746,212
Long-term debt in
default classified as
current................ 760,885 - - - -
Stockholders' equity.... 313,245 905,350 797,091 772,064 596,454
Operating Data:
Number of hospitals..... 57 60 38 36 33
Number of hospital
licensed beds.......... 4,979 5,273 3,325 3,263 2,511
Number of hospital
patient days........... 947,488 767,810 586,144 489,612 403,623
Hospital occupancy %.... 54.0 52.9 53.7 47.6 48.8
Number of nursing
centers................ 291 309 313 311 310
Number of nursing center
licensed beds.......... 38,362 40,383 39,619 39,480 39,423
Number of nursing center
patient days........... 11,939,266 12,622,238 12,566,763 12,569,600 12,654,016
Nursing center occupancy
%...................... 87.3 90.5 91.9 92.2 92.9
Number of Vencare
contracts.............. 2,847 3,877 4,346 4,072 2,648
</TABLE>
44
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Selected Financial Data in Item 6 and the consolidated financial
statements included herein set forth certain data with respect to the
financial position, results of operations and cash flows of the Company which
should be read in conjunction with the following discussion and analysis.
The 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 December 31, 1998, the Company operated 57 long-term
care hospitals (4,979 licensed beds), 291 nursing centers (38,362 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.
Spin-off. In January 1998, the Board of Directors of 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 hospital,
nursing center 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 completed 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 four 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 the events prior to the Distribution Date refers to the
Company's business as it was conducted prior to the Reorganization
Transactions.
TheraTx Merger. On March 21, 1997, the TheraTx Merger was completed
following a cash tender offer. At the time of the TheraTx Merger, TheraTx
primarily provided rehabilitation and respiratory therapy management services
and operated 26 nursing centers. Annualized revenues approximated $425
million. The TheraTx Merger has been accounted for by the purchase method. See
Note 3 of the Notes to Consolidated Financial Statements for a description of
the TheraTx Merger.
Transitional Merger. On June 24, 1997, the Company acquired approximately
95% of the outstanding common stock of Transitional through a cash tender
offer, after which time the operations of Transitional were consolidated with
those of the Company in accordance with the purchase method of accounting. On
August 26, 1997, the Transitional Merger was completed. At the time of the
Transitional Merger, Transitional operated 19 long-term acute care hospitals
and provided respiratory therapy management services. Annualized revenues
approximated $350 million. In addition, Transitional owned a 44% voting equity
interest (61% equity interest) in BHC, an operator of psychiatric and
behavioral clinics. See Note 4 of the Notes to Consolidated Financial
Statements for a description of the Transitional Merger.
45
<PAGE>
Results of Operations
A summary of key operating data follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Nursing centers........................ $ 1,621,662 $ 1,722,416 $ 1,615,141
Hospitals.............................. 919,847 785,829 551,268
Vencare................................ 582,730 642,471 399,068
Atria.................................. - 31,199 51,846
----------- ----------- -----------
3,124,239 3,181,915 2,617,323
Elimination of Vencare charges to
Company nursing centers............... (124,500) (65,911) (39,540)
----------- ----------- -----------
$ 2,999,739 $ 3,116,004 $ 2,577,783
=========== =========== ===========
Income (loss) from operations:
Operating income (loss):
Nursing centers........................ $ 245,569 $ 273,280 $ 260,885
Hospitals.............................. 259,874 246,653 155,015
Vencare................................ 64,104 114,545 69,958
Atria.................................. - 9,945 15,937
Corporate overhead..................... (166,150) (123,772) (96,161)
Unusual transactions................... (439,125) 13,833 (111,407)
----------- ----------- -----------
Operating income (loss).............. (35,728) 534,484 294,227
Rent................................... (234,144) (89,474) (77,795)
Depreciation and amortization.......... (124,617) (123,865) (99,533)
Interest, net.......................... (102,320) (96,679) (33,719)
----------- ----------- -----------
Income (loss) before income taxes...... (496,809) 224,466 83,180
Provision for income taxes............. 76,099 89,338 35,175
----------- ----------- -----------
$ (572,908) $ 135,128 $ 48,005
=========== =========== ===========
Nursing Center Data:
Revenue mix %:
Medicare............................... 29.3 32.1 29.7
Medicaid............................... 44.7 42.9 44.3
Private and other...................... 26.0 25.0 26.0
Patient days:
Medicare............................... 1,498,968 1,610,470 1,562,645
Medicaid............................... 7,746,401 8,152,503 8,191,450
Private and other...................... 2,693,897 2,859,265 2,812,668
----------- ----------- -----------
11,939,266 12,622,238 12,566,763
=========== =========== ===========
Average daily census................... 32,710 34,581 34,335
Occupancy %............................ 87.3 90.5 91.9
Hospital Data:
Revenue mix %:
Medicare............................... 58.5 63.0 59.4
Medicaid............................... 9.7 8.1 12.3
Private and other...................... 31.8 28.9 28.3
Patient days:
Medicare............................... 647,283 520,144 375,128
Medicaid............................... 121,538 96,490 97,521
Private and other...................... 178,667 151,176 113,495
----------- ----------- -----------
947,488 767,810 586,144
=========== =========== ===========
Average daily census................... 2,596 2,104 1,601
Occupancy %............................ 54.0 52.9 53.7
Ancillary Services Data:
Revenues:
Rehabilitation therapy................. $ 250,010 $ 215,734 $ 47,827
Respiratory therapy.................... 141,168 169,955 125,551
Pharmacy............................... 159,623 167,078 174,075
Other.................................. 31,929 89,704 51,615
----------- ----------- -----------
$ 582,730 $ 642,471 $ 399,068
=========== =========== ===========
</TABLE>
46
<PAGE>
Nursing Center Division
Revenues declined 6% in 1998 to $1.6 billion and increased 7% in 1997 to
$1.7 billion. Excluding the effect of acquisitions and disposals, revenues
declined 4% in 1998 and increased 3% in 1997. The decline in 1998 was
primarily attributable to a 3% decline in same-store patient days and
reductions in Medicare reimbursements under PPS in the second half of the
year. In 1997, same-store patient days declined approximately 2%. The increase
in 1997 revenues was primarily attributable to increased reimbursement from
Medicare and Medicaid, as well as price increases to private patients.
Management believes that declines in overall occupancy percentages in both
1998 and 1997 were primarily attributable to the Company's former strategy of
lowering Medicaid utilization to improve patient mix. This strategy adversely
impacted the nursing centers' relationships with many of its primary patient
referral sources. In addition, this strategy also resulted in significant
regulatory compliance actions against the Company and general negative
publicity. See "Legal Proceedings." The Company discontinued pursuing this
strategy in April 1998.
Operating income declined 10% to $246 million in 1998 and increased 5% to
$273 million in 1997. Operating margins were 15.1% in 1998, 15.9% in 1997 and
16.2% in 1996. The decline in operating margins in both 1998 and 1997 was
primarily attributable to reduced occupancy levels. Overall occupancy levels
were 87.3%, 90.5% and 91.9% for 1998, 1997 and 1996, respectively. The mix of
patient days by payor type (Medicare, Medicaid and private) did not changed
materially during the past three years. Operating results for 1997 include a
fourth quarter charge of $7.3 million of additional provisions for doubtful
accounts related to the former TheraTx nursing centers to adjust the initial
purchase price allocation.
On July 1, 1998, PPS became effective for all of the Company's nursing
centers. 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 would 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. For the first
three years, per diem rates under PPS are blended based on facility-specific
costs and Federal costs. Thereafter, the per diem rates will be based solely
on Federal costs.
Medicare revenues recorded by the Company in the second half of 1998 under
PPS were substantially less than those received under the previous cost-based
reimbursement system. For the six months ended June 30, 1998 (prior to the
implementation of PPS), Medicare revenues per patient day approximated $350,
while reimbursement per patient day under PPS approximated $280 in the second
half of 1998 (including the effects of certain fourth quarter adjustments). In
an effort to maintain operating margins, the Company substantially reduced its
operating costs primarily through the reduction of certified therapists in its
Vencare ancillary services business (which provides ancillary services to most
of the Company's nursing centers). Operating margins in the first six months
of 1998 approximated 15.0%, while operating margins in the second half of 1998
were 15.3%.
Management believes that nursing center operating margins can be improved by
increasing overall patient census levels. The nursing center division's
strategy is focused primarily on improving the quality of its management and
operations, thereby improving relationships with patient referral sources,
particularly acute care hospitals. However, there can be no assurance that the
negative census and operating income trends in the Company's nursing center
division will be remedied by these actions.
Hospital Division
Revenues increased 17% in 1998 to $920 million and 43% in 1997 to $786
million. Excluding the effect of the Transitional Merger in 1997, revenues
declined 3% in 1998 and increased 15% in 1997. While same-store patient
volumes increased in both years, the decline in 1998 revenues resulted
primarily from reductions in Medicare reimbursement.
The Budget Act reduced Medicare reimbursement to the Company's hospitals
related to TEFRA incentives, allowable bad debts and capital costs, and
payments for services to patients transferred from a PPS hospital. The
47
<PAGE>
capital cost reductions became effective in the fourth quarter of 1997. The
TEFRA incentive and bad debt reimbursements were reduced beginning in the
second and third quarters of 1998. The reduction for payments for services to
patients transferred from a PPS hospital became effective in the fourth
quarter of 1998. Medicare revenues declined approximately $25 million in 1998
as a result of these legislative changes. 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.
Operating income increased 5% in 1998 to $260 million and 59% in 1997 to
$247 million. The Transitional Merger accounted for $51 million of operating
income in 1998 and $28 million in 1997. Operating margins were 28.3% in 1998,
31.4% in 1997 and 28.1% in 1996. Although operating costs per patient day
declined slightly in 1998, operating margins were impacted adversely by the
previously discussed Medicare reimbursement reductions. Operating results for
1997 included a charge of $1.0 million for additional provisions for doubtful
accounts related to the former Transitional hospitals to adjust the initial
purchase price allocation. Management believes that hospital operating margins
may continue to decline in 1999.
Vencare Ancillary Services Division
Revenues declined 9% in 1998 to $583 million and increased 61% to $642
million in 1997. Most of the rehabilitation therapy business increase in 1998
and 1997 was attributable to the TheraTx Merger. Revenues from respiratory
therapy declined 17% in 1998 to $141 million (including a 38% decline to $27
million in the fourth quarter) and increased 35% in 1997 to $170 million. The
pharmacy business (acquired in connection with the Hillhaven Merger) generated
revenues of $160 million, $167 million and $174 million for each of the past
three years. Revenues related to other Vencare services, including home
health, hospice, occupational medicine and diagnostic services, aggregated $32
million, $90 million and $52 million, respectively, for the last three years.
By the end of 1998, the Company had disposed of or sold most of these
businesses.
Vencare provides ancillary services to both Company-operated and non-
affiliated nursing centers. While most of the nursing center industry will be
subject to PPS on or after January 1, 1999, management believes that Vencare's
ability to maintain services and revenues was impacted adversely during 1998,
particularly in the third and fourth quarters, since nursing centers were
reluctant to enter into Vencare contracts while transitioning to the new fixed
payment system under PPS. 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
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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The new limits became effective for services
provided on or after April 10, 1998 and negatively impacted operating results
of the ancillary services division in 1998. Under PPS, the reimbursement for
these services provided to nursing center participants is a component of the
total reimbursement allowed per nursing center patient and the salary
equivalency guidelines are not applicable.
Operating income declined 44% in 1998 to $64 million and increased 64% in
1997 to $115 million. Operating income increased by $28 million and $27
million in 1998 and 1997, respectively, as a result of the TheraTx Merger.
However, the ancillary services division reported an operating loss of $7
million in the fourth quarter of 1998, including the negative impact of $25
million of year-end adjustments. Management believes that the decline in the
demand for respiratory therapy and rehabilitation therapy will continue into
1999 as most Vencare customers convert to PPS. Accordingly, the Company
believes that Vencare operating income in 1999 could decline materially.
48
<PAGE>
Corporate Overhead
Operating income for the Company's three operating divisions excludes
allocations of corporate overhead. These costs aggregated $166 million, $124
million and $96 million during each of the last three years. The substantial
increase in corporate overhead during 1998 was primarily attributable to the
increased information systems spending necessary to strategically support each
of the Company's businesses, to increase future operating efficiencies and to
address Y2K issues. See "--Year 2000." Assimilation and support services
related to the TheraTx Merger and the Transitional Merger also contributed to
the increase in overhead in both 1998 and 1997. As a percentage of revenues
(before eliminations), corporate overhead totaled 5.3% in 1998, 3.9% in 1997
and 3.7% in 1996.
Unusual Transactions
Operating results for each of the last three years include certain unusual
transactions. These transactions are included in other operating expenses in
the consolidated statement of operations (unless otherwise indicated) for the
respective periods in which they were recorded. See Note 7 of the Notes to
Consolidated Financial Statements for a discussion of unusual transactions.
1998
The following table summarizes the pretax impact of unusual transactions
recorded during 1998 (in millions):
<TABLE>
<CAPTION>
Quarters
---------------------------
First Second Third Fourth Year
----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment........... $307.8 $ 307.8
Investment in BHC..................... $ 8.5 43.1 51.6
Wisconsin nursing center.............. 27.5 27.5
Corporate properties.................. $ 8.8 2.9 15.1 26.8
Acquired entities..................... 13.5 13.5
Gain on sale of investments............. (98.5) (13.0) (111.5)
Losses from termination of construction
projects............................... 71.3 71.3
Reorganization Transactions costs....... $7.7 9.6 17.3
Write-off of clinical information
systems................................ 10.1 10.1
Doubtful accounts related to sold
operations............................. 9.6 9.6
Settlement of litigation................ 7.8 7.8
Loss on sale and closure of home health
and hospice businesses................. 7.3 7.3
---- ----- ------ ------ -------
$7.7 $25.7 $ (6.2) $411.9 $ 439.1
==== ===== ====== ====== =======
</TABLE>
Long-lived asset impairment--Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"), requires impairment losses to be
recognized for long-lived assets used in operations when indications of
impairment are present and the estimate of undiscounted future cash flows is
not sufficient to recover asset carrying amounts. SFAS No. 121 also requires
that long-lived assets held for disposal be carried at the lower of carrying
value or fair value less costs of disposal, once management is committed to a
plan of disposal.
As previously discussed, all of the Company's nursing centers became subject
to PPS effective July 1, 1998. 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.
The Budget Act also reduced payments to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients
49
<PAGE>
transferred from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective in the fourth quarter of 1997. The reductions in
TEFRA incentive payments and allowable costs for bad debts became effective in
the second and third quarters of 1998. The reduction for payments for services
to patients transferred from a PPS hospital became effective in the fourth
quarter of 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.
Vencare provides ancillary services to both Company-operated and non-
affiliated nursing centers. While most of the nursing center industry will be
subject to PPS on or after January 1, 1999, management believes that Vencare's
ability to maintain services and revenues was impacted adversely during 1998,
particularly in the third and fourth quarters, since nursing centers were
reluctant to enter into Vencare contracts while transitioning to the new fixed
payment system under PPS. 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
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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The new limits became effective for services
provided on or after April 10, 1998 and negatively impacted operating results
of the ancillary services division in 1998.
These significant regulatory changes and the impact of such changes on the
Company's operating results in the third and fourth quarters of 1998 served as
an indication to management that the carrying values of the assets of its
nursing center and hospital facilities, as well as certain portions of its
ancillary services business, may be impaired.
In accordance with SFAS No. 121, management estimated the undiscounted cash
flows for each of its facilities and ancillary services lines of business over
the useful lives of the assets or the amortization periods for goodwill, and
compared these estimates to the carrying values of the underlying assets. As a
result of these estimates, the Company reduced the carrying amounts of the
assets associated with 110 nursing centers, 12 hospitals and a portion of the
goodwill associated with rehabilitation therapy business to their respective
estimated fair values. The determination of the fair values of the impaired
facilities and rehabilitation therapy business was based upon the net present
value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property, Plant
Goodwill and Equipment Total
-------- --------------- ------
<S> <C> <C> <C>
Nursing centers.............................. $ 27.7 $ 71.6 $ 99.3
Hospitals.................................... 74.4 34.7 109.1
Vencare...................................... 99.2 0.2 99.4
------ ------ ------
$201.3 $106.5 $307.8
====== ====== ======
</TABLE>
In addition to the above impairment charges, the amortization period for the
remaining goodwill associated with the rehabilitation therapy business
acquired as part of the TheraTx Merger was reduced from forty years to seven
years, effective October 1, 1998. Management believes that the provisions of
the Budget Act altered the expected long-term cash flows and business
prospects associated with this business to such an extent that a shorter
amortization period is deemed appropriate. The change in the amortization
period resulted in an
50
<PAGE>
additional pretax charge to operations of $6.4 million in the fourth quarter
of 1998. Further, the effect of the change in estimated useful life will
result in additional amortization expense of approximately $11 million during
each of the next five years. See Note 8 of the Notes to Consolidated Financial
Statements.
Investment in BHC--In connection with the Transitional Merger, the Company
acquired a 44% voting equity interest (61% equity interest) in BHC. The
Company has been unsuccessful in its attempts to sell this investment. In July
1998, the Company entered into an agreement to sell its interest in BHC for an
amount less than its carrying value and accordingly, a provision for loss of
$8.5 million was recorded during the third quarter. In November 1998, the
agreement to sell the Company's interest in BHC was terminated by the
prospective buyer, indicating to the Company that the carrying amount of its
investment may be impaired. Following an independent appraisal, the Company
recorded a $43.1 million write-down of the investment in the fourth quarter of
1998. The net carrying amount of the investment aggregated $20.0 million at
December 31, 1998.
Wisconsin nursing center--The Company recorded an asset impairment charge of
$27.5 million in the fourth quarter of 1998 related to a nursing center in
Wisconsin that is leased from Ventas. The impairment resulted primarily from
certain fourth quarter regulatory actions by state and Federal agencies with
respect to the operation of the facility. In the fourth quarter of 1998, the
facility reported a pretax loss of $4.2 million and is not expected to
generate positive cash flows in the future.
Corporate properties and acquired entities--During 1998, the Company
recorded $26.8 million of charges related to the valuation of certain
corporate assets, the most significant of which relates to previously
capitalized amounts and expected property disposal losses associated with the
cancellation of a corporate headquarters construction project. The Company
also recorded $13.5 million of asset write-downs associated with the Hillhaven
Merger, the TheraTx Merger and the Transitional Merger, including provisions
for obsolete or abandoned computer equipment and miscellaneous receivables.
Gain on sale of investments--In September 1998, the Company sold its
investment in Atria Communities, Inc. ("Atria") for $177.5 million in cash and
an equity interest in the surviving corporation, resulting in a gain of $98.5
million. In November 1998, the Company's investment in Colorado MEDtech, Inc.
was sold at a gain of $13.0 million. Proceeds from the sale were
$22.0 million.
Losses from termination of construction projects--In the third quarter of
1998, as a result of substantial reductions in Medicare reimbursement to the
Company's nursing centers and hospitals in connection with the Budget Act,
management determined to suspend all acquisition and development activities,
terminate the construction of substantially all of its development properties,
and close two recently acquired hospitals. Accordingly, the Company recorded
pretax charges aggregating $71.3 million, of which $53.9 million related to
the cancellation of construction projects and the remainder related to the
planned closure of the hospitals. In connection with the construction
termination charge, the Company decided that it would not replace certain
facilities that previously were accounted for as assets intended for disposal.
Accordingly, the $53.9 million charge discussed above included a $10.0 million
reversal of a previously recorded valuation allowance (the amount necessary to
reduce the carrying value to fair value less costs of disposal) related to
such facilities.
Reorganization Transactions costs--The Reorganization Transactions were
completed on May 1, 1998. Direct costs related to the transactions were $17.3
million and primarily included costs for professional services.
Write-off of clinical information systems--During 1997, the Company began
the installation of its proprietary clinical information system, VenTouch(TM),
in several of its nursing centers. During the pilot process, the Company
determined that VenTouch(TM) did not support effectively the nursing center
processes, especially in facilities with lower acuity patients. Accordingly,
management determined in the fourth quarter of 1998 to remove VenTouch(TM)
from these facilities during 1999. A loss of $10.1 million has been recorded
to reflect the write-off of the equipment and estimated costs of removal from
the facilities.
Doubtful accounts related to sold operations--In the third quarter of 1998,
the Company recorded $9.6 million of additional provisions for doubtful
accounts for accounts receivable associated with previously sold facilities.
51
<PAGE>
Settlement of litigation--The Company settled a legal action entitled
Highland Pines Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al.
(assumed in connection with the TheraTx Merger) which resulted in a payment of
$16.2 million. Approximately $7.8 million of the settlement was charged to
earnings in the fourth quarter of 1998, and the remainder of such costs had
been previously accrued in connection with the purchase price allocation.
Loss on sale and closure of home health and hospice businesses--The Company
began operating its home health and hospice businesses as part of Vencare in
1996. These operations generally were unprofitable. In the second quarter of
1998, management decided to cease operations and either close or sell these
businesses, resulting in a loss of $7.3 million.
1997
During 1997, the Company completed the restructuring of the institutional
pharmacy business discussed below and, in the fourth quarter, adjusted the
accrued costs of the restructuring originally recorded in 1996. The adjustment
increased pretax income by $8.7 million. In addition, changes in estimates and
gains related to the disposition of assets increased pretax income by $5.1
million during 1997.
1996
In the fourth quarter of 1996, the Company recorded pretax charges
aggregating $125.2 million primarily to complete the integration of Hillhaven.
In November 1996, the Company executed a definitive agreement to sell 34
underperforming or non-strategic nursing centers in early 1997. A charge of
$65.3 million was recorded in connection with the disposition. In addition,
the Company's previously independent institutional pharmacy business, acquired
as part of the Hillhaven Merger, was reorganized to eliminate duplicative
administrative functions and operate as an integral part of the Company's
hospital operations. These activities resulted in a charge of $39.6 million
and related primarily to costs associated with employee severance and benefit
costs, facility close-down expenses and the write-off of certain deferred
costs for services to be discontinued. A provision for loss totaling $20.3
million related to the planned replacement of one hospital and three nursing
centers also was recorded in the fourth quarter.
During 1997, the Company sold 28 of the 34 non-strategic nursing centers
planned for disposition. Proceeds from the transaction aggregated $11.2
million. In addition, one facility was sold and one was closed in January
1998, and two nursing centers were sold in April 1998. In February 1998, the
Company was unable to receive the necessary licensure approvals to sell two
non-strategic nursing centers for which provision for loss had been recorded
in 1996. The Company continues to operate these facilities. Accrued provisions
for loss related to these facilities were not significant.
During 1996, the Company completed the integration of Hillhaven and adjusted
the accrued costs of the Hillhaven Merger originally recorded in 1995. These
adjustments increased 1996 pretax income by $13.8 million, including $9.3
million of gains on sales of assets.
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 $461 million in 1998,
$310 million in 1997 and $211 million in 1996. Rent expense in 1998 included
$148 million paid to Ventas in connection with the Master Lease Agreements.
As a result of the Reorganization Transactions, the overall leverage of the
Company was increased substantially. Capital costs in 1998, including the
impact of reduced depreciation and interest costs, were increased by
approximately $75 million as a result of the Reorganization Transactions.
52
<PAGE>
The TheraTx Merger and the Transitional Merger in 1997 resulted in net cash
payments of $359 million and $616 million, respectively, and were financed
through the issuance of long-term debt. In connection with the Reorganization
Transactions in 1998, approximately $992 million of long-term debt was
retained by Ventas.
Fourth Quarter Adjustments
Preparation of the financial statements requires a number of estimates and
judgments that are based upon the best available evidence at the time. In
addition, management regularly reviews the methods used to recognize revenues
and allocate costs to ensure that the financial statements reflect properly
the results of interim periods.
In addition to the unusual transactions previously discussed, during the
fourth quarter of 1998, the Company recorded certain adjustments which
significantly impacted operating results. A summary of such adjustments
follows (in millions):
<TABLE>
<CAPTION>
Business Segment
-----------------------------------------
Nursing
Centers Hospitals Vencare Corporate Total
------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
(Income)/expense
Provision for doubtful accounts.... $14.0 $ 5.7 $ 9.3 $29.0
Third party reimbursements,
including amounts due from
government agencies that are
subject to dispute................ 4.8 11.4 11.5 27.7
Change in goodwill amortization
period related to rehabilitation
therapy business.................. 6.4 6.4
Taxes other than income............ $ 6.4 6.4
Compensated absences............... 2.1 (0.8) 1.3 0.7 3.3
Incentive compensation............. (1.0) (0.8) (0.5) (2.9) (5.2)
Litigation and regulatory actions.. 3.5 3.5
Miscellaneous receivables.......... 5.2 5.2
Gain on sale of assets............. (2.0) (2.0)
Other.............................. 1.2 (1.0) 0.7 3.7 4.6
----- ----- ----- ----- -----
$21.1 $14.5 $31.9 $11.4 $78.9
===== ===== ===== ===== =====
</TABLE>
Income Taxes
At December 31, 1997, management believed that recorded deferred tax assets
ultimately would be realized. Management's conclusions at that time primarily
were based on the existence of sufficient taxable income within the allowable
carryback periods to realize the tax benefits of deductible temporary
differences recorded at December 31, 1997. For the fourth quarter of 1998, the
Company reported a pretax loss of $506 million. Additionally, the Company
revised its operating budgets as a result of the Budget Act and the less than
expected operating results in 1998. Based upon these revised forecasts,
management does not believe that the Company can generate sufficient taxable
income to realize the net deferred tax assets recorded at December 31, 1998.
As a result of those estimates, the Company recorded a deferred tax valuation
allowance aggregating $203 million at December 31, 1998. See Note 11 of the
Notes to Consolidated Financial Statements for a discussion of the valuation
allowance.
Consolidated Results
The Company reported a pretax loss of $497 million in 1998 compared to
income of $224 million in 1997 and $83 million in 1996.
The net loss from operations in 1998, including the impact of the deferred
tax valuation allowance ($203 million), aggregated $573 million. Net income
from operations in 1997 and 1996 totaled $135 million and $48 million,
respectively.
In conjunction with the Reorganization Transactions, the Company incurred an
extraordinary loss on extinguishment of debt aggregating $78 million.
Extraordinary losses related to the refinancing of long-term debt in 1997
reduced net income by $4 million.
53
<PAGE>
Liquidity
As a result of the 1998 net loss from operations, the Company is currently
in default of certain financial covenants under the Credit Agreement which was
consummated in connection with the Reorganization Transactions. Management and
the Senior Lenders are engaged in discussions in an effort to resolve this
matter. The Senior Lenders have agreed to a 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. The waiver
limits, among other things, the amount of available borrowings under the
Revolving Credit Facility to $55 million during the waiver period. 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. As
discussed below, the Company and Ventas have entered into a structured payment
plan for the payment of rent due under the Master Lease Agreements for April.
In addition, the Company was informed on April 9, 1999 by HCFA that the
Medicare program has made a demand for repayment of approximately $90 million
of reimbursement overpayments by April 23, 1999. In addition, HCFA has
indicated that all reimbursement payments to the Company will be suspended if
the overpayment is not received by April 23. The Company is in discussions
with HCFA regarding extending the repayment terms. The amount demanded by HCFA
is included in amounts due to third party payors in the Company's consolidated
balance sheet at December 31, 1998. The waiver also places additional
informational requirements and minimum daily census level requirements on the
Company's hospitals and nursing centers. The Company's failure to comply with
those covenants would result in the termination of the waiver.
In the event the parties are unable to reach an agreement to amend or
restructure the Credit Agreement, the Senior Lenders are entitled, at their
discretion, to exercise certain remedies including acceleration of repayment.
There can be no assurance that the Senior Lenders will provide the Company
with an amendment to the Credit Agreement or waiver of the defaults after
May 28, 1999 or will not seek to declare an event of default or credit freeze
even prior to that date. In addition, the Company's 1998 Notes contain
provisions which allow the creditors to accelerate their debt and seek certain
other remedies if the Company has a payment default under the terms of the
Credit Agreement or if the obligations under the Credit Agreement have been
accelerated. The Master Lease Agreements with Ventas do not contain similar
cross-default provisions.
If the Senior Lenders or the other creditors elect to exercise their right
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. Furthermore, if such obligations were to be accelerated,
in whole or in part, there can be no assurance that the Company would be
successful in identifying or consummating financing necessary to satisfy the
obligations which would become immediately due and payable. 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 and the principal amount of the 1998 Notes are presented as
current liabilities on the Company's consolidated balance sheet at December
31, 1998 and the Company has a deficit in working capital of $683 million. The
report of the Company's independent auditors, Ernst & Young LLP, includes a
statement regarding the Company's ability to continue as a going concern after
December 31, 1998.
In addition to continuing to negotiate with the Senior Lenders in an attempt
to obtain additional waivers or amendment of the aforementioned defaults, the
Company has retained an investment banking firm and legal counsel to assist in
the development of a strategic plan to restructure the Company's financial
obligations and improve its financial position.
54
<PAGE>
On March 18, 1999, the Company served Ventas with a demand for mediation,
seeking a reduction in rent and other concessions under the Master Lease
Agreements. In view of ongoing discussions, on March 31, 1999, the Company and
Ventas entered in the Standstill Agreement which provided that both companies
would postpone through April 12, 1999 any claims either may have against the
other. On April 12, 1999, the Company and Ventas entered into the Second
Standstill which provides for the structured payment of approximately $18.5
million of rental payments initially due on April 1. The Company agreed to pay
$8.0 million on April 13, 1999, $4.3 million on each of April 20 and April 27,
and $1.9 million on April 30, 1999. The Second Standstill further provides
that neither party will pursue any claims against the other or any other third
party related to the Reorganization Transactions as long as the Company
complies with the structured payment terms. The Second Standstill will
terminate on May 5, 1999 or on any date that a voluntary or involuntary
bankruptcy proceeding is commenced by or against the Company. 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.
Cash provided by operations totaled $323 million for 1998 compared to $266
million for 1997 and $179 million for 1996. Cash flows increased in 1998 due
to a substantial reduction in accounts receivable and a $99 million increase
in amounts due to third party payors. Days of revenues in accounts receivable
declined to 59 at December 31, 1998 compared to 67 at December 31, 1997.
Growth in amounts due to third party payors is primarily attributable to the
Medicare program continuing to reimburse the Company's nursing centers under
the prior cost-based reimbursement system after the Company's nursing centers
had converted to PPS. On April 9, 1999, the Company was informed by HCFA that
the Medicare program has made a demand for repayment of approximately $90
million of reimbursement overpayments by April 23, 1999. In addition, HCFA has
indicated that all reimbursement payments to the Company will be suspended if
the overpayment is not received by April 23. The Company is in discussions
with HCFA regarding extending the repayment terms. There can be no assurance
that the Company will have sufficient financial resources to satisfy this
obligation. If the Company is unable to satisfy this obligation, it is likely
that the Medicare program would recoup these funds by offsetting amounts to be
paid to the Company in the future.
Capital Resources
Excluding acquisitions, capital expenditures totaled $267 million for 1998
compared to $282 million for 1997 and $135 million for 1996. Planned capital
expenditures in 1999 (excluding acquisitions) 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 during the last three years were financed primarily
through additional borrowings, internally generated funds and, in 1996, from
the collection of notes receivable aggregating $78 million. At December 31,
1998, the estimated cost to complete and equip construction in progress
approximated $41 million. There can be no assurance that the Company will have
sufficient resources to finance its capital expenditure program in 1999.
During 1997, the Company expended approximately $359 million and $616
million in connection with the TheraTx Merger and the Transitional Merger,
respectively. These acquisitions were financed primarily through the issuance
of long-term debt. See Notes 3 and 4 of the Notes to Consolidated Financial
Statements for a discussion of these acquisitions. The Company also expended
$24 million, $37 million and $26 million for acquisitions of new facilities
(and related healthcare businesses) and previously leased nursing centers
during 1998, 1997 and 1996, respectively. The Company does not intend to
acquire additional nursing centers, hospitals and ancillary service businesses
in 1999.
55
<PAGE>
In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
the Company's common stock at an aggregate cost of $82 million. Repurchases of
1,950,000 shares of the Company's common stock in 1996 totaled $55 million.
These transactions were financed primarily through bank borrowings.
At December 31, 1998, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $300
million of floating rate debt outstanding. The agreement provides for fixed
rates on $300 million of floating rate debt at 6.4% plus 3/8% to 1 1/8% and
expires in $100 million increments in May 1999, November 1999 and May 2000.
The fair value of the swap agreements is not recognized in the consolidated
financial statements. The fair value of the swap agreements represents the
estimated amount the Company would pay to terminate the agreements based on
current interest rates.
Other Information
In September 1998, the Company received $178 million from the sale of
approximately 88% of its ownership of Atria and retained approximately 12% of
the outstanding capital stock of the surviving entity. The Company is
accounting for its investment in the surviving entity under the cost method.
From July 1, 1997 until the sale, the Company accounted for Atria under the
equity method. Prior to July 1, 1997, such accounts were consolidated with
those of the Company and provisions related to minority interests in the
earnings and equity of Atria had been recorded since the consummation of the
initial public offering of Atria in August 1996.
At the time of the Reorganization Transactions, the Company recorded both a
deferred tax asset and a valuation allowance for identical amounts in
connection with the difference in book and tax basis of the Company's
investment in Atria which resulted from the Reorganization Transactions. The
valuation allowance was recorded due to the litigation and other uncertainties
associated with the realization of the deferred tax asset, based upon the
available evidence at the time of the Reorganization Transactions. During the
third quarter, upon favorable resolution of such litigation and completion of
the Atria sale, the Company adjusted the valuation allowance that had been
recorded in the second quarter of 1998.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which requires
entities to expense start-up costs, including organizational costs, as
incurred. SOP 98-5 requires most entities to write off as a cumulative effect
of a change in accounting principle any previously capitalized start-up or
organizational costs. SOP 98-5 is effective for most entities for fiscal years
beginning after December 15, 1998. The Company plans to adopt the provisions
of SOP 98-5 in the first quarter of 1999. The amount of such unamortized costs
was $8.9 million at December 31, 1998.
The Company is a party to certain material litigation and regulatory actions
as well as various lawsuits and claims arising in the ordinary course of
business. See Note 23 of the Notes to Consolidated Financial Statements for a
description of material litigation and regulatory actions.
Year 2000
The 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.
56
<PAGE>
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 and patient accounting systems and 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.
All phases of the compliance program are on schedule to meet target
completion dates. 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 December 31, 1998:
<TABLE>
<CAPTION>
Target Approximate
Completion Percentage
Phase Date Completed
----- ------------- -----------
<S> <C> <C>
Business assessment................................... May 1998 100%
Inventory and assessment.............................. December 1998 100%
Remediation and testing............................... June 1999 65%
Implementation and rollout............................ November 1999 40%
Post-implementation................................... April 2000 0%
</TABLE>
The implementation and rollout phase will involve the installation of the
new financial information and patient accounting systems beginning in the
first quarter of 1999. Substantially all of the current systems are being
remediated in the event of unanticipated delays in the implementation of the
new systems.
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 December 31, 1998:
<TABLE>
<CAPTION>
Approximate Percentages
Designated Area Tested Y2K Compliant
--------------- -----------------------
<S> <C>
IT software and hardware................................ 60%
Facility components..................................... 70%
Medical equipment....................................... 90%
Telephone systems....................................... 80%
</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
57
<PAGE>
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.
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 are scheduled to be completed during the first quarter of 1999. At
that point, the Company will begin installing the new systems in its
facilities and plans to complete the installation by November 1999. 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.
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 is developing 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. Substantially all
critical financial information and patient accounting systems currently in
place are being remediated to be Y2K compliant in the event of an
unanticipated delay in the implementation of the Company's new systems. 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.
Management currently is implementing a plan to replace 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 currently are estimated to be approximately $66
million, of which the Company has expended approximately $34 million through
December 31, 1998. A majority of the costs related solely to Y2K compliance
will be expensed as incurred. The costs of the new financial information and
patient accounting systems and the additional Y2K costs are expected
58
<PAGE>
to be funded through operating cash flows and available borrowings under the
Credit Agreement. There can be no assurance that the Company will have
sufficient resources to finance these costs. 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. See "Business--Recent Developments."
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 new financial 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.
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 by $115 billion and $13 billion,
respectively, over the next five years. Under the Budget Act, annual growth
rates for Medicare will be reduced from over 10% to approximately 7.5% for the
next five years based on specific program baseline projections from the last
five years. Virtually all spending reductions will come from providers and
changes in program components. The Budget Act has affected adversely the
revenues in each of the Company's operating divisions.
The Budget Act reduced payments made to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a PPS
hospital. The reductions in allowable costs for capital expenditures became
effective October 1, 1997. The reductions in the TEFRA incentive payments and
allowable costs for bad debts 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 PPS 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 will be 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 expenses 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
59
<PAGE>
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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The limits are based on a blend of data from
wage rates for hospitals and nursing centers and include salary, fringe
benefit and expense factors. Rates are defined by specific geographic market
areas, based upon a modified version of the hospital wage index. The new
limits became effective for services provided on or after April 10, 1998 and
negatively impacted operating results of the ancillary services division in
1998. The Company will continue to charge client nursing centers in accordance
with the revised guidelines until such nursing centers transition to PPS.
Under PPS for nursing centers, the reimbursement for these services provided
to nursing center patients is a component of the total reimbursement allowed
per nursing center patient and the salary equivalency guidelines are not
applicable. Most of the Company's client nursing centers are expected to
transition to PPS on or about January 1, 1999.
There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and
to make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that 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 33%, 34% and 31%
for 1998, 1997 and 1996, respectively, while Medicaid percentages of total
revenues approximated 27%, 26% and 31% for the respective periods.
60
<PAGE>
Item 7A. 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
agreements.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates and constitute a
forward-looking statement. For long-term debt, the table presents principal
cash flows and related weighted average interest rates by expected maturity
date. 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 12/31/98
-------- -------- ------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt,
including amounts due
within one year:
Fixed rate............. $ 2,074 $ 1,495 $ 610 $ 577 $ 474 $305,835 $311,065 $255,736
Average interest rate.. 9.77% 9.77% 9.77% 9.77% 9.77% 9.00%
Variable rate.......... $ 6,974 $ 19,474 $61,974 $128,640 $27,700 $220,706 $465,468 $465,468
(a) Average interest
rate
Interest rate derivative
financial instruments
related to debt:
Interest rate swaps:
Pay fixed/receive
variable.............. $200,000 $100,000 $300,000 $ 3,860
Average pay rate....... 6.4% 6.4%
(b) Average receive
rate
</TABLE>
- --------
(a) Interest is payable, depending on certain leverage ratios and other
factors, at a rate of LIBOR plus 3/4% to 3 1/2%.
(b) The variable rate portion of the interest rate swap is 3-month LIBOR.
61
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in appendix pages F-2
through F-37 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items other than the information set forth
above under Part I, "Executive Officers of the Registrant," is omitted because
the Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K which includes the required information. The
required information contained in the Company's proxy statement is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Index to Consolidated Financial Statements and Financial Statement
Schedules:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-3
Consolidated Balance Sheet, December 31, 1998 and 1997.................. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Consolidated Financial Information (Unaudited)................ F-36
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996....................................... F-37
</TABLE>
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
62
<PAGE>
(a)(2) Index to Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company. Exhibit 3.1 to
the Company's Form 10, as amended, dated April 27, 1998 (Comm. File
No. 001-14057) is hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10, as amended, dated April 27, 1998 (Comm. File No.
001-14057) is hereby incorporated by reference.
4.1 Articles IV and X of the Restated Certificate of Incorporation of the
Company is included in Exhibit 3.1.
4.2 Indenture dated April 30, 1998, among the Company, Vencor Operating,
Inc. and PNC Bank, National Association, as Trustee. Exhibit 4.1 to
the Company's Registration Statement on Form S-4 (Reg. No. 333-57953)
is hereby incorporated by reference.
4.3 Form of 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (included
in Exhibit 4.2).
4.4 Form of the Company's 8 5/8% Senior Subordinated Notes due 2007.
Exhibit 4.1 to the Ventas, Inc. Current Report on Form 8-K dated July
21, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference.
4.5 Indenture dated as of July 21, 1997, between the Company and the Bank
of New York, as Trustee. Exhibit 4.2 to the Ventas, Inc. Current
Report of Form 8-K dated July 21, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.1 Credit Agreement dated as of April 29, 1998 (the "Credit Agreement"),
among the Company, Vencor Operating, Inc., the Lenders party thereto,
the Swingline Bank party thereto, the LC Issuing Banks party thereto,
the Senior Managing Agents, Managing Agents and Co-Agents party
thereto, Morgan Guaranty Trust Company of New York and NationsBank,
N.A. Exhibit 10.1 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.2 Amendment No. 1 dated as of September 30, 1998 to the Credit Agreement
dated as of April 29, 1998 among Vencor Operating, Inc., Vencor, Inc.,
the Lenders, Swingline Bank, LC Issuing Banks, Senior Managing Agents,
Managing Agents and Co-Agents party thereto, Morgan Guaranty Trust
Company of New York, as Documentation Agent and Collateral Agent, and
NationsBank, N.A., as Administrative Agent.
10.3 Waiver No. 2 to the Credit Agreement dated as of March 31, 1999 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 March 31, 1999 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.4* Vencor Retirement Savings Plan Amended and Restated as of January 1,
1997. Exhibit 10.2 to the Ventas, Inc. Form 10-K for the year ended
December 31, 1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.5* Amendment No. 1 to the Vencor Retirement Savings Plan Amended and
Restated dated July 1, 1997. Exhibit 10.3 to the Ventas, Inc. Form 10-
K for the year ended December 31, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.6* Amendment No. 2 to the Vencor Retirement Savings Plan Amended and
Restated dated December 31, 1997. Exhibit 10.4 to the Ventas, Inc.
Form 10-K for the year ended December 31, 1997 (Comm. File No. 1-
10989) is hereby incorporated by reference.
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.7* Amendment No. 3 to the Vencor Retirement Savings Plan Amended and
Restated dated December 31, 1997. Exhibit 10.5 to the Ventas, Inc.
Form 10-K for the year ended December 31, 1997 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.8* Vencor, Inc. 401(k) Master Trust Agreement dated January 1, 1997 by
and between the Company and Wachovia Bank of North Carolina, N.A.
Exhibit 10.6 to the Ventas, Inc. Form 10-K for the year ended December
31, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.9* Amendment No. 1 to Vencor, Inc. 401(k) Master Trust Agreement dated
January 1, 1997 by and between the Company and Wachovia Bank of North
Carolina, N.A. Exhibit 10.7 to the Ventas, Inc. Form 10-K for the year
ended December 31, 1997 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.10* Amendment No. 2 to Vencor, Inc. 401(k) Master Trust Agreement by and
between the Company and Wachovia Bank of North Carolina, N.A. Exhibit
10.3 to the Company's Form 10-Q for the quarterly period ended
September 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.11* Retirement Savings Plan for Certain Employees of Vencor and its
Affiliates Amended and Restated as of January 1, 1997. Exhibit 10.8 to
the Ventas, Inc. Form 10-K for the year ended December 31, 1997 (Comm.
File No. 1-19089) is hereby incorporated by reference.
10.12* TheraTx Retirement Savings Plan Amended and Restated effective as of
January 1, 1998. Exhibit 10.1 to the Company's Form 10-Q for the
quarterly period ended September 30, 1998 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.13* THC Retirement Savings Plan Amended and Restated effective as of
January 1, 1998. Exhibit 10.2 to the Company's Form 10-Q for the
quarterly period ended September 30, 1998 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.14 Tax Allocation Agreement dated as of April 30, 1998 by and between the
Company and Ventas, Inc. Exhibit 10.9 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 001-14057) is
hereby incorporated by reference.
10.15 Transition Services Agreement dated as of April 30, 1998 by and
between the Company and Ventas, Inc. Exhibit 10.10 to the Company's
Form 10-Q for the quarterly period ended June 30, 1998 (Comm. File No.
001-14057) is hereby incorporated by reference.
10.16 Agreement of Indemnity--Third Party Leases dated as of April 30, 1998
by and between the Company and its subsidiaries and Ventas, Inc.
Exhibit 10.11 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.17 Agreement of Indemnity--Third Party Contracts dated as of April 30,
1998 by and between the Company and its subsidiaries and Ventas, Inc.
Exhibit 10.12 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.18* Vencor, Inc. Deferred Compensation Plan dated January 1, 1996. Exhibit
10.24 to the Ventas, Inc. Form 10-K for the year ended December 31,
1996 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.19* Form of Indemnification Agreement between Vencor, Inc. and certain of
its officers and employees. Exhibit 10.31 to the Ventas, Inc. Form 10-
K for the year ended December 31, 1995 (Comm. File No. 1-10989) is
hereby incorporated by reference.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.20 Forbearance Agreement among First Healthcare Corporation, Medisave
Pharmacies, Inc. and Certain Limited Partnerships, dated as of August
25, 1995. Exhibit 10.52 to the Ventas, Inc. Form 10-K for the year
ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.21 Strategic Alliance Agreement dated as of June 10, 1997 by and between
the Company, Continental Casualty Company and Valley Forge Life
Insurance Company. Exhibit 10.1 to the Ventas, Inc. Form 10-Q for the
quarterly period ended June 30, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.22 Amended and Restated Agreement and Plan of Merger. Appendix A to
Amendment No. 2 to the Ventas, Inc. Registration Statement on Form S-4
(Reg. No. 33-59345) is hereby incorporated by reference.
10.23 Agreement and Plan of Merger dated as of February 9, 1997 among
TheraTx, Incorporated, Vencor, Inc. and Peach Acquisition Corp.
("Peach"). Exhibit (c)(1) to the Statement on Schedule 14D-1 of
Ventas, Inc. and Peach, dated February 14, 1997 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.24 Amendment No. 1 to Agreement and Plan of Merger dated as of February
28, 1997 among TheraTx, Incorporated, Vencor, Inc. and Peach. Exhibit
(c)(3) of Amendment No. 2 to the Statement on Schedule 14D-1 of
Ventas, Inc. and Peach, dated March 3, 1997 (Comm. File No. 1-10989)
is hereby incorporated by reference.
10.25 Agreement and Plan of Merger, dated June 18, 1997 by and among Vencor,
Inc., LV Acquisition Corp. and Transitional Hospitals Corporation.
Exhibit 2.1 to the Ventas, Inc. Current Report on Form 8-K dated July
3, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.26 Agreement and Plan of Merger, dated May 2, 1997, among Select Medical
Corporation, SM Acquisition Co. and Transitional Hospitals
Corporation. Exhibit 99.1 to the Current Report on Form 8-K of
Transitional dated May 2, 1997 (Comm. File No. 1-7008) is hereby
incorporated by reference.
10.27 Asset Purchase Agreement between Transitional Hospitals Corporation
and Behavioral Healthcare Corporation, dated October 22, 1996. Exhibit
99.1 to the Current Report on Form 8-K of Transitional dated October
22, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference.
10.28 Agreement and Plan of Merger between Transitional Hospitals
Corporation and Behavioral Healthcare Corporation, dated October 22,
1996. Exhibit 99.2 to the Current Report on Form 8-K of Transitional
dated October 22, 1996 (Comm. File No. 1-7008) is hereby incorporated
by reference.
10.29 First Amendment to Asset Purchase Agreement between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation, dated
November 30, 1996. Exhibit 99.1 to the Current Report on Form 8-K of
Transitional dated December 16, 1996 (Comm. File No. 1-7008) is hereby
incorporated by reference.
10.30 Amendment to Agreement and Plan of Merger between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation, dated
November 30, 1996. Exhibit 99.2 to the Current Report on Form 8-K of
Transitional dated December 16, 1996 (Comm. File No. 1-7008) is hereby
incorporated by reference.
10.31* Vencor, Inc. 1998 Incentive Compensation Plan. Exhibit 10.23 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-57953) is
hereby incorporated by reference.
10.32* Vencor, Inc. 1998 Stock Option Plan for Non-Employee Directors.
Exhibit 10.24 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.33* Vencor, Inc. Deferred Compensation Plan dated April 30, 1998. Exhibit
10.25 to the Company's Registration Statement on Form S-4 (Reg. No.
333-57953) is hereby incorporated by reference.
10.34* Vencor, Inc. Non-Employee Directors Deferred Compensation Plan.
Exhibit 10.26 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.35* Vencor, Inc. Supplemental Executive Retirement Plan dated January 1,
1998, as amended. Exhibit 10.27 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-57953) is hereby incorporated by
reference.
10.36* Form of Vencor Operating, Inc. Change-in-Control Severance Agreement.
Exhibit 10.28 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.37 Form of Vencor, Inc. Promissory Note. Exhibit 10.29 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-57953) is hereby
incorporated by reference.
10.38* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and W. Bruce Lunsford. Exhibit 10.4 to the Company's
Form 10-Q for the quarterly period ended September 30, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.39* Form of Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and certain executive officers of Vencor Operating,
Inc. Exhibit 10.5 to the Company's Form 10-Q for the quarterly period
ended September 30, 1998 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.40* Form of Non-Transferable Full Recourse Secured Promissory Note dated
as of September 28, 1998 made by certain executive officers in favor
of Vencor Operating, Inc. Exhibit 10.6 to the Company's Form 10-Q for
the quarterly period ended September 30, 1998 (Comm. File No. 001-
14057) is hereby incorporated by reference.
10.41* Separation Agreement and Release of Claims entered into by Michael R.
Barr and Vencor, Inc.
10.42* Separation Agreement and Release of Claims entered into by W. Earl
Reed, III and Vencor, Inc.
10.43* Employment Agreement dated as of November 9, 1998 between Edward L.
Kuntz and Vencor Operating, Inc.
10.44* Change-in-Control Severance Agreement dated as of October 14, 1998
between W. Bruce Lunsford and Vencor Operating, Inc.
10.45 Distribution Agreement between the Company and Ventas, Inc. Exhibit
10.2 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.46 Form of Master Lease Agreement between the Company and Ventas, Inc.
Exhibit 10.3 to the Company's Form 10, as amended, dated April 27,
1998 (Comm. File No. 001-14057) is hereby incorporated by reference.
10.47 Form of First Amendment to Master Lease Agreement dated December 31,
1998 between the Company and Ventas, Inc.
10.48 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.
10.49 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.
10.50 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.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.51 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.
10.52 Development Agreement between the Company and Ventas, Inc. Exhibit
10.4 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.53 Participation Agreement between the Company and Ventas, Inc. Exhibit
10.5 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.54 Agreement and Plan of Reorganization between the Company and Ventas,
Inc. Exhibit 10.1 to the Company's Form 10, as amended, dated April
27, 1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.55 Other Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished to the
Commission upon request.
10.56 Standstill Agreement dated March 31, 1999 between the Company and
Ventas, Inc. Exhibit 99.3 to the Current Report on Form 8-K of the
Company dated March 31, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.57 Second Standstill Agreement dated April 12, 1999 between the Company
and Ventas, Inc.
10.58 Tolling Agreement dated April 12, 1999 between the Company and Ventas,
Inc.
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule (included only in filings submitted under the
Electronic Data Gathering, Analysis, and Retrieval system).
27.2 Restated Financial Data Schedule (included only in filings submitted
under the Electronic Data Gathering, Analysis, and Retrieval system).
</TABLE>
- --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Annual Report on Form 10-K.
(b) Reports on Form 8-K.
On December 18, 1998, the Company filed a Current Report on Form 8-K to
report the results of the exchange offer to reprice certain stock options. On
December 31, 1998, the Company filed a Current Report on Form 8-K to announce
that it intended to engage an independent investment adviser to appraise the
Company's equity investment in BHC and that the Company anticipated a write-
down in its investment in BHC.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this Report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is included in appendix page F-37 of
this Report.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 15, 1999 Vencor, Inc.
/s/ Edward L. Kuntz
By: _________________________________
Edward L. Kuntz
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ulysses L. Bridgeman, Jr. Director April 15, 1999
______________________________________
Ulysses L. Bridgeman, Jr.
/s/ Elaine L. Chao Director April 15, 1999
______________________________________
Elaine L. Chao
/s/ Donna R. Ecton Director April 15, 1999
______________________________________
Donna R. Ecton
/s/ Stanley C. Gault Director April 15, 1999
______________________________________
Stanley C. Gault
/s/ Edward L. Kuntz Chairman of the Board, Chief April 15, 1999
______________________________________ Executive Officer and
Edward L. Kuntz President (Principal
Executive Officer)
/s/ Richard A. Lechleiter Vice President, Finance, April 15, 1999
______________________________________ Corporate Controller and
Richard A. Lechleiter Treasurer (Principal
Accounting Officer)
/s/ William H. Lomicka Director April 15, 1999
______________________________________
William H. Lomicka
/s/ Richard A. Schweinhart Senior Vice President and April 15, 1999
______________________________________ Chief Financial Officer
Richard A. Schweinhart (Principal Financial
Officer)
</TABLE>
68
<PAGE>
VENCOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-3
Consolidated Balance Sheet, December 31, 1998 and 1997.................. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997
and 1996............................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Consolidated Financial Information (Unaudited)................ F-36
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997
and 1996............................................................... F-37
</TABLE>
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Vencor, Inc.
We have audited the accompanying consolidated balance sheets of Vencor, Inc.
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed on page F-1. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vencor, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 2, the Company incurred a net loss in 1998 and has a working
capital deficiency at December 31, 1998. In addition, the Company was not in
compliance with certain covenants of a loan agreement at December 31, 1998.
These conditions raise substantial doubts about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 13, 1999
F-2
<PAGE>
VENCOR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $2,999,739 $3,116,004 $2,577,783
---------- ---------- ----------
Salaries, wages and benefits............... 1,753,023 1,788,053 1,490,938
Supplies................................... 294,372 303,140 261,621
Rent....................................... 234,144 89,474 77,795
Other operating expenses................... 988,072 490,327 530,997
Depreciation and amortization.............. 124,617 123,865 99,533
Interest expense........................... 107,008 102,736 45,922
Investment income.......................... (4,688) (6,057) (12,203)
---------- ---------- ----------
3,496,548 2,891,538 2,494,603
---------- ---------- ----------
Income (loss) before income taxes.......... (496,809) 224,466 83,180
Provision for income taxes................. 76,099 89,338 35,175
---------- ---------- ----------
Income (loss) from operations.............. (572,908) 135,128 48,005
Extraordinary loss on extinguishment of
debt, net of income tax
benefit of $48,789 in 1998 and $2,634 in
1997...................................... (77,937) (4,195) -
---------- ---------- ----------
Net income (loss)...................... (650,845) 130,933 48,005
Preferred stock dividend requirements...... (697) - -
---------- ---------- ----------
Income (loss) available to common
stockholders.......................... $ (651,542) $ 130,933 $ 48,005
========== ========== ==========
Earnings (loss) per common share:
Basic:
Income (loss) from operations............ $ (8.39) $ 1.96 $ 0.69
Extraordinary loss on extinguishment of
debt.................................... (1.14) (0.06) -
---------- ---------- ----------
Net income (loss)...................... $ (9.53) $ 1.90 $ 0.69
========== ========== ==========
Diluted:
Income (loss) from operations............ $ (8.39) $ 1.92 $ 0.68
Extraordinary loss on extinguishment of
debt.................................... (1.14) (0.06) -
---------- ---------- ----------
Net income (loss)...................... $ (9.53) $ 1.86 $ 0.68
========== ========== ==========
Shares used in computing earnings (loss)
per common share:
Basic.................................... 68,343 68,938 69,704
Diluted.................................. 68,343 70,359 70,702
</TABLE>
See accompanying notes.
F-3
<PAGE>
VENCOR, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 34,551 $ 55,627
Accounts and notes receivable less allowance for loss
of $106,471--1998
and $57,203--1997.................................... 471,701 619,068
Inventories........................................... 28,594 27,605
Income taxes.......................................... 15,315 73,413
Other................................................. 78,317 82,435
---------- ----------
628,478 858,148
Property and equipment, at cost:
Land.................................................. 22,256 144,074
Buildings............................................. 163,846 1,084,770
Equipment............................................. 456,825 592,335
Construction in progress (estimated cost to complete
and equip after
December 31, 1998--$41,000).......................... 106,940 174,851
---------- ----------
749,867 1,996,030
Accumulated depreciation.............................. (262,551) (488,212)
---------- ----------
487,316 1,507,818
Goodwill less accumulated amortization of $45,628--1998
and $18,886--1997..................................... 456,644 659,311
Investment in affiliates............................... 35,707 178,301
Assets held for sale................................... 28,524 -
Other.................................................. 81,221 131,161
---------- ----------
$1,717,890 $3,334,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 152,103 $ 106,019
Salaries, wages and other compensation................ 150,906 163,642
Due to third party payors............................. 98,851 -
Other accrued liabilities............................. 139,254 129,906
Long-term debt due within one year.................... 9,048 27,468
Long-term debt in default classified as current....... 760,885 -
---------- ----------
1,311,047 427,035
Long-term debt......................................... 6,600 1,919,624
Deferred credits and other liabilities................. 85,255 82,730
Series A preferred stock............................... 1,743 -
Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 10,000
shares; none issued and outstanding.................. - -
Common stock, $0.25 par value; authorized 180,000
shares;
issued 70,146 shares--1998 and 73,470 shares--1997... 17,537 18,368
Capital in excess of par value........................ 665,447 766,078
Retained earnings (deficit)........................... (369,739) 281,803
---------- ----------
313,245 1,066,249
Common treasury stock; 6,159 shares--1997............. - (160,899)
---------- ----------
313,245 905,350
---------- ----------
$1,717,890 $3,334,739
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
VENCOR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Shares
----------------
Common Par Value Capital in Retained Common
Common Treasury Common Excess of Earnings Treasury
Stock Stock Stock Par Value (Deficit) Stock Total
------ -------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1995................... 72,158 (2,025) $18,040 $ 684,377 $ 102,865 $ (33,218) $ 772,064
Net income............. 48,005 48,005
Increase in equity
resulting from initial
public offering of
Atria Communities,
Inc.
common stock.......... 19,828 19,828
Issuance of common
stock in connection
with employee benefit
plans................. 457 246 114 9,223 3,083 12,420
Repurchase of common
stock................. (1,950) (55,305) (55,305)
Other.................. (1) 99 (20) 79
------ ------ ------- --------- --------- --------- ---------
Balances, December 31,
1996................... 72,615 (3,730) 18,154 713,527 150,870 (85,460) 797,091
Net income............. 130,933 130,933
Increase in equity
resulting from
secondary public
offering of Atria
Communities, Inc.
common stock.......... 22,553 22,553
Issuance of common
stock in connection
with employee benefit
plans................. 855 496 214 29,336 6,212 35,762
Repurchase of common
stock................. (2,925) (81,651) (81,651)
Other.................. 662 662
------ ------ ------- --------- --------- --------- ---------
Balances, December 31,
1997................... 73,470 (6,159) 18,368 766,078 281,803 (160,899) 905,350
Net loss............... (650,845) (650,845)
Non-cash spin-off
transactions with
Ventas, Inc.:
Property and equipment,
net................... (953,534) (953,534)
Long-term debt......... 991,768 991,768
Common treasury stock.. (5,917) 5,917 (1,479) (156,390) 157,869 -
Series A preferred
stock................. (17,700) (17,700)
Deferred income taxes.. 15,907 15,907
Issuance of common
stock in connection
with employee benefit
plans................. 2,593 242 648 14,396 3,030 18,074
Preferred stock
dividend
requirements.......... (697) (697)
Other.................. 4,922 4,922
------ ------ ------- --------- --------- --------- ---------
Balances, December 31,
1998................... 70,146 - $17,537 $ 665,447 $(369,739) $ - $ 313,245
====== ====== ======= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
VENCOR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $(650,845) $ 130,933 $ 48,005
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization.............. 124,617 123,865 99,533
Provision for doubtful accounts............ 55,561 31,176 15,001
Deferred income taxes...................... 71,496 53,164 (34,814)
Extraordinary loss on extinguishment of
debt...................................... 126,726 6,829 -
Unusual transactions....................... 407,542 - 121,789
Other...................................... 2,173 (9,737) (9,316)
Change in operating assets and liabilities:
Accounts and notes receivable............. 100,131 (87,914) (64,304)
Inventories and other assets.............. (11,920) (7,196) (3,313)
Accounts payable.......................... 52,437 (14,177) 2,165
Income taxes payable...................... (17,167) 22,850 (23,892)
Due to third party payors................. 98,851 - -
Other accrued liabilities................. (36,406) 16,251 28,088
--------- ---------- ---------
Net cash provided by operating
activities............................. 323,196 266,044 178,942
--------- ---------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......... (267,288) (281,672) (135,027)
Acquisition of TheraTx, Incorporated........ - (359,439) -
Acquisition of Transitional Hospitals
Corporation................................ - (615,620) -
Other acquisitions.......................... (24,227) (36,630) (26,236)
Sale of investment in Atria Communities,
Inc........................................ 177,500 - -
Sale of investment in Colorado MEDtech,
Inc........................................ 22,001 - -
Sale of other assets........................ 37,827 75,988 9,147
Series A preferred stock loans.............. (15,930) - -
Collection of notes receivable.............. 2,678 8,687 78,151
Net change in investments................... 13,164 (4,513) (445)
Other....................................... (7,881) (20,461) (6,576)
--------- ---------- ---------
Net cash used in investing activities... (62,156) (1,233,660) (80,986)
--------- ---------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving
lines of credit............................ (251,146) 418,700 (1,500)
Issuance of long-term debt.................. 700,000 2,818 10,495
Net proceeds from senior subordinated notes
offerings.................................. 294,000 731,812 -
Redemption of senior subordinated notes..... (732,547) - -
Repayment of long-term debt................. (281,316) (130,516) (31,586)
Payment of deferred financing costs......... (11,334) (22,052) (1,816)
Public offering of common stock of
affiliate.................................. - - 52,247
Other issuances of common stock............. 227 13,832 2,242
Repurchase of common stock.................. - (81,651) (55,305)
Other....................................... - (207) (46)
--------- ---------- ---------
Net cash provided by (used in) financing
activities............................. (282,116) 932,736 (25,269)
--------- ---------- ---------
Change in cash and cash equivalents.......... (21,076) (34,880) 72,687
Cash and cash equivalents at beginning of
period...................................... 55,627 90,507 17,820
--------- ---------- ---------
Cash and cash equivalents at end of period... $ 34,551 $ 55,627 $ 90,507
========= ========== =========
Supplemental information:
Interest payments........................... $ 129,395 $ 76,864 $ 46,527
Income tax payments (refunds)............... (31,576) 16,042 55,303
</TABLE>
See accompanying notes.
F-6
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
Reporting Entity
Vencor, Inc. and its subsidiaries ("Vencor" or the "Company") operate an
integrated network of healthcare services in 46 states primarily focused on
the needs of the elderly. At December 31, 1998, the Company operated 57 long-
term acute care hospitals (4,979 licensed beds), 291 nursing centers (38,362
licensed beds) and its Vencare ancillary services business ("Vencare") which
provided respiratory and rehabilitation therapies, medical services and
pharmacy management services under approximately 2,800 contracts to nursing
centers and other healthcare providers.
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
hospital, nursing center 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"). On
April 30, 1998, Ventas completed the spin off of its healthcare operations
through the distribution of the common stock of Vencor 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.
On March 21, 1997, the Company completed the acquisition of TheraTx,
Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy
management services and operator of 26 nursing centers, pursuant to a cash
tender offer (the "TheraTx Merger"). See Note 3.
On June 24, 1997, the Company acquired substantially all of the outstanding
common stock of Transitional Hospitals Corporation ("Transitional"), an
operator of 19 long-term acute care hospitals, pursuant to a cash tender
offer. The Company completed the merger of its wholly owned subsidiary with
and into Transitional on August 26, 1997 (the "Transitional Merger"). See Note
4.
Basis of Presentation
The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated. Investments in affiliates in
which the Company has a 50% or less interest are accounted for by either the
equity or cost method.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.
The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying consolidated financial
statements include the operations of TheraTx and Transitional since March 21,
1997 and June 24, 1997, respectively. The Company finalized the purchase price
allocations related to these transactions in 1998.
In September 1998, the Company sold approximately 88% of its investment in
its assisted living affiliate, Atria Communities, Inc. ("Atria") resulting
from the merger of Atria and Kapson Senior Quarters Corp. In connection with
the merger, the Company retained approximately 12% of the outstanding capital
stock of the surviving entity and accounts for such investment under the cost
method of accounting. From July 1, 1997 to the date of sale, the Company
accounted for Atria under the equity method of accounting. Prior to July 1,
1997, such accounts were consolidated with those of the Company and provisions
related to minority interests in the earnings and equity of Atria were
recorded since the consummation of the initial public offering in August 1996.
See Note 7.
F-7
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
Impact of Recent Accounting Pronouncements
Beginning in 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which established new rules for the reporting of
comprehensive income and its components. SFAS 130 requires, among other
things, unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported as changes in common
stockholders' equity, to be disclosed as other comprehensive income. The
adoption of SFAS 130 had no impact on the Company's net loss or common
stockholders' equity for the year ended December 31, 1998.
Beginning in 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
requires revised disclosures for segments of a company based upon management's
approach to defining business operating segments. See Note 9.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which is required to be adopted by the Company in
the first quarter of 1999. SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
consolidated financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which requires
entities to expense start-up costs, including organizational costs, as
incurred. SOP 98-5 requires most entities to write off as a cumulative effect
of a change in accounting principle any previously capitalized start-up or
organizational costs. SOP 98-5 is effective for most entities for fiscal years
beginning after December 15, 1998. The Company plans to adopt the provisions
of SOP 98-5 in the first quarter of 1999. The amount of such unamortized costs
was $8.9 million at December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in fiscal years beginning after June 15, 1999.
Management has not determined the effect, if any, of SFAS 133 on the Company's
consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
Revenues
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of revenues by payor type follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Medicare.................................... $1,024,508 $1,068,624 $ 822,589
Medicaid.................................... 848,910 841,598 821,828
Private and other........................... 1,250,821 1,271,693 972,906
---------- ---------- ----------
3,124,239 3,181,915 2,617,323
Elimination................................. (124,500) (65,911) (39,540)
---------- ---------- ----------
$2,999,739 $3,116,004 $2,577,783
========== ========== ==========
</TABLE>
F-8
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted highly liquid investments
with an original maturity of three months or less when purchased. Carrying
values of cash and cash equivalents approximate fair value due to the short-
term nature of these instruments.
Accounts Receivable
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients. Amounts recorded
include estimated provisions for loss related to uncollectible accounts and
disputed items that have continuing significance, such as third-party
reimbursements that continue to be claimed in current cost reports.
Inventories
Inventories consist primarily of medical supplies and are stated at the
lower of cost (first-in, first-out) or market.
Property and Equipment
Depreciation expense, computed by the straight-line method, was $90.9
million in 1998, $105.3 million in 1997 and $91.6 million in 1996.
Depreciation rates for buildings range generally from 20 to 45 years.
Estimated useful lives of equipment vary from 5 to 15 years.
Goodwill
Costs in excess of the fair value of identifiable net assets of acquired
entities are amortized using the straight-line method principally over 40
years. Effective October 1, 1998 the Company reduced the amortization period
for goodwill related to its rehabilitation therapy business to seven years.
Amortization expense recorded for 1998, 1997 and 1996 totaled $27.2 million,
$11.4 million and $2.7 million, respectively.
Long-Lived Assets
The Company regularly reviews the carrying value of certain long-lived
assets and the related identifiable intangible assets with respect to any
events or circumstances that indicate impairment or that the amortization
period may require adjustment. If such circumstances suggest the recorded
amounts cannot be recovered, calculated based on estimated cash flows
(undiscounted) over the remaining amortization period, the carrying values of
such assets are reduced to fair value. See Note 7.
Preopening Costs
Costs incurred prior to the opening of new facilities are deferred and
amortized on a straight-line basis over a three year period. At December 31,
1998 and 1997, the Company's unamortized preopening costs (included in other
assets) totaled $8.9 million and $15.0 million, respectively.
Professional Liability Risks
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
Derivative Instruments
The Company is a party to interest rate swap agreements that eliminate the
impact of changes in interest rates on certain outstanding floating rate debt.
Each interest rate swap agreement is associated with all or a portion of the
principal balance of a specific debt obligation. These agreements involve the
exchange of amounts
F-9
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
Derivative Instruments (Continued)
based on variable rates for amounts based on fixed interest rates over the
life of the agreement, without an exchange of the notational amount upon which
the payments are based. The differential to be paid or received as interest
rates change is accrued and recognized as an adjustment of interest expense
related to the debt, and the related amount payable to or receivable from
counterparties is included in accrued interest. The fair values of the swap
agreements are not recognized in the financial statements. Gains and losses on
terminations of interest rate swap agreements are deferred (included in other
assets) and amortized as an adjustment to interest expense over the remaining
term of the original contract life of the terminated swap agreement.
Earnings per Common Share
Basic earnings per common share are based upon the weighted average number
of common shares outstanding. Diluted earnings per common share for 1997 and
1996 include the effect of employee stock options aggregating 1,421,000 shares
in 1997 and 998,000 shares in 1996. No incremental shares are included in the
1998 calculation of the diluted loss per common share since the result would
be antidilutive.
NOTE 2--ISSUES AFFECTING LIQUIDITY
As a result of the 1998 net operating loss, the Company is currently in
default of certain financial covenants under the Company's $1.0 billion bank
credit facility (the "Credit Agreement") which was consummated in connection
with the Reorganization Transactions. Management and the Credit Agreement
lenders ("Senior Lenders") are engaged in discussions in an effort to resolve
this matter. The Senior Lenders have agreed to a waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the revolving credit
portion of the Credit Agreement (the "Revolving Credit Facility") was
permanently reduced from $300 million to $125 million. The waiver limits,
among other things, the amount of available borrowings under the Revolving
Credit Facility to $55 million during the waiver period. 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. As discussed below,
the Company and Ventas have entered into a structured payment plan for the
payment of rent due under the Master Lease Agreements for April. In addition,
the Company was informed on April 9, 1999 by the Health Care Financing
Administration ("HCFA") that the Medicare program has made a demand for
repayment of approximately $90 million of reimbursement overpayments by April
23, 1999. In addition, HCFA has indicated that all reimbursement payments to
the Company will be suspended if the overpayment is not received by April 23.
The Company is in discussions with HCFA regarding extending the repayment
terms. The amount demanded by HCFA is included in amounts due to third party
payors in the Company's consolidated balance sheet at December 31, 1998. The
waiver also places additional informational requirements and minimum daily
census level requirements on the Company's hospitals and nursing centers. The
Company's failure to comply with those covenants would result in the
termination of the waiver.
In the event the Company is unable to obtain the necessary amendment or
comply with or maintain a covenant waiver, the Senior Lenders are entitled, at
their discretion, to exercise certain remedies including acceleration of the
outstanding borrowings under the Credit Agreement. There can be no assurance
that the Senior Lenders will provide the Company with an amendment or waiver
of the defaults after May 28, 1999, or will not seek to declare an event of
default or credit freeze prior to such date. In addition, the Company's 9 7/8%
Guaranteed Senior Subordinated Notes due 2005 (the "1998 Notes") contain
provisions which allow the creditors to accelerate their debt and seek certain
other remedies if the Company has a payment default under the Credit Agreement
or if the obligations under the Credit Agreement have been accelerated.
F-10
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ISSUES AFFECTING LIQUIDITY (Continued)
If the Senior Lenders or the other creditors elect to exercise their right
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. Furthermore, if such obligations were to be accelerated,
in whole or in part, there can be no assurance that the Company would be
successful in identifying or consummating financing necessary to satisfy the
obligations which would become immediately due and payable. As a result of the
uncertainty related to the covenant defaults and corresponding remedies
described above, outstanding borrowings under the Credit Agreement and the
principal amount of the 1998 Notes are presented as current liabilities on the
Company's consolidated balance sheet at December 31, 1998 and the Company had
a deficit in working capital of $683 million. These matters raise substantial
doubts about the Company's ability to continue as a going concern.
In addition to continuing to negotiate with the Senior Lenders in an attempt
to obtain additional waivers or amendment of the aforementioned defaults, the
Company has retained an investment banking firm and legal counsel to assist in
the development of a strategic plan to restructure the Company's financial
obligations and improve its financial position. Pursuant to the Agreement and
Plan of Reorganization governing the Reorganization Transactions (the
"Reorganization Agreement"), on March 18, 1999, the Company served Ventas with
a demand for mediation, seeking a reduction in rent and other concessions
under the Master Lease Agreements. In view of ongoing discussions, 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. On
April 12, 1999, the Company and Ventas entered into a Second Standstill
Agreement (the "Second Standstill") which provides for the structured payment
of approximately $18.5 million of rental payments initially due on April 1.
The Company agreed to pay $8.0 million on April 13, 1999, $4.3 million on each
of April 20 and April 27, and $1.9 million on April 30, 1999. The Second
Standstill further provides that neither party will pursue any claims against
the other or any other third party related to the Reorganization Transactions
as long as the Company complies with the structured payment terms. The Second
Standstill will terminate on May 5, 1999 or on any date that a voluntary or
involuntary bankruptcy proceeding is commenced by or against the Company. 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.
The accompanying 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 these uncertainties.
NOTE 3--THERATX MERGER
On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired........................................ $ 633,793
Fair value of liabilities assumed.................................... (259,439)
---------
Net assets acquired................................................ 374,354
Cash received from acquired entity................................... (14,915)
---------
Net cash paid...................................................... $ 359,439
=========
</TABLE>
F-11
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--THERATX MERGER (Continued)
The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $315.2 million. During 1997, the Company completed
the sales of certain non-strategic assets acquired in connection with the
TheraTx merger, the proceeds from which approximated $54.6 million. No gain or
loss was recognized in connection with these transactions. Purchase price
adjustments recorded in 1998 increased goodwill by $7.6 million.
NOTE 4--TRANSITIONAL MERGER
On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which
the Company paid $16.00 per common share. The Company completed the merger of
its wholly owned subsidiary with and into Transitional on August 26, 1997. A
summary of the Transitional Merger follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired......................................... $713,336
Fair value of liabilities assumed..................................... (44,842)
--------
Net assets acquired................................................. 668,494
Cash received from acquired entity.................................... (52,874)
--------
Net cash paid....................................................... $615,620
========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $364.7 million. Purchase price adjustments recorded
in 1998 increased goodwill by $15.6 million.
NOTE 5--BUSINESS COMBINATIONS OTHER THAN THERATX AND TRANSITIONAL
The Company has acquired a number of healthcare facilities (including
certain previously leased facilities) and other related businesses,
substantially all of which have been accounted for by the purchase method.
Accordingly, the aggregate purchase price of these transactions has been
allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based upon their respective fair values. The consolidated
financial statements include the operations of acquired entities since the
respective acquisition dates. The pro forma effect of these acquisitions on
the Company's results of operations prior to consummation was not significant.
The following is a summary of acquisitions consummated during the last three
years under the purchase method of accounting (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Fair value of assets acquired....................... $32,286 $ 71,601 $26,621
Fair value of liabilities assumed................... (8,059) (34,971) (385)
------- -------- -------
Net cash paid for acquisitions..................... $24,227 $ 36,630 $26,236
======= ======== =======
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $7.9 million in 1998, $5.7 million in
1997 and $4.8 million in 1996.
F-12
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6 --PRO FORMA INFORMATION (UNAUDITED)
The pro forma effect of the TheraTx Merger and Transitional Merger assuming
that the transactions occurred on January 1, 1996 follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues................................................. $3,364,274 $3,475,217
Income from operations................................... 98,446 14,001
Net income............................................... 94,251 12,867
Earnings per common share:
Basic:
Income from operations................................. $ 1.43 $ 0.20
Net income............................................. 1.37 0.18
Diluted:
Income from operations................................. $ 1.40 $ 0.20
Net income............................................. 1.34 0.18
</TABLE>
For both periods presented, pro forma financial data have been derived by
combining the financial results of the Company and TheraTx (based upon year
end reporting periods ending on December 31) and Transitional (based upon year
end reporting periods ending on November 30).
Pro forma income from operations for 1997 includes costs incurred by both
TheraTx and Transitional in connection with the acquisitions which reduced net
income by $29.7 million. Pro forma income from operations for 1996 includes a
gain on the sale of Transitional's United Kingdom psychiatric hospitals
aggregating $33 million and losses of $53 million related primarily to the
sale of Transitional's United States psychiatric hospitals.
F-13
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--UNUSUAL TRANSACTIONS
Operating results for each of the last three years include certain unusual
transactions. These transactions are included in other operating expenses in
the consolidated statement of operations (unless otherwise indicated) for the
respective periods in which they were recorded.
1998
The following table summarizes the pretax impact of unusual transactions
recorded during 1998 (in millions):
<TABLE>
<CAPTION>
Quarters
---------------------------
First Second Third Fourth Year
----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment........... $307.8 $ 307.8
Investment in BHC..................... $ 8.5 43.1 51.6
Wisconsin nursing center.............. 27.5 27.5
Corporate properties.................. $ 8.8 2.9 15.1 26.8
Acquired entities..................... 13.5 13.5
Gain on sale of investments............. (98.5) (13.0) (111.5)
Losses from termination of construction
projects............................... 71.3 71.3
Reorganization Transactions costs....... $7.7 9.6 17.3
Write-off of clinical information
systems................................ 10.1 10.1
Doubtful accounts related to sold
operations............................. 9.6 9.6
Settlement of litigation................ 7.8 7.8
Loss on sale and closure of home health
and hospice businesses................. 7.3 7.3
---- ----- ------ ------ -------
$7.7 $25.7 $ (6.2) $411.9 $ 439.1
==== ===== ====== ====== =======
</TABLE>
Long-lived asset impairment--Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"), requires impairment losses to be
recognized for long-lived assets used in operations when indications of
impairment are present and the estimate of undiscounted future cash flows is
not sufficient to recover asset carrying amounts. SFAS No. 121 also requires
that long-lived assets held for disposal be carried at the lower of carrying
value or fair value less costs of disposal, once management has committed to a
plan of disposal.
The Balanced Budget Act of 1997 (the "Budget Act") established, among other
things, a new Medicare prospective payment system ("PPS") for nursing centers.
All of the Company's nursing centers became subject to PPS effective July 1,
1998. During the first three years, the per diem rates for nursing centers are
based on a blend of facility-specific and Federal costs. Thereafter, the per
diem rates will be based solely on Federal costs. 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.
The Budget Act also reduced payments to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a PPS
hospital. The reductions in allowable costs for capital expenditures became
effective in the fourth quarter of 1997. The reductions in TEFRA incentive
payments and allowable costs for bad debts became effective in the third and
fourth quarters of 1998. The reduction for payments for services to patients
transferred from a PPS hospital became effective in the fourth quarter of
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.
F-14
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--UNUSUAL TRANSACTIONS (Continued)
Vencare provides ancillary services to both Company-operated and non-
affiliated nursing centers. While most of the nursing center industry will be
subject to PPS on or after January 1, 1999, management believes that Vencare's
ability to maintain services and revenues was impacted adversely during 1998,
particularly in the third and fourth quarters, since nursing centers were
reluctant to enter into Vencare contracts while transitioning to the new fixed
payment system under PPS. 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
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.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The new limits became effective for services
provided on or after April 10, 1998 and negatively impacted operating results
of the ancillary services division in 1998.
These significant regulatory changes and the impact of such changes on the
Company's operating results in the third and fourth quarters of 1998 served as
an indication to management that the carrying values of the assets of its
nursing center and hospital facilities, as well as certain portions of its
ancillary services business, may be impaired.
In accordance with SFAS No.121, management estimated the undiscounted cash
flows for each of its facilities and ancillary services lines of business over
the useful lives of the assets or the amortization periods for goodwill, and
compared these estimates to the carrying values of the underlying assets. As a
result of these estimates, the Company reduced the carrying amounts of the
assets associated with 110 nursing centers, 12 hospitals and a portion of the
goodwill associated with the rehabilitation therapy business to their
respective estimated fair values. The determination of the fair values of the
impaired facilities and rehabilitation therapy business was based upon the net
present value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property, Plant
Goodwill and Equipment Total
-------- --------------- ------
<S> <C> <C> <C>
Nursing centers.............................. $ 27.7 $ 71.6 $ 99.3
Hospitals.................................... 74.4 34.7 109.1
Vencare...................................... 99.2 0.2 99.4
------ ------ ------
$201.3 $106.5 $307.8
====== ====== ======
</TABLE>
In addition to the above impairment charges, the amortization period for the
remaining goodwill associated with the rehabilitation therapy business
acquired as part of the TheraTx Merger was reduced from forty years to seven
years, effective October 1, 1998. Management believes that the provisions of
the Budget Act altered the expected long-term cash flows and business
prospects associated with this business to such an extent that a shorter
amortization period is deemed appropriate. The change in the amortization
period resulted in an additional pretax charge to operations of $6.4 million
in the fourth quarter of 1998. Further, the effect of the change in estimated
useful life will result in additional amortization expense of approximately
$11 million during each of the next five years. See Note 8.
Investment in BHC--In connection with the Transitional Merger, the Company
acquired a 44% voting equity interest (61% equity interest) in Behavioral
Healthcare Corporation ("BHC"), an operator of psychiatric and behavioral
clinics. The Company has been unsuccessful in its attempts to sell this
investment. In July 1998,
F-15
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--UNUSUAL TRANSACTIONS (Continued)
the Company entered into an agreement to sell its interest in BHC for an
amount less than its carrying value and accordingly, a provision for loss of
$8.5 million was recorded during the third quarter. In November 1998, the
agreement to sell the Company's interest in BHC was terminated by the
prospective buyer, indicating to the Company that the carrying amount of its
investment may be impaired. Following an independent appraisal, the Company
recorded a $43.1 million write-down of the investment in the fourth quarter of
1998. The net carrying amount of the investment aggregated $20.0 million at
December 31, 1998.
Wisconsin nursing center--The Company recorded an asset impairment charge of
$27.5 million in the fourth quarter of 1998 related to a nursing center in
Wisconsin that is leased from Ventas. The impairment resulted primarily from
certain fourth quarter regulatory actions by state and Federal agencies with
respect to the operation of the facility. In the fourth quarter of 1998, the
facility reported a pretax loss of $4.2 million and is not expected to
generate positive cash flows in the future.
Corporate properties and acquired entities--During 1998, the Company
recorded $26.8 million of charges related to the valuation of certain
corporate assets, the most significant of which relates to previously
capitalized amounts and expected property disposal losses associated with the
cancellation of a corporate headquarters
construction project. The Company also recorded $13.5 million of asset write-
downs associated with the acquisition of The Hillhaven Corporation
("Hillhaven") (the "Hillhaven Merger"), the TheraTx Merger and the
Transitional Merger, including provisions for obsolete or abandoned computer
equipment and miscellaneous receivables.
Gain on sale of investments--In September 1998, the Company sold its
investment in Atria for $177.5 million in cash and an equity interest in the
surviving corporation, resulting in a gain of $98.5 million. In November 1998,
the Company's investment in Colorado MEDtech, Inc. was sold at a gain of $13.0
million. Proceeds from the sale were $22.0 million.
Losses from termination of construction projects--In the third quarter of
1998, as a result of substantial reductions in Medicare reimbursement to the
Company's nursing centers and hospitals in connection with the Budget Act,
management determined to suspend all acquisition and development activities,
terminate the construction of substantially all of its development properties,
and close two recently acquired hospitals. Accordingly, the Company recorded
pretax charges aggregating $71.3 million, of which $53.9 million related to
the cancellation of construction projects and the remainder related to the
planned closure of the hospitals. In connection with the construction
termination charge, the Company decided that it would not replace certain
facilities that previously were accounted for as assets intended for disposal.
Accordingly, the $53.9 million charge discussed above included a $10.0 million
reversal of a previously recorded valuation allowance (the amount necessary to
reduce the carrying value to fair value less costs of disposal) related to
such facilities.
Reorganization Transactions costs--The Reorganization Transactions were
completed on May 1, 1998. Direct costs related to the transactions were $17.3
million and primarily included costs for professional services.
Write-off of clinical information systems--During 1997, the Company began
the installation of its proprietary clinical information system, VenTouch(TM),
in several of its nursing centers. During the pilot process, the Company
determined that VenTouch(TM) did not support effectively the nursing center
processes, especially in facilities with lower acuity patients. Accordingly,
management determined in the fourth quarter of 1998 to remove VenTouch(TM)
from these facilities during 1999. A loss of $10.1 million has been recorded
to reflect the write-off of the equipment and estimated costs of removal from
the facilities.
Doubtful accounts related to sold operations--In the third quarter of 1998,
the Company recorded $9.6 million of additional provisions for doubtful
accounts for accounts receivable associated with previously sold facilities.
F-16
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--UNUSUAL TRANSACTIONS (Continued)
Settlement of litigation--The Company settled a legal action entitled
Highland Pines Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al.
(assumed in connection with the TheraTx Merger) which resulted in a payment of
$16.2 million. Approximately $7.8 million of the settlement was charged to
earnings in the fourth quarter of 1998, and the remainder of such costs had
been previously accrued in connection with the purchase price allocation.
Loss on sale and closure of home health and hospice businesses--The Company
began operating its home health and hospice businesses as part of Vencare in
1996. These operations generally were unprofitable. In the second quarter of
1998, management decided to cease operations and either close or sell these
businesses, resulting in a loss of $7.3 million.
1997
During 1997, the Company completed the restructuring of the institutional
pharmacy business discussed below and, in the fourth quarter, adjusted the
accrued costs of the restructuring originally recorded in 1996. The adjustment
increased pretax income by $8.7 million. In addition, changes in estimates and
gains related to the disposition of assets increased pretax income by $5.1
million during 1997.
1996
In the fourth quarter of 1996, the Company recorded pretax charges
aggregating $125.2 million primarily to complete the integration of Hillhaven.
In November 1996, the Company executed a definitive agreement to sell 34
underperforming or non-strategic nursing centers in early 1997. A charge of
$65.3 million was recorded in connection with the disposition. In addition,
the Company's previously independent institutional pharmacy business, acquired
as part of the Hillhaven Merger, was reorganized to eliminate duplicative
administrative functions and operate as an integral part of the Company's
hospital operations. These activities resulted in a charge of $39.6 million
and related primarily to costs associated with employee severance and benefit
costs, facility close-down expenses and the write-off of certain deferred
costs for services to be discontinued. A provision for loss totaling $20.3
million related to the planned replacement of one hospital and three nursing
centers also was recorded in the fourth quarter.
During 1997, the Company sold 28 of the 34 non-strategic nursing centers
planned for disposition. Proceeds from the transaction aggregated $11.2
million. In addition, one facility was sold and one was closed in January
1998, and two nursing centers were sold in April 1998. In February 1998, the
Company was unable to receive the necessary licensure approvals to sell two
non-strategic nursing centers for which provision for loss had been recorded
in 1996. The Company continues to operate these facilities. Accrued provisions
for loss related to these facilities were not significant.
During 1996, the Company completed the integration of Hillhaven and adjusted
the accrued costs of the Hillhaven Merger originally recorded in 1995. These
adjustments increased 1996 pretax income by $13.8 million, including $9.3
million of gains on sales of assets.
F-17
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--FOURTH QUARTER ADJUSTMENTS
In addition to the unusual transactions discussed in Note 7, during the
fourth quarter of 1998, the Company recorded certain adjustments which
significantly impacted operating results. A summary of such adjustments follows
(in millions):
<TABLE>
<CAPTION>
Business Segment
-----------------------------------------
Nursing
Centers Hospitals Vencare Corporate Total
------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
(Income)/expense
Provision for doubtful accounts.... $14.0 $ 5.7 $ 9.3 $29.0
Third party reimbursements,
including amounts due from
government agencies that are
subject to dispute................ 4.8 11.4 11.5 27.7
Change in goodwill amortization
period related to rehabilitation
therapy business.................. 6.4 6.4
Taxes other than income............ $ 6.4 6.4
Compensated absences............... 2.1 (0.8) 1.3 0.7 3.3
Incentive compensation............. (1.0) (0.8) (0.5) (2.9) (5.2)
Litigation and regulatory actions.. 3.5 3.5
Miscellaneous receivables.......... 5.2 5.2
Gain on sale of assets............. (2.0) (2.0)
Other.............................. 1.2 (1.0) 0.7 3.7 4.6
----- ----- ----- ----- -----
$21.1 $14.5 $31.9 $11.4 $78.9
===== ===== ===== ===== =====
</TABLE>
F-18
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--BUSINESS SEGMENT DATA
The Company operates three business segments: nursing centers, hospitals and
ancillary services. The nursing center business provides skilled nursing and
rehabilitation services to patients who do not otherwise require
hospitalization or similar levels of care. Most of the nursing centers
operated by the Company were acquired in the Hillhaven Merger; additional
facilities were acquired in 1997 in connection with the TheraTx Merger. The
hospital segment comprises long-term acute care facilities providing care to
medically complex, chronically ill patients requiring extended hospital stays
generally in excess of 25 days. The ancillary services segment, or Vencare,
provides rehabilitation, respiratory and pharmacy services to Company-operated
and non-affiliated nursing centers generally pursuant to short-term contracts.
Respiratory and pharmacy components of Vencare generally are provided by the
Company's hospital-based clinical and administrative staffs. The operations of
the Company's independent and assisted living business, Atria, were
consolidated for accounting purposes through June 30, 1997, accounted for
under the equity method from July 1, 1997 until September 1998 and under the
cost method thereafter. See Note 10.
The following table represents the Company's revenues, operating results and
assets by operating segment. The Company defines operating income as earnings
before interest, income taxes, depreciation, amortization and rent. Operating
income reported for each of the Company's business segments excludes
allocations of corporate overhead.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Nursing centers........................... $1,621,662 $1,722,416 $1,615,141
Hospitals................................. 919,847 785,829 551,268
Vencare................................... 582,730 642,471 399,068
Atria..................................... - 31,199 51,846
---------- ---------- ----------
3,124,239 3,181,915 2,617,323
Elimination of Vencare charges to Company
nursing centers.......................... (124,500) (65,911) (39,540)
---------- ---------- ----------
$2,999,739 $3,116,004 $2,577,783
========== ========== ==========
Income (loss) from operations:
Operating income (loss):
Nursing centers.......................... $ 245,569 $ 273,280 $ 260,885
Hospitals................................ 259,874 246,653 155,015
Vencare.................................. 64,104 114,545 69,958
Atria.................................... - 9,945 15,937
Corporate overhead....................... (166,150) (123,772) (96,161)
Unusual transactions..................... (439,125) 13,833 (111,407)
---------- ---------- ----------
Operating income (loss)................. (35,728) 534,484 294,227
Rent...................................... (234,144) (89,474) (77,795)
Depreciation and amortization............. (124,617) (123,865) (99,533)
Interest, net............................. (102,320) (96,679) (33,719)
---------- ---------- ----------
Income (loss) before income taxes......... (496,809) 224,466 83,180
Provision for income taxes................ 76,099 89,338 35,175
---------- ---------- ----------
$ (572,908) $ 135,128 $ 48,005
========== ========== ==========
Assets:
Nursing centers........................... $ 537,388 $1,236,202 $ 931,253
Hospitals and Vencare..................... 852,567 1,572,722 632,780
Atria..................................... - - 210,231
Corporate................................. 327,935 525,815 194,592
---------- ---------- ----------
$1,717,890 $3,334,739 $1,968,856
========== ========== ==========
</TABLE>
F-19
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--INVESTMENTS IN AFFILIATES
Affiliated companies accounted for on the equity method include BHC
(acquired as part of the Transitional Merger) and various other healthcare
related companies. Affiliated companies accounted for on the cost basis
include Atria (after September 1998). Summarized financial data reported by
these affiliates and a summary of the amounts recorded in the Company's
consolidated financial statements as of and for the years ended December 31,
1998 and 1997 follow (in thousands):
<TABLE>
<CAPTION>
1998
-----------------------------------
Atria BHC Other Total
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Financial position:
Current assets............................ $ - $ 68,762 $ 7,907 $ 76,669
Current liabilities....................... - 27,725 3,234 30,959
Working capital........................... - 41,037 4,673 45,710
Noncurrent assets......................... - 189,752 16,001 205,753
Noncurrent liabilities.................... - 108,311 17,024 125,335
Stockholders' equity...................... - 122,478 3,650 126,128
Results of operations:
Revenues.................................. - 300,464 27,680 328,144
Net income (loss)......................... - (3,334) 2,078 (1,256)
Amounts recorded by the Company:
Investment in affiliates.................. 9,237 20,000 6,470 35,707
Equity in earnings (loss)................. 2,388 (1,429) 6,073 7,032
<CAPTION>
1997
-----------------------------------
Atria BHC Other Total
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Financial position:
Current assets............................ $194,761 $ 74,526 $44,107 $313,394
Current liabilities....................... 14,100 32,876 18,359 65,335
Working capital........................... 180,661 41,650 25,748 248,059
Noncurrent assets......................... 280,702 196,394 22,916 500,012
Noncurrent liabilities.................... 268,524 112,190 16,908 397,622
Stockholders' equity...................... 192,839 125,854 31,756 350,449
Results of operations:
Revenues.................................. 37,679 158,597 97,604 293,880
Net income................................ 4,328 788 9,913 15,029
Amounts recorded by the Company:
Investment in affiliates.................. 85,886 73,046 19,369 178,301
Equity in earnings........................ 1,870 407 5,904 8,181
</TABLE>
F-20
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--INCOME TAXES
Provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 3,945 $31,006 $ 59,470
State................................................ 658 5,168 10,519
------- ------- --------
4,603 36,174 69,989
Deferred.............................................. 71,496 53,164 (34,814)
------- ------- --------
$76,099 $89,338 $ 35,175
======= ======= ========
</TABLE>
Reconciliation of federal statutory tax expense to the provision for income
taxes follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Income tax expense (benefit) at federal rate...... $(173,883) $78,563 $29,183
State income taxes, net of federal income tax ben-
efit............................................. (17,388) 8,085 2,981
Merger and restructuring costs.................... 5,943 - 2,909
Goodwill amortization............................. 8,823 3,512 -
Write-off of goodwill............................. 77,482 - -
Gain on sale of Atria............................. (37,908) - -
Acquisition costs and merger adjustments.......... 8,851 - -
Valuation allowance............................... 202,949 - -
Other items, net.................................. 1,230 (822) 102
--------- ------- -------
$ 76,099 $89,338 $35,175
========= ======= =======
</TABLE>
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
Assets Liabilities Assets Liabilities
-------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Depreciation....................... $ - $26,707 $ - $65,018
Insurance.......................... 5,572 - 17,948 -
Doubtful accounts.................. 77,036 - 37,689 -
Property........................... 91,927 - 23,428 -
Compensation....................... 10,599 - 16,154 -
Subsidiary net operating losses
(expiring in 2017)................ 33,519 - 15,864 -
Other.............................. 18,775 7,772 26,236 27,170
-------- ------- ------- -------
237,428 $34,479 137,319 $92,188
======= =======
Reclassification of deferred tax
liabilities....................... (34,479) (92,188)
-------- -------
Net deferred tax assets............ 202,949 45,131
Valuation allowance................ (202,949) -
-------- -------
$ - $45,131
======== =======
</TABLE>
At December 31, 1997, management believed that recorded deferred tax assets
ultimately would be realized. Management's conclusions at that time were based
primarily on the existence of sufficient taxable income within the allowable
carryback periods to realize the tax benefits of deductible temporary
differences recorded at
F-21
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--INCOME TAXES (Continued)
December 31, 1997. For the fourth quarter of 1998, the Company reported a
pretax loss of $506 million. Additionally, the Company revised its operating
budgets as a result of the Budget Act and the less than expected operating
results in 1998. Based upon these revised forecasts, management does not
believe that the Company can generate sufficient taxable income to realize the
net deferred tax assets recorded at December 31, 1998. As a result of these
estimates, the Company recorded a deferred tax asset valuation allowance
aggregating $202.9 million at December 31, 1998.
Deferred income taxes totaling $73.4 million at December 31, 1997 are
included in other current assets. Noncurrent deferred income taxes, included
in other long-term liabilities, totaled $28.3 million at December 31, 1997.
At the time of the Reorganization Transactions, the Company recorded both a
deferred tax asset and a valuation allowance for identical amounts in
connection with the difference in book and tax basis of the Company's
investment in Atria which resulted from the Reorganization Transactions. The
valuation allowance was recorded due to the litigation and other uncertainties
associated with the realization of the deferred tax asset, based upon the
available evidence at the time of the Reorganization Transactions. During the
third quarter, upon favorable resolution of such litigation and completion of
the Atria sale, the Company adjusted the valuation allowance that had been
recorded in the second quarter of 1998.
NOTE 12--PROFESSIONAL LIABILITY RISKS
The Company insures a substantial portion of its professional liability
risks through a wholly owned insurance subsidiary. Provisions for such risks
underwritten by the subsidiary were $16.7 million for 1998, $10.7 million for
1997 and $10.4 million for 1996.
Amounts funded for the payment of claims and expenses incident thereto,
included principally in other assets, aggregated $24.9 million and $26.4
million at December 31, 1998 and 1997, respectively. Allowances for
professional liability risks, included principally in deferred credits and
other liabilities, were $24.2 million and $26.3 million, respectively.
NOTE 13--LONG-TERM DEBT
Capitalization
A summary of long-term debt at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Senior collateralized debt, 5% to 10% (rates generally
floating) payable in periodic installments through
2019.................................................. $ 1,944 $ 55,651
Term A Loan, 7.9% to 8.6% (rates generally floating)
payable in periodic installments through 2003......... 232,261 -
Term B Loan, 8.4% to 9.1% (rates generally floating)
payable in periodic installments through 2005......... 233,207 -
Bank revolving credit agreement due 2002 (floating
rates averaging 6.6%)................................. - 1,129,300
9 7/8% Senior Subordinated Notes due 2005.............. 300,000 -
8 5/8% Senior Subordinated Notes due 2007.............. 2,391 750,000
Other.................................................. 6,730 12,141
--------- ----------
Total debt, average life of six years (rates
averaging 9%)....................................... 776,533 1,947,092
Amounts due within one year............................ (9,048) (27,468)
Amounts in default classified as current............... (760,885) -
--------- ----------
Long-term debt....................................... $ 6,600 $1,919,624
========= ==========
</TABLE>
F-22
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--LONG-TERM DEBT (Continued)
In connection with the Reorganization Transactions, the Company consummated
the $1.0 billion Credit Agreement which includes (i) a five-year $300 million
Revolving Credit Facility, (ii) a $250 million Term A Loan (the "Term A Loan")
payable in various installments over five years, (iii) a $250 million Term B
Loan (the "Term B Loan") payable in installments of 1% per year with the
outstanding balance due in seven years and (iv) a $200 million Bridge Loan
(the "Bridge Loan") which was repaid in September 1998 primarily from the
proceeds of the sale of the Company's investment in Atria. Interest is
payable, depending on certain leverage ratios and other factors, at a rate of
LIBOR plus 3/4 to 3% for the Revolving Credit Facility and Term A Loan, and
LIBOR plus 2 1/4% to 3 1/2% for the Term B Loan.
On April 30, 1998, the Company completed the private placement of $300
million aggregate principal amount of the 1998 Notes, which are not callable
by the Company until 2002. On September 10, 1998, the Company exchanged the
1998 Notes for publicly registered securities having identical terms and
conditions.
In July 1997, the Company completed the private placement of $750 million
aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the
"1997 Notes"). The 1997 Notes were issued at 99.575% of face value and were
not callable by the Company until 2002. The net proceeds of the offering were
used to reduce outstanding bank borrowings. The Company exchanged the 1997
Notes for publicly registered securities having identical terms and conditions
in November 1997.
Refinancing Activities
In connection with the Reorganization Transactions, the Company refinanced
substantially all of its long-term debt, including the 1997 Notes. These
transactions resulted in after-tax losses of $77.9 million in 1998.
In connection with the TheraTx Merger and the Transitional Merger, the
Company refinanced its bank debt, resulting in after-tax losses of $4.2
million in 1997.
Other Information
At December 31, 1998, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $300
million of floating rate debt outstanding. The agreements provide for fixed
rates on $300 million of floating rate debt at 6.4% plus 3/8% to 1 1/8% and
expires in $100 million increments in May 1999, November 1999 and May 2000.
The fair value of the swap agreements (a payable position of $3.9 million and
$2.9 million at December 31, 1998 and 1997, respectively) has not been
recognized in the consolidated financial statements. The fair value of the
swap agreements represents the estimated amount the Company would pay to
terminate the agreements based on current interest rates.
Scheduled maturities of long-term debt in years 2000 through 2003 are $21.0
million, $62.6 million, $129.2 million and $28.2 million, respectively,
assuming that certain defaults are remedied.
The estimated fair value of the Company's long-term debt was $725.1 million
and $1.96 billion at December 31, 1998 and 1997, respectively, compared to
carrying amounts aggregating $776.5 million and $1.95 billion. The estimate of
fair value includes the effect of the interest rate swap agreements and is
based upon the quoted market prices for the same or similar issues of long-
term debt, or on rates available to the Company for debt of the same remaining
maturities.
The Credit Agreement contains customary covenants which, among other things,
require maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. The Company is currently in
default of certain of these financial covenants. As discussed in Note 2, the
Company has obtained a
F-23
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--LONG-TERM DEBT (Continued)
Other Information (Continued)
waiver under the Credit Agreement which expires on May 28, 1999. Pursuant to
the waiver, the aggregate commitment under the Revolving Credit Facility was
permanently reduced from $300 million to $125 million. The current waiver
includes, among other things, an aggregate borrowing limitation of $55 million
under the Revolving Credit Facility during the waiver period. There can be no
assurance that such borrowing capacity will be sufficient to finance the
Company's liquidity needs during the waiver period or that an extension of
such waiver or other arrangements to permit the Company to continue to borrow
will be obtained.
NOTE 14--LEASES
The Company leases real estate and equipment under cancelable and non-
cancelable arrangements. Future minimum payments and related sublease income
under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Minimum Payments
----------------------------- Sublease
Ventas Other Total Income
---------- ------- ---------- --------
<S> <C> <C> <C> <C>
1999..................................... $ 225,117 $57,710 $ 282,827 $ 7,055
2000..................................... 229,620 47,861 277,481 6,750
2001..................................... 234,212 36,352 270,564 5,037
2002..................................... 238,897 25,074 263,971 2,466
2003..................................... 243,674 19,371 263,045 2,421
Thereafter............................... 1,706,682 86,599 1,793,281 12,918
</TABLE>
Sublease income aggregated $6.9 million, $8.0 million and $8.8 million for
1998, 1997 and 1996, respectively.
NOTE 15--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Principal contingencies are described below:
Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. The Company is contesting certain
issues raised in audits of prior year cost reports.
Professional liability risks--The Company has provided for loss for
professional liability risks based upon actuarially determined estimates.
Actual settlements may differ from the provisions for loss.
Interest rate swap agreements--The Company is a party to certain
agreements which reduce the impact of changes in interest rates on $300
million of its floating rate long-term debt. In the event of nonperformance
by other parties to these agreements, the Company may incur a loss to the
extent that market rates exceed contract rates.
Guarantees of indebtedness--Letters of credit and guarantees of
indebtedness aggregated $23.6 million at December 31, 1998.
Income taxes--The Company is contesting adjustments proposed by the
Internal Revenue Service for years 1995, 1994 and 1993.
Litigation--The Company is a party to certain material litigation and
regulatory actions as well as various suits and claims arising in the
ordinary course of business. See Note 23.
F-24
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--CAPITAL STOCK
Plan Descriptions
The Company has plans under which options to purchase common stock may be
granted to officers, employees and certain non-employee directors. Options
have been granted at not less than market price on the date of grant. Exercise
provisions vary, but most options are exercisable in whole or in part
beginning one to four years after grant and ending ten years after grant.
Activity in the plans is summarized below:
<TABLE>
<CAPTION>
Shares Weighted
under Option Price Average
Option per Share Exercise Price
---------- --------------- --------------
<S> <C> <C> <C>
Balances, December 31, 1995......... 2,939,401 $0.53 to $32.50 $20.48
Granted............................ 1,467,451 25.50 to 38.38 26.02
Exercised.......................... (368,758) 0.53 to 28.50 6.10
Canceled or expired................ (351,271) 14.17 to 32.63 26.65
----------
Balances, December 31, 1996......... 3,686,823 0.53 to 38.38 23.54
Granted............................ 1,309,900 25.50 to 43.88 30.47
Assumed in connection with TheraTx
Merger............................ 475,643 0.20 to 38.83 27.05
Exercised.......................... (775,431) 0.53 to 35.46 17.90
Canceled or expired................ (301,765) 19.92 to 34.25 26.78
----------
Balances, December 31, 1997......... 4,395,170 0.20 to 43.88 26.77
Granted............................ 6,422,132 3.81 to 10.98 7.00
Exchange offer:
Canceled.......................... (5,721,027) 6.12 to 16.87 10.14
Issued............................ 4,631,694 5.50 5.50
Exercised.......................... (48,431) 0.12 to 10.96 2.69
Canceled or expired................ (855,904) 3.67 to 16.58 8.22
----------
Balances, December 31, 1998......... 8,823,634 $0.08 to $16.58 $ 5.72
==========
</TABLE>
A summary of stock options outstanding at December 31, 1998 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Number Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of At December 31, Contractual Exercise At December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
--------------- --------------- ------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$0.08 to $9.32.......... 237,603 1 to 4 years $5.19 130,767 $ 4.93
$3.07 to $14.93......... 1,133,249 5 to 7 years 6.77 263,466 10.55
$3.81 to $16.58......... 7,452,782 8 to 10 years 5.58 927,137 8.87
--------- ---------
8,823,634 $5.72 1,321,370 $ 8.81
========= =========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1998 approximated nine years. Shares of common stock available
for future grants were 2,670,846, 3,980,678 and 1,387,396 at December 31,
1998, 1997 and 1996, respectively. The number of options exercisable at
December 31, 1997 and December 31, 1996 were 1,531,755 and 1,142,688,
respectively.
In connection with the Reorganization Transaction, options outstanding prior
thereto were bifurcated on a one-for-one basis between the Company and Ventas,
and corresponding option prices were adjusted in proportion to the fair values
of the respective common stocks at the Distribution Date. Option data for
periods prior to the Reorganization Transactions have not been restated.
F-25
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--CAPITAL STOCK (Continued)
Plan Descriptions (Continued)
On December 19, 1998, the Company completed the exchange of employee stock
options. The exchange offer entitled employees to exchange outstanding stock
options for a reduced number of options with an exercise price equal to the
closing price of the Company's common stock on November 9, 1998. Exchange
ratios were calculated using a Black-Scholes option valuation model. The
exchange resulted in the cancellation of options to purchase approximately 5.7
million shares and the issuance of options to purchase approximately 4.6
million shares.
In 1995, the Company issued long-term incentive agreements to certain
officers and key employees whereby the Company may annually issue shares of
common stock to such individuals in satisfaction of predetermined performance
goals. Share awards aggregated 74,330 for 1997 and 80,913 for 1996. No share
awards were issued for 1998.
In connection with the Reorganization Transactions, the Company adopted an
employee incentive compensation and a stock option plan for non-employee
directors. These plans replaced similar plans in effect prior to the
Reorganization Transactions.
In May 1997, stockholders voted to approve an employee incentive
compensation plan and a stock option plan for non-employee directors. Shares
issuable under the plans aggregated 200,000 and 3,400,000, respectively.
Statement No. 123 Data
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options is equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value of such options was estimated at the date of grant
using a Black-Scholes option valuation model with the following weighted
average assumptions: risk-free interest rate of 4.96% for 1998, 5.50% for 1997
and 6.33% for 1996; no dividend yield; expected term of seven years and
volatility factors of the expected market price of the Company's common stock
of .42 for 1998, .31 for 1997 and .24 for 1996.
A Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because the changes
in the subjective input assumptions can affect materially the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-26
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--CAPITAL STOCK (Continued)
Statement No. 123 Data (Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the respective vesting period. The
weighted average fair values of options granted during 1998, 1997 and 1996
under a Black-Scholes valuation model were $2.62, $13.75, and $10.95,
respectively. Pro forma information follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Pro forma income (loss) available to common stock-
holders.......................................... $(657,942) $120,941 $42,530
Pro forma earnings (loss) per common share:
Basic........................................... $ (9.63) $ 1.75 $ 0.61
Diluted......................................... (9.63) 1.71 0.61
</TABLE>
Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be reflected fully until
1999.
NOTE 17--EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution retirement plans covering
employees who meet certain minimum eligibility requirements. Benefits are
determined as a percentage of a participant's contributions and generally are
vested based upon length of service. Retirement plan expense was $12.7 million
for 1998, $13.0 million for 1997 and $8.8 million for 1996. Amounts equal to
retirement plan expense are funded annually.
The Company also established a supplemental retirement plan in 1998 covering
certain key employees under which benefits are determined based primarily upon
participants' compensation and length of service to the Company. The cost of
the plan aggregated $4.2 million. No amounts were funded under this plan in
1998.
NOTE 18--ACCRUED LIABILITIES
A summary of other accrued liabilities at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Litigation and regulatory actions............................ $ 28,890 $ -
Patient accounts............................................. 25,370 21,370
Taxes other than income...................................... 17,303 15,462
Canceled construction project costs.......................... 12,981 -
Professional liability risks................................. 11,963 13,973
Due to Ventas, Inc........................................... 6,967 -
Interest..................................................... 6,519 30,662
Merger related costs......................................... 3,561 15,338
Income taxes................................................. - 7,737
Other........................................................ 25,700 25,364
-------- --------
$139,254 $129,906
======== ========
</TABLE>
F-27
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--TRANSACTIONS WITH VENTAS
For the purpose of governing certain of the ongoing relationships between
the Company and Ventas after the Reorganization Transactions and to provide
mechanisms for an orderly transition, the Company and Ventas have entered into
various agreements. The most significant agreements are as follows:
Master Lease Agreements
Ventas retained substantially all of the real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing centers) in
the Reorganization Transactions and leases them to the Company under four
master lease agreements which set forth the material terms governing each of
the leased properties (individually, a "Master Lease Agreement" and
collectively, the "Master Leases Agreements").
The leased properties include land, buildings, structures, easements,
improvements on the land and permanently affixed equipment, machinery and
other fixtures relating to the operation of the facilities.
There are multiple bundles of leased properties under each Master Lease
Agreement with each bundle containing seven to twelve leased properties. All
leased properties within a bundle have the same base terms, ranging from 10 to
15 years. At the option of the Company, all, but not less than all, of the
leased properties in a bundle may be extended for one five-year renewal term
beyond the base term at the then existing rental rate plus 2% per annum if
certain lessee revenue parameters are obtained. At the option of the Company,
all, but not less than all, of the leased properties in a bundle may be
extended for two additional five-year renewal terms thereafter at the then
fair market value rental rate. The base and renewal terms of each leased
property are subject to termination upon default by either party and certain
other conditions described in the Master Lease Agreements.
The Master Lease Agreements are structured as triple-net leases. In addition
to the base annual rent of approximately $222 million, plus 2% per annum if
certain lessee revenue parameters are obtained, the Company is required to pay
all insurance, taxes, utilities and maintenance related to the leased
properties. Rent paid to Ventas in 1998 (eight months) aggregated $148
million.
An "Event of Default" will be deemed to have occurred under any lease if,
among other things, the Company fails to pay rent or other amounts within five
days after notice; the Company fails to comply with covenants continuing for
30 days or, so long as diligent efforts to cure such failure are being made,
such longer period (not over 180 days) as is necessary to cure such failure;
certain bankruptcy or insolvency events occur, including filing a petition of
bankruptcy or a petition for reorganization under the Federal bankruptcy code;
the Company ceases to operate any leased property as a provider of healthcare
services; the Company loses any required healthcare license, permit or
approval; the Company fails to maintain insurance; the Company creates or
allows to remain certain liens; a reduction occurs in the number of licensed
beds in excess of 10% of the number of licensed beds in the applicable
facility on the date the applicable facility was leased; certification for
reimbursement under Medicare with respect to a participating facility is
revoked; or a tenant becomes subject to regulatory sanctions and has failed to
cure or satisfy such regulatory sanctions within its specified cure period in
any material respect with respect to any facility.
Upon an Event of Default under a particular Master Lease Agreement, Ventas
may, at its option, exercise the following remedies: (i) after not less than
ten (10) days' notice to the Company, terminate the Master Lease Agreement,
repossess the leased property and relet the leased property to a third party
and require the Company pay Ventas, as liquidated damages, the net present
value of the rent for the balance of the term, discounted at the prime rate;
(ii) without terminating the Master Lease Agreement, repossess the leased
property and relet the leased property with the Company remaining liable under
the Master Lease Agreement for all obligations to be
F-28
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--TRANSACTIONS WITH VENTAS (Continued)
Master Lease Agreements (Continued)
performed by the Company thereunder, including the difference, if any, between
the rent under the Master Lease Agreement and the rent payable as a result of
the reletting of the leased property; and (iii) seek any and all other rights
and remedies available under law or in equity.
If an Event of Default is caused by (i) the loss of any required healthcare
license, permit or approval, (ii) a reduction in the number of licensed beds
in excess of 10% of the number of licensed beds in the applicable facility or
a revocation of certification for reimbursement under Medicare with respect to
any facility that participates in such programs, or (iii) the tenant becoming
subject to regulatory sanctions and failing to cure or satisfy such regulatory
sanctions within its specified cure period, Ventas may, if it so desires,
terminate the lease with respect to the applicable facility that is the
subject of the Event of Default and collect liquidated damages attributable to
such facility multiplied by the number of years remaining on the lease;
provided, however, that after the occurrence of four Events of Default as set
forth in this paragraph, determined on a cumulative basis, Ventas would be
permitted to exercise all of the rights and remedies set forth in the Master
Lease Agreement with respect to all facilities covered under the Master Lease
Agreement, without regard to the facility from which the Event of Default
emanated.
Development Agreement
Under the terms of the Development Agreement, the Company, if it so desires,
will complete the construction of certain development properties substantially
in accordance with the existing plans and specifications for each such
property. Upon completion of each such development property, Ventas has the
option to purchase the development property from the Company at a purchase
price equal to the amount of the Company's actual costs in acquiring,
developing and improving such development property prior to the purchase date.
If Ventas purchases the development property, the Company will lease the
development property from Ventas. The annual base rent under such a lease will
be ten percent of the actual costs incurred by the Company in acquiring and
developing the development property. The other terms of the lease for the
development property will be substantially similar to those set forth in the
Master Lease Agreements. Since the Reorganization Transactions, the Company
has sold one skilled nursing center to Ventas under the Development Agreement
for $6.2 million.
Participation Agreement
Under the terms and conditions of the Participation Agreement, the Company
has a right of first offer to become the lessee of any real property acquired
or developed by Ventas which is to be operated as a hospital, nursing center
or other healthcare facility, provided that the Company and Ventas negotiate a
mutually satisfactory lease arrangement.
The Participation Agreement also provides, subject to certain terms, that
the Company will provide Ventas with a right of first offer to purchase or
finance any healthcare related real property that the Company determines to
sell or mortgage to a third party, provided that the Company and Ventas
negotiate mutually satisfactory terms for such purchase or mortgage.
The Participation Agreement has a three-year term. The Company and Ventas
each have the right to terminate the Participation Agreement in the event of a
change of control.
Transition Services Agreement
The Transition Services Agreement provided that the Company provide Ventas
with transitional administrative and support services, including but not
limited to finance and accounting, human resources, risk management, legal,
and information systems support through December 31, 1998. Ventas paid the
Company $1.6 million in 1998 under the Transition Services Agreement.
F-29
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--TRANSACTIONS WITH VENTAS (Continued)
Tax Allocation Agreement
The Tax Allocation Agreement provides that Ventas will be liable for taxes
of the Ventas consolidated group attributable to periods prior to the
Distribution Date with respect to the portion of such taxes attributable to
the property held by Ventas after the Distribution Date and the Company will
be liable for such pre-distribution taxes with respect to the portion of such
taxes attributable to the property held by the Company after the Distribution
Date. The Tax Allocation Agreement further provides that Ventas will be liable
for any taxes attributable to the Reorganization Transactions except that the
Company will be liable for any such taxes to the extent that the Company
derives certain future tax benefits as a result of the payment of such taxes.
Ventas and its subsidiaries are liable for taxes payable with respect to
periods after the Reorganization Transactions that are attributable to Ventas
operations and the Company and its subsidiaries are liable for taxes payable
with respect to periods after the Reorganization Transactions that are
attributable to the Company's operations. If, in connection with a tax audit
or filing of an amended return, a taxing authority adjusts the tax liability
of either the Company or Ventas with respect to taxes for which the other
party was liable under the Tax Allocation Agreement, such other party would be
liable for the resulting tax assessment or would be entitled to the resulting
tax refund. During 1998, $6.7 million was received from Ventas under the Tax
Allocation Agreement. At December 31, 1998, the Company owed Ventas $5.9
million for a tax settlement under the Tax Allocation Agreement (which was
repaid to Ventas in January 1999). This transaction had no impact on earnings.
Amendments to Master Lease Agreements
Effective December 31, 1998, the Company and Ventas agreed to incorporate
into the Master Lease Agreements certain facilities which could not otherwise
have been included therein at the time of the Reorganization Transactions due
to regulatory limitations.
Effective April 30, 1998, the Company and Ventas amended the Master Lease
Agreements to delete the right of Ventas to require the Company to purchase
leased properties from Ventas upon certain events of default under the Master
Lease Agreements.
NOTE 20--OTHER RELATED PARTY TRANSACTIONS
As part of the Reorganization Transactions, the Company issued $17.7 million
of its 6% Series A Non-Voting Convertible Preferred Stock (the "Preferred
Stock") to Ventas as part of the consideration for its healthcare operations
and assets. The Company subsequently loaned officers of the Company
approximately 90% of the funds required ($15.9 million) to purchase the
Preferred Stock from Ventas. The Preferred Stock (par value $1,000) includes a
ten-year mandatory redemption provision and is convertible into common stock
at a price of $12.50 per share.
In June 1998, the Company loaned approximately $1.8 million to certain
officers of the Company to finance estimated personal income tax liability
resulting from the Reorganization Transactions. The loans bear interest at a
rate of 5.77% and are due in ten years. Interest is payable quarterly;
however, interest payments will be forgiven if the officer remains employed in
his or her position with the Company on the date on which such interest
payment is due.
F-30
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 21--FAIR VALUE DATA
A summary of fair value data at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 34,551 $ 34,551 $ 55,627 $ 55,627
Restricted funds (included in other
current assets)...................... 26,220 26,220 26,846 26,846
Long-term debt, including amounts due
within one year...................... 776,533 725,064 1,947,092 1,955,097
Interest rate swap agreements (in-
cluded in long-term debt)............ - 3,860 - 2,945
</TABLE>
NOTE 22--REPURCHASES OF COMMON STOCK
In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
common stock at an aggregate cost of $81.7 million. Repurchases of 1,950,000
shares of common stock in 1996 totaled $55.3 million. These transactions were
financed primarily through bank borrowings.
NOTE 23--LITIGATION
Summary descriptions of significant legal and regulatory activities follow:
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 rental payments and other concessions under the Master Lease Agreements.
On April 12, 1999, the Company and Ventas entered into the Second Standstill
which provides for the structured payment of approximately $18.5 million of
rental payments initially due on April 1. The Company agreed to pay $8.0
million on April 13, 1999, $4.3 million on each of April 20 and April 27, and
$1.9 million on April 30, 1999. The Second Standstill further provides that
neither party will pursue any claims against the other or any third party
related to the Reorganization Transations as long as the Company complies with
the structured payment terms. The Second Standstill will terminate on May 5,
1999 or on any date that a voluntary or involuntary bankruptcy proceeding is
commenced by or against the Company. If the parties are unable to resolve
their disputes or maintain an interim resolution, the Company's failure to pay
the rent due in April or thereafter, 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 (i) 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 (ii) pay the net present value of the rent due for the
balance of the terms of the Master Lease Agreements.
On October 21, 1998, the Company was notified by HCFA Administrator in
Chicago, Illinois and the State of Wisconsin that the Medicare and Medicaid
certification for its 657-bed skilled nursing facility known as Mt. Carmel
Health & Rehabilitation Center in Milwaukee, Wisconsin (the "Facility") would
be terminated effective November 6, 1998. The State of Wisconsin Department of
Health and Family Services also informed the Company that the Facility's
license would be terminated as of February 13, 1999. The Facility appealed
that termination. These actions resulted from the Facility's failure to attain
substantial compliance with Federal and state requirements by an October 12,
1998 deadline. On November 6, 1998, the Company filed an action against
F-31
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23--LITIGATION (Continued)
HCFA in Federal district court in Washington, D.C. and obtained an order
enjoining HCFA and its agents, including the State of Wisconsin, from
terminating the Facility's certification and from relocating any of the
Facility's residents. That case was dismissed after the Company reached
agreements with state and Federal authorities to settle all fines and
penalties and extend the threatened certification termination date to January
29, 1999. The Company has paid state and Federal fines totaling $500,000. On
January 29, 1999, the Facility was determined to be in substantial compliance
with Federal and state requirements, which removed the threat of Medicare and
Medicaid decertification. On January 29, 1999, the Facility's license and
operations were transferred to Benedictine Health Dimensions, an unrelated
entity.
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 on February 18, 1999
after trial that defendants/counterclaims were entitled to damages and
prejudgment interest in the amount of approximately $1.3 million and to an
undetermined amount of attorneys' fees and other litigation expenses. The
Company intends to appeal the court's rulings against TheraTx upon receipt of
a final judgment.
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.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition,
HCFA imposed a fine of $113,000. The Company appealed both the AHCA and HCFA
fines and has settled both appeals for a total of $370,000. The Company
submitted an acceptable plan of correction at the Tampa nursing center and was
informed by AHCA that "immediate jeopardy" no longer existed. The threatened
termination of the Tampa nursing center's Medicare provider agreement also was
reversed. The temporary injunction order has been dissolved, and that legal
action has been dismissed.
The Tampa Prosecuting Attorney's office has indicated to the Company that it
is conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. The Company cooperated fully with
this investigation and has been informed that no action will be taken against
the Company.
F-32
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23--LITIGATION (Continued)
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.
The HCFA Administrator of the Medicare and Medicaid programs indicated in
April 1998 that the Company's facilities in other states also are being
monitored.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide. The complaint alleges
various breaches of contract, and statutory and regulatory violations
including violations of Federal and state RICO statutes. The original
complaint has been amended to delineate several purported subclasses. The
plaintiffs seek class certification, unspecified damages, attorneys' fees and
costs. The Company is defending this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain 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, as amended (the "Exchange Act"), by, among
other things, issuing to the investing public a series of false and misleading
statements concerning the Company's current operations and the inherent value
of the Company's common stock. The complaint further alleges that as a result
of these purported false and misleading statements concerning the Company's
revenues and successful acquisitions, the price of the Company's common stock
was artificially inflated. In particular, the complaint alleges that the
Company issued false and misleading financial statements during the first,
second and third calendar quarters of 1997 which misrepresented and
understated the 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 Company is defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of the Company and
Ventas. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or
F-33
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23--LITIGATION (Continued)
injunctive relief permitted by law or equity to assure that the Company and
Ventas have an effective remedy. The Company believes that the allegations in
the complaint are without merit and intends to defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospital
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 common stock
during the period from February 26, 1997 through May 4, 1997, inclusive. The
complaint alleges that Transitional purchased shares of its common stock from
members of the investing public after it had received a written offer to
acquire all of Transitional's common stock and without making the required
disclosure that such an offer had been made. The complaint further alleges
that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had
reached an advanced stage with actual firm offers at substantial premiums to
the trading price of Transitional's stock having been made which were actively
being considered by Transitional's Board of Directors. The complaint asserts
claims pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and
common law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. On June 18, 1998, the court granted the Company's
motion to dismiss with leave to amend the Section 10(b) claim and the state
law claims for misrepresentation. The court denied the Company's motion to
dismiss the Section 14(e) and Section 20(a) claims, 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's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice has intervened in the suit which was
brought under the Federal Civil False Claims Act. AXR provided portable X-ray
services to nursing facilities (including those operated by the Company) and
other healthcare providers. The Company acquired an interest in AXR when
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 seek
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.
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 intends to defend vigorously the
action.
The Company's subsidiary, TheraTx, was a defendant and counterclaimant in an
action pending in state court in Jacksonville, Florida entitled Highland Pines
Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al.
F-34
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 23--LITIGATION (Continued)
The plaintiffs claimed that they were entitled to up to $40.0 million in
earnout compensation from TheraTx's purchase of several businesses from the
plaintiffs in 1995 and to damages from related tort claims. TheraTx had
asserted fraud counterclaims against the plaintiffs relating to the original
purchase. This case, along with other pending claims between TheraTx and the
various plaintiffs, was settled in January 1999, resulting in a payment of
$16.2 million in cash and other consideration by TheraTx to the plaintiffs.
All legal actions between the parties have been dismissed pursuant to the
settlement.
The Company has been informed by the U.S. Department of Justice that it is
the subject of ongoing investigations into various aspects of its Medicare
billing practices. The Company is cooperating fully in the investigations.
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 other 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 impact on the Company's
liquidity, financial position or results of operations. 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.
F-35
<PAGE>
VENCOR, INC.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998
-----------------------------------------------
First Second Third Fourth
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues................... $823,316 $ 778,706 $718,115 $ 679,602
Net income (loss):
Income (loss) from opera-
tions (a)................ 18,881 (23,452) 37,582 (605,919)(b)
Extraordinary loss on ex-
tinguishment of debt..... - (77,937) - -
Net income (loss)....... 18,881 (101,389) 37,582 (605,919)
Per common share:
Basic earnings (loss):
Income (loss) from opera-
tions................... 0.28 (0.35) 0.55 (8.68)
Extraordinary loss on ex-
tinguishment of debt.... - (1.15) - -
Net income (loss)....... 0.28 (1.50) 0.55 (8.68)
Diluted earnings (loss):
Income (loss) from opera-
tions................... 0.28 (0.35) 0.54 (8.68)
Extraordinary loss on ex-
tinguishment of debt.... - (1.15) - -
Net income (loss)....... 0.28 (1.50) 0.54 (8.68)
Market prices (c):
After Reorganization
Transactions:
High.................... - 12 7/8 7 1/4 5 3/4
Low..................... - 6 9/16 2 15/16 3 1/2
<CAPTION>
1997
-----------------------------------------------
First Second Third Fourth
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues................... $680,696 $778,295 $844,740 $812,273
Net income:
Income from operations
(a)...................... 33,982 37,010 36,902 27,234
Extraordinary loss on ex-
tinguishment of debt..... (2,259) (1,590) (346) -
Net income.............. 31,723 35,420 36,556 27,234
Earnings per common share:
Basic:
Income from operations... 0.49 0.53 0.53 0.40
Extraordinary loss on ex-
tinguishment of debt.... (0.03) (0.02) - -
Net income.............. 0.46 0.51 0.53 0.40
Diluted:
Income from operations... 0.48 0.52 0.52 0.40
Extraordinary loss on ex-
tinguishment of debt.... (0.03) (0.02) (0.01) -
Net income.............. 0.45 0.50 0.51 0.40
</TABLE>
- --------
(a) Includes the effect of certain unusual transactions and a charge to
establish a deferred tax valuation allowance. See Notes 7 and 11 of the
Notes to Consolidated Financial Statements for a description of these
transactions.
(b) Includes certain pretax charges related to year-end adjustments. See Note 8
of the Notes to Consolidated Financial Statements for a description of these
adjustments.
(c) Vencor common stock is traded on the New York Stock Exchange (ticker
symbol--VC).
F-36
<PAGE>
VENCOR, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Balance
Beginning Costs and Deductions at End
of Period Expenses Acquisitions or Payments of Period
---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowances for loss on
accounts and notes
receivable (a):
Year ended December
31, 1996............. $32,090 $15,001 $ - $(23,176) $ 23,915
Year ended December
31, 1997............. 23,915 31,176 21,187 (19,255) 57,023
Year ended December
31, 1998............. 57,023 64,008(b) - (14,560) 106,471
Allowances for loss on
assets held for
disposition:
Year ended December
31, 1996............. 26,900 64,000(c) - (22,812) 68,088
Year ended December
31, 1997............. 68,088 - 7,225 (43,891) 31,422
Year ended December
31, 1998............. 31,422 64,676(d) - (18,172) 77,926
</TABLE>
- --------
(a) Certain prior year amounts have been reclassified to conform to the
current year presentation.
(b) Includes unusual charges of $8.4 million.
(c) Reflects provision for loss associated with the sale of certain nursing
centers and the planned replacement of one hospital and three nursing
centers.
(d) Reflects provision for loss associated with the sale or closure of home
health and hospice operations, planned disposal of cancelled construction
projects and corporate office properties, and closure of two hospitals.
F-37
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of September 30, 1998 to the Credit Agreement dated as
of April 29, 1998 (the "CREDIT AGREEMENT") among VENCOR OPERATING, INC. (the
"BORROWER"), VENCOR, INC. (f/k/a Vencor Healthcare, Inc.), the LENDERS,
SWINGLINE BANK, LC ISSUING BANKS, SENIOR MANAGING AGENTS, MANAGING AGENTS AND
CO-AGENTS party thereto, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Documentation Agent and Collateral Agent, and NATIONSBANK, N.A., as
Administrative Agent.
WHEREAS, the parties hereto desire to amend the Credit Agreement to (i)
amend the financial covenants in Article 6 thereof, (ii) amend the restriction
on Consolidated Capital Expenditures in Section 7.07 thereof, (iii) amend the
Pricing Schedule attached thereto and (iv) amend and update certain other
provisions thereof;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
SECTION 2. Total Leverage Ratio. Subsection (a) of Section 6.01 is
amended to read as follows:
SECTION 6.01. Total Leverage Ratio. (a) On and after September 30,
1998, the ratio of (x) Adjusted Consolidated Debt for Borrowed Money to (y)
Consolidated EBITDAR for the four consecutive Fiscal Quarters then most
recently ended will not, at any date during any period set forth below,
exceed the ratio set forth below opposite such period:
PERIOD RATIO
------ -----
September 30, 1998 through December 30, 1998 7.50 to 1
December 31, 1998 through March 30, 1999 7.25 to 1
March 31, 1999 through June 29, 1999 7.10 to 1
June 30, 1999 through December 30, 1999 6.75 to 1
December 31, 1999 through March 30, 2000 6.50 to 1
March 31, 2000 through June 29, 2000 6.40 to 1
June 30, 2000 through September 29, 2000 6.30 to 1
September 30, 2000 through December 30, 2000 6.10 to 1
<PAGE>
PERIOD RATIO
------ -----
December 31, 2000 through March 30, 2001 6.00 to 1
March 31, 2001 through March 30, 2002 5.00 to 1
March 31, 2002 through March 30, 2003 4.75 to 1
March 31, 2003 and thereafter 4.50 to 1
provided that, for dates prior to June 30, 1999, Consolidated EBITDAR shall be
determined as of the end of the then most recently ended Fiscal Quarter on an
Annualized Basis.
SECTION 3. Senior Leverage Ratio. Subsection (b) of Section 6.02 of the
Credit Agreement is amended to read as follows:
(b) On and after September 30, 1998, the ratio of (x) Adjusted
Consolidated Senior Debt for Borrowed Money to (y) Consolidated EBITDAR for
the four consecutive Fiscal Quarters then most recently ended will not, at
any date during any period set forth below, exceed the ratio set forth
below opposite such period:
PERIOD RATIO
------ -----
September 30, 1998 through December 30, 1998 7.00 to 1
December 31, 1998 through March 30, 1999 6.75 to 1
March 31, 1999 through June 29, 1999 6.60 to 1
June 30, 1999 through December 30, 1999 6.25 to 1
December 31, 1999 through March 30, 2000 6.00 to 1
March 31, 2000 through June 29, 2000 5.90 to 1
June 30, 2000 through September 29, 2000 5.80 to 1
September 30, 2000 through December 30, 2000 5.60 to 1
December 31, 2000 through March 30, 2001 5.50 to 1
March 31, 2001 through March 30, 2002 4.40 to 1
March 31, 2002 through March 30, 2003 4.25 to 1
March 31, 2003 and thereafter 4.00 to 1
provided that, for dates prior to June 30, 1999, Consolidated EBITDAR shall
be determined as of the end of the then most recently ended Fiscal Quarter
on an Annualized Basis.
SECTION 4. Fixed Charge Coverage Ratio. Section 6.03 of the Credit
Agreement is amended to read as follows:Section 6.03. Fixed Charge Coverage
Ratio. At each Quarterly Measurement Date on or after September 30, 1998, the
ratio of (i) Consolidated EBITDAR for the four consecutive Fiscal Quarters then
ended to (ii) the sum of Consolidated Interest Expense plus Consolidated Rental
Expense plus the aggregate principal amount of long term Debt of the Vencor
Companies scheduled to be amortized plus dividends on the Management Preferred
Stock, in each case for the same four Fiscal
2
<PAGE>
Quarters, will not be less than the ratio set forth below opposite such
Quarterly Measurement Date or the period in which such Quarterly Measurement
Date falls, as the case may be:
DATE OR PERIOD RATIO
-------------- -----
September 30, 1998 1.05 to 1
December 31, 1998 through March 31, 1999 1.10 to 1
June 30, 1999 1.15 to 1
September 30, 1999 1.20 to 1
December 31, 1999 through March 31, 2000 1.25 to 1
June 30, 2000 through December 31, 2000 1.30 to 1
March 31, 2001 and thereafter 1.50 to 1
provided that, at any Quarterly Measurement Date prior to June 30, 1999,
the foregoing amounts shall be calculated for the period from the end of
the month in which the Closing Date occurs to such Quarterly Measurement
Date.
SECTION 5. Minimum Consolidated Net Worth. Section 6.04 of the Credit
Agreement is amended to read as follows:
SECTION 6.04. Minimum Consolidated Net Worth. Consolidated Net Worth
will at no time be less than the Minimum Compliance Level. The "MINIMUM
COMPLIANCE LEVEL" means, at any date (the "DATE OF DETERMINATION"), an
amount equal to the sum of (i) $845,000,000 plus (ii) for each Fiscal
Quarter ending after September 30, 1998 and on or prior to the date of
determination for which Consolidated Net Income is a positive number, an
amount equal to 75% of such positive number plus (iii) 100% of each amount
by which Consolidated Net Worth shall have been increased after September
30, 1998 and on or prior to the date of determination as a result of (x)
any issuance or sale of Equity Securities of Vencor, (y) any conversion of
convertible Debt of Vencor or (z) any gain on the sale of Equity Interests
(other than the Atria Shares) owned by any Vencor Company. The Minimum
Compliance Level shall not be reduced if Consolidated Net Income for any
Fiscal Quarter is a negative number.
SECTION 6. Limitation on Capital Expenditures. Subsection (a) of Section
7.07 of the Credit Agreement is amended to read as follows:
(a) Consolidated Capital Expenditures will not, for any Fiscal Year
listed below, exceed the amount indicated for such Fiscal Year:
3
<PAGE>
FISCAL YEAR Amount
----------- ------
1998 $310,000,000
1999 $140,000,000
Each Fiscal Year Thereafter $105,000,000
The amount shown above for 1998 includes capital expenditures made by Old
Vencor and its Subsidiaries prior to the Closing Date.
SECTION 7. Amendment of Section 12.09 of the Credit Agreement. Section
12.09 of the Credit Agreement is amended by inserting the following proviso
after the last word of the first paragraph thereof:
; provided that the foregoing obligation to pledge Eligible Collateral or
to have letters of credit issued in favor of each of the LC Banks shall not
apply to any Non-Complying Lender at any time if (i) such Non-Complying
Lender's Commitment Percentage of the aggregate amount that is available
for drawing under all Letters of Credit outstanding at such time is less
than $750,000 and (ii) such Non-Complying Lender has not previously pledged
Eligible Collateral or caused letters of credit to be issued in favor of
such LC Issuing Bank pursuant to this Section.
SECTION 8. Pricing Schedule. The Pricing Schedule attached to the Credit
Agreement is deleted and replaced by the Pricing Schedule attached hereto.
SECTION 9. Corporate or Other Existence and Power. Section 4.01 of the
Credit Agreement is amended to read as follows:
SECTION 4.01. Corporate or Other Existence and Power. Each Vencor
Company is a corporation, limited liability company or partnership duly
incorporated or organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, and has all
corporate or other powers and all governmental licenses, authorizations,
consents and approvals (collectively, "LICENSES") required to carry on its
business as now conducted and as proposed to be conducted, except:
(i) Licenses to operate pharmacies as to which there is no
reasonable doubt that they will be obtained on or before December 31,
1998; and
(ii) other Licenses as to which the delay in obtaining them (in
cases where there is no reasonable doubt that they will eventually be
obtained) and failures ever to obtain them (in cases where there is
such a reasonable doubt) could not, in the aggregate, reasonably be
expected to have a Material Adverse Effect.
4
<PAGE>
Failures to obtain the Licenses referred to in the foregoing clauses (i)
and (ii), in the aggregate, have not had and could not reasonably be
expected to have a Material Adverse Effect.
SECTION 10. Amendments and Waivers. Section 12.05(b) of the Credit
Agreement is amended by deleting the words "Required Basic Lenders (or the
Administrative Agent with their written consent)" in the second line and in the
eighth and ninth lines and replacing them in each case with the words "Required
Basic Lenders (or, with their written consent, the Documentation Agent or the
Collateral Agent, as appropriate)".
SECTION 11. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 12. Counterparts. This Amendment 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.
SECTION 13. Effectiveness. This Amendment shall become effective as of
the date hereof when:
(i) the Documentation Agent shall have received from the Borrower and
each of the Required Basic Lenders a counterpart hereof signed by such
party or facsimile or other written confirmation (in form satisfactory to
the Documentation Agent) that such party has signed a counterpart hereof;
and
(ii) the Administrative Agent shall have received, for the account of
each Basic Lender that signs this Amendment on or before October 16, 1998
an amendment fee equal to .25% of the sum of such Basic Lender's Revolving
Credit Commitment and its Facility A Commitment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
VENCOR OPERATING, INC.
By: /s/ RICHARD A. LECHLEITER
--------------------------------
Title: Vice President of Finance
5
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ DIANA H. IMHOF
---------------------
Title: Vice President
NATIONSBANK, N.A.
By: /s/ KEVIN WAGLEY
---------------------
Title: Vice President
BANQUE PARIBAS
By: /s/ RUSSELL POMERANTZ
---------------------
Title: Vice President
By: /s/ DAVID I. CANAVAN
--------------------
Title: Director
THE BANK OF NOVA SCOTIA
By: /s/ W. J. BROWN
---------------------
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ FARBOUD TAVANGAR
---------------------------
Title: First Vice President
6
<PAGE>
CREDIT SUISSE FIRST BOSTON
By: /s/ WILLIAM S. LUTKINS
---------------------
Title: Vice President
By: /s/ ROBERT B. POTTER
---------------------
Title: Vice President
FLEET NATIONAL BANK
By: /s/ GINGER STOLZENTHALER
----------------------------
Title: Senior Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
NEW YORK BRANCH
By: /s/ J. KENNETH BIEGEN
----------------------------
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ BENJAMIN A. WILLINGHAM
--------------------------
Title: Vice President
SOCIETE GENERALE
By: /s/ RICHARD BERNAL
---------------------
Title: Vice President
TORONTO-DOMINION (TEXAS), INC.
By: /s/ DEBBIE A. GREENE
---------------------
Title: Vice President
7
<PAGE>
WACHOVIA BANK, N.A.
By: /s/ JOHN B. TIBE
---------------------
Title: Vice President
ABN AMRO BANK N.V.
By: /s/ ANDRE NEL
------------------------------
Title: Senior Vice President &
Managing Director - Pittsburgh
By: /s/ PATRICK M. PASTORE
---------------------
Title: Vice President
BANK ONE, KENTUCKY, NA
By: /s/ DENNIS P. HEISHMAN
----------------------------
Title: Senior Vice President
COMERICA BANK
By: /s/ COLLEEN M. MURPHY
-------------------------------
Title: Assistant Vice President
DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By: /s/ SUSAN L. PEARSON
--------------------
Title: Director
By: /s/ JEAN M. HANNIGAN
---------------------
Title: Vice President
8
<PAGE>
NATIONAL CITY BANK OF KENTUCKY
By: /s/ DEROY SCOTT
---------------------
Title: Vice President
BANK OF AMERICA NT & SA
By: /s/ KEVIN WAGLEY
---------------------
Title: Vice President
THE BANK OF NEW YORK
By: /s/ EDWARD J. DOUGHERTY III
--------------------------------
Title: Vice President - U.S.
Commercial Banking
U.S. BANK
By: /s/ LYNN MANLEY
----------------------------
Title: Senior Vice President
BANK AUSTRIA
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ JOHN G. TAYLOR
-----------------------
Title: Senior Associate
By: /s/ ROBERT M. BIRINGER
-------------------------------
Title: Executive Vice President
9
<PAGE>
STAR BANK, N.A.
By: /s/ TOBY B. RAU
-------------------------------
Title: Assistant Vice President
AMSOUTH BANK
By: /s/ JANA LUELLER
--------------
Title: Officer
FIRST AMERICAN NATIONAL BANK
By: /s/ KENT D. WOOD
---------------------
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ JAMES A. HOBENSACK
----------------------------
Title: Senior Vice President
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: /s/ JUNICHI EBIHARA
-----------------------------
Title: Deputy General Manager
BANK OF LOUISVILLE
By: /s/ ROY L. JOHNSON, JR.
----------------------------
Title: Senior Vice President
10
<PAGE>
FIFTH THIRD BANK
By:_____________________________
Name:
Title:
MICHIGAN NATIONAL BANK
By: /s/ NERAN SHAYA
---------------------------
Title: Relationship Manager
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ MICHAEL P. CIUCHTA
---------------------
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ HOLLY KACZMARCZYK
--------------------------------
Title: Duly Authorized Signatory
HIBERNIA NATIONAL BANK
By: /s/ CHRISTOPHER B. PITRE
---------------------
Title: Vice President
THE SUMITOMO BANK LIMITED
By: /s/ SURESH S. TATA
----------------------------
Title: Senior Vice President
11
<PAGE>
SUMMIT BANK
By: /s/ LAWRENCE W. DESSEN
------------------------------
Title: Regional Vice President
UNION BANK OF CALIFORNIA
By: /s/ VIRGINIA HART
---------------------
Title: Vice President
VAN KAMPEN AMERICAN CAPITAL
SENIOR INCOME TRUST
By: /s/ JEFFREY W. MAILLET
----------------------------
Title: Senior Vice President and
Director
12
<PAGE>
PRICING SCHEDULE
Each of "Basic Euro-Dollar Margin", "Facility B Euro-Dollar Margin", "CD
Margin", "Basic Base Rate Margin", "Facility B Base Rate Margin", "Commitment
Fee Rate" and "LC Fee Rate" means:
(i) for any day on or before September 30, 1998, the rate set forth below
in the row opposite such term and in the column headed "Level VIII";
(ii) for any day after September 30, 1998 and before November 15, 1998, the
rate set forth in the row opposite such term and in the column headed "Level
IX"; and
(iii) for any day on or after November 15, 1998, the rate set forth below
in the row opposite such term and in the column corresponding to the "Pricing
Level" that applies on such day:
<TABLE>
<CAPTION>
=====================================================================================
Pricing Level Level Level Level Level Level Level Level Level Level
I II III IV V VI VII VIII IX
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Euro-
Dollar Margin 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 3.00%
- -------------------------------------------------------------------------------------
Facility B
Euro-Dollar 2.25% 2.25% 2.25% 2.50% 2.50% 2.75% 3.00% 3.00% 3.50%
Margin
- -------------------------------------------------------------------------------------
CD Margin 0.875% 1.125% 1.375% 1.625% 1.875% 2.125% 2.375% 2.625% 3.125%
- -------------------------------------------------------------------------------------
Basic Base
Rate Margin 0.00% 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 2.00%
Facility B Base
Rate Margin 1.25% 1.25% 1.25% 1.50% 1.50% 1.75% 2.00% 2.00% 2.50%
- -------------------------------------------------------------------------------------
Commitment
Fee Rate 0.25% 0.25% 0.30% 0.3125% 0.375% 0.50% 0.50% 0.50% 0.50%
- -------------------------------------------------------------------------------------
LC Fee Rate 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 3.00%
=====================================================================================
</TABLE>
Terms defined in the Agreement and not otherwise defined herein have, as
used herein, the respective meanings provided for therein. For purposes of this
Pricing Schedule, the following additional terms, as used herein, have the
following respective meanings:
"LEVEL I PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was less than or equal to 3.0 to 1.
"LEVEL II PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 3.0 to 1 and not
greater than 3.5 to 1.
"LEVEL III PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 3.5 to 1 and not
greater than 4.0 to 1.
13
<PAGE>
"LEVEL IV PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 4.0 to 1 and not
greater than 4.5 to 1.
"LEVEL V PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 4.5 to 1 and not
greater than 5.0 to 1.
"LEVEL VI PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 5.0 to 1 and not
greater than 5.5 to 1.
"LEVEL VII PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 5.5 to 1 and not
greater than 6.0 to 1.
"LEVEL VIII PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was greater than 6.0 to 1 and less
than 6.5 to 1.
"LEVEL IX PRICING" applies during any Rate Period if, at the end of the
Preceding Fiscal Quarter, the Leverage Ratio was equal to or greater than 6.5 to
1.
"LEVERAGE RATIO" means, at the end of any Fiscal Quarter, the ratio of (x)
Adjusted Consolidated Debt for Borrowed Money at the end of such Fiscal Quarter
to (y) Consolidated EBITDAR for the period of four consecutive Fiscal Quarters
then ended; provided that, at the end of any Fiscal Quarter ending before June
30, 1999 Consolidated EBITDAR shall be determined on an Annualized Basis.
"PRECEDING FISCAL QUARTER" means, with respect to any Rate Period, the most
recent Fiscal Quarter ended before such Rate Period begins.
"PRICING LEVEL" refers to the determination of which of Level I Pricing,
Level II Pricing, Level III Pricing, Level IV Pricing, Level V Pricing, Level VI
Pricing, Level VII Pricing, Level VIII Pricing or Level IX Pricing applies on
any day. Pricing Levels are referred to in ascending order (e.g., Level III
Pricing is a higher Pricing Level than Level II Pricing).
"RATE PERIOD" means any period from and including the 46th day of a Fiscal
Quarter to and including the 45th day of the immediately succeeding Fiscal
Quarter; provided that the first Rate Period shall begin on and include November
15, 1998.
14
<PAGE>
EXHIBIT 10.41
AGREEMENT
---------
This Separation Agreement and Release of Claims ("Agreement") is
entered into by Michael R. Barr and all of his agents, successors and assigns
("Employee"), and Vencor, Inc. ("Vencor") and all companies related to Vencor
and all of its affiliates, directors, officers, supervisors, employees, agents,
successors, assigns, representatives, subsidiaries or related companies, past
and present (collectively, the "Company").
Employee and the Company hereby desire to settle all disputes and
issues related to the resignation of Employee from his services as an employee
to the Company.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
1. Resignation. Employee hereby resigns from all capacities and
-----------
positions with the Company effective October 31, 1998 ("Date of Termination").
2. Obligations of the Company. Following the execution of this
-----------
Agreement, the Company shall pay Employee his base salary through the Date of
Termination and any amounts owed to Employee pursuant to the Company's standard
reimbursement procedures. In addition, subject to the terms and conditions of
this Agreement (including Section 14), Employee shall be entitled to the
following additional payments and benefits:
(a) $138,750 representing the prorated portion of the
Employee's target bonus for 1998.
(b) 17,345 shares of Vencor common stock representing the
prorated portion of his Performance Share Award for 1998.
(c) $499,500 representing an amount equal to 1.5 times the
Employee's base salary for 1998.
(d) $249,750 representing an amount equal to 1.5 times the
Employee's target bonus for 1998.
(e) 31,221 shares of Vencor common stock representing an amount
equal to 1.5 times the number of performance shares to be awarded to the
-1-
<PAGE>
Employee pursuant to the Vencor, Inc. 1998 Incentive Compensation Plan
(including assumed awards granted under the Vencor, Inc. 1987 Incentive
Compensation Program).
(f) For a period of 18 months following the Date of
Termination, the Employee shall be treated as if he had continued to be an
executive for all purposes under the Vencor Health Insurance Plan and Dental
Insurance Plan. Following this continuation period, the Employee shall be
entitled to receive continuation coverage under Part 6 of Title I of ERISA
("COBRA Benefits") treating the end of this period as a termination of the
Employee's employment if allowed by law.
(g) For a period of 18 months following the Date of
Termination, the Company shall maintain in force, at its expense, the Employee's
life insurance in effect under the Vencor, Inc. Voluntary Life Insurance Benefit
Plan as of the Date of Termination.
(h) For a period of 18 months following the Date of
Termination, the Company shall provide short-term and long-term disability
insurance benefits to Employee equivalent to the coverage that the Employee
would have had had he remained employed under the disability insurance plans
applicable to Employee on the Date of Termination. Should Employee become
disabled during such period, Employee shall be entitled to receive such
benefits, and for such duration, as the applicable plan provides.
(i) To the extent not already vested pursuant to the terms of
such plan, the Employee's interests under the Vencor Retirement Savings Plan
shall be automatically fully vested, without regard to otherwise applicable
percentages for the vesting of employer matching contributions based upon the
Employee's years of service with the Company.
(j) The Company shall adopt such amendments to its employee
benefit plans, if any, as are necessary to effectuate the provisions of this
Agreement.
(k) The Company shall take such action as is required to cause
the promissory note, dated June 15, 1998 in an original principal amount of
$1,025,000 (the "Tax Loan") entered into in connection with the loan made to
Employee to cover certain taxes owed by Employee, to be amended to provide that
the Tax Loan and any payments scheduled to be made in respect thereof shall not
be due and payable prior to the fifth anniversary of the Date of Termination.
Pursuant to the terms of the Tax Loan, upon a change in control of the Company
(as defined therein) the principal and interest on the Tax Loan will be forgiven
regardless of the employment status of Employee.
-2-
<PAGE>
(l) The Company shall take such action as is required to cause
the promissory note entered into in connection with the loan to Employee, dated
April 30, 1998 in an original principal amount of $1,296,000 (the "Preferred
Stock Loan") to be amended to provide that (w) the Preferred Stock Loan shall
not be due and payable until April 30, 2008, (x) any payments scheduled to be
made in respect to the Preferred Stock Loan shall not be due and payable prior
to the fifth anniversary of the Date of Termination, (y) if the average closing
price of Vencor common stock for the 90 days prior to any interest payment date
is less than $8.00, such interest payment shall be forgiven and (z) during the
five-day period following the expiration of the fifth anniversary of the Date of
Termination, the Employee shall have the right to put the preferred stock
underlying the Preferred Stock Loan to the Company at a price of $1,000 per
share.
(m) Employee shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards to purchase Vencor
common stock and Employee will have an additional 18 months in which to exercise
such stock options.
(n) Employee shall receive the computer which Employee is
utilizing as of the Date of Termination. Employee shall provide the Company with
access to such computer so that Company files and information may be deleted
from the memory.
(o) The Company shall provide Employee with assistance in
complying with his reporting obligations under Section 16 of the Securities Act
of 1934, as amended, for a period of six months following the Date of
Termination. Following the effectiveness of this Agreement, the Company will not
designate Employee as a Section 16 officer. Employee acknowledges that Employee
continues to have obligations under Section 16 as the result of his previous
status as a Section 16 officer.
(p) In the event of a change in control (as defined in the 1998
Incentive Compensation Plan of Vencor, Inc.) of the Company on or before October
31, 1999, the Company shall pay Employee $300,000 of additional consideration.
(q) The Company hereby acknowledges that Employee is entitled
to the indemnification provided by the Company's Certificate of Incorporation
and bylaws as a result of Employee's former status as a director and officer of
the Company. The Company further acknowledges that such indemnification may
include reasonable out-of-pocket expenses incurred by Employee including fines
or monetary penalties incurred in settlement of any indemnifiable matter.
-3-
<PAGE>
(r) All commitments made to Employee under paragraphs (a), (b),
(c), (d), and (e) above shall be paid or issued upon the later of 14 days from
the Date of Termination or the expiration of the seven day period referenced in
Section 17.
3. Death after Resignation. In the event of the death of Employee
-----------------------
during the period Employee is receiving payments pursuant to this Agreement,
Employee'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 Employee's estate.
4. Employee Acknowledgment and Release. Employee expressly
-----------------------------------
acknowledges that the above payments include consideration for the settlement,
waiver, release and discharge of any and all claims or actions arising from
Employee's employment, the terms and conditions of Employee's employment, or
Employee's termination of employment with the Company, including claims of
employment discrimination, wrongful termination, unemployment compensation or
any claim arising under law or equity, express or implied contract, tort, public
policy, common law or any federal, state or local statute, ordinance, regulation
or constitutional provision.
(a) The claims released and discharged by Employee include, but are
not limited to, claims arising under Title VII of the Civil Rights Act of 1964,
as amended; the Civil Rights Act of 1991; The Older Workers Benefit Protection
Act ("OWBPA"); the Age Discrimination in Employment Act of 1967 ("ADEA"), as
amended; the Americans with Disabilities Act ("ADA"); the Fair Labor Standards
Act; the Employee Retirement Income and Security Act of 1974, as amended; the
National Labor Relations Act; the Labor Management Relations Act; the Equal Pay
Act of 1963; the Pregnancy Discrimination Act of 1978; the Rehabilitation Act of
1973; workers' compensation laws; Kentucky Wage and Hours Laws, claims before
the Kentucky Commission for Human Rights and Kentucky Revised Statutes sections
341 et seq.
(b) Employee recognizes that by signing this Agreement, he may be
giving up some claim, demand or cause of action which he now has or may have,
but which is unknown to him. Employee also acknowledges that he is giving up any
right to seek future employment with the Company, that the Company has no
obligation to rehire him at any future date, and agrees that he will not apply
for work with the Company.
(c) Employee agrees not to file any charges, complaints, lawsuits
or other claims against the Company that relate in any manner to the Employee's
employment or the resignation or termination of Employee's employment with the
Company.
-4-
<PAGE>
(d) Employee expressly waives any present or future claims against
the Company for alleged race, color, religious, sex, national origin, age or
disability discrimination or harassment under Title VII of the Civil Rights Act
of 1964, as amended; the Civil Rights Act of 1991; the Equal Pay Act of 1963;
the Americans with Disabilities Act; the Family Medical Leave Act; the Age
Discrimination in Employment Act of 1967; the Older Workers Benefit Protection
Act; the Rehabilitation Act of 1973; or any other federal or state law
protecting against such discrimination or harassment.
(e) Employee acknowledges that the Company has not and does not
admit that it engaged in any discrimination, wrong doing or violation of law on
the Company's part concerning Employee. Employee and the Company agree that by
entering into this Agreement no discrimination, wrong doing, or violation of law
has been acknowledged by the Company or assumed by Employee. Employee and the
Company further acknowledge that this Agreement is not an admission of
liability.
5. Consulting Services. At the request of the Company, Employee shall
-------------------
provide consulting services to the Company for a one year period following the
Date of Termination on the dates and times requested by the Company. The Company
shall pay Employee a consulting fee of $150 per hour for any services rendered
hereunder payable on the first day of each month after such services are
rendered. In addition, the Company shall promptly reimburse Employee for all
reasonable, pre-approved expenses incurred by Employee in performing the
services requested by the Company, provided that Employee properly accounts
therefor in accordance with the Company's established policies. Employee shall
provide the services requested by the Company at the principal office of the
Company or at such location as agreed to by the Company and Employee. In
providing these services, Employee shall perform these services diligently and
to the standards generally recognized in the industry and shall use his best
efforts, skills and abilities to promote the interests of the Company. Any
information, reports, ideas, inventions, or work product developed or produced
solely by Employee or with third parties in the course of providing services
hereunder will be the exclusive property of the Company. Employee agrees to take
any and all actions requested by the Company to further evidence the ownership
of such information by the Company. Employee agrees that in providing consulting
services, Employee shall be an independent contractor and not an agent or
employee of the Company and shall not hold himself out as a legal
representative, agent, joint venturer, partner, or employee of the Company for
any purpose whatsoever.
6. Confidentiality. Employee and the Company agree to keep the
---------------
contents and terms of this Agreement confidential and not to voluntarily
disclose its terms. The only exception is that Employee may reveal the terms of
this Agreement to his spouse, attorney, tax preparer or as otherwise required by
law. The Company may reveal the terms of this Agreement to its attorneys,
accountants, financial advisors, managerial employees, and any disclosure
required by law or business necessity.
-5-
<PAGE>
Employee and the Company agree that in the event the terms of this Agreement are
disclosed to the third parties as allowed or required herein, the third parties
will be advised of the obligation to keep the terms of this Agreement
confidential, and will obtain the third party's agreement to abide by the terms
of the confidentiality provisions set forth in this Agreement. In the event that
Employee breaches the confidentiality of this Agreement, Employee understands
that the Company shall have the right to pursue all appropriate legal relief,
including, but unlimited to, attorneys' fees and costs.
7. Public Statement. Employee further agrees not to make derogatory
----------------
or negative remarks or comments about the Company, its affiliates and their
respective directors, officers, shareholders, agents or employees, to any third
parties, and not to otherwise defame the Company in any manner. In the event
that Employee defames the Company, its affiliates and their respective
directors, officers, shareholders, agents or employees, Employee understands
that the Company shall have the right to pursue all appropriate legal relief,
including but not limited to, attorneys fees and costs, and reimbursement of all
monies paid hereunder. Company agrees not to make derogatory or negative
remarks or comments about Employee to any third parties, not to otherwise defame
the Employee in any manner. In the event that the Company defames Employee,
Company understands that the Employee shall have the right to pursue all
appropriate legal relief, including but not limited to, attorneys' fees and
costs.
8. Ability to Revoke.
-----------------
(a) Employee acknowledges and agrees of the Company has advised
him and encouraged him to consult with an attorney, and he has consulted with an
attorney regarding this Agreement prior to signing below, and that he has been
given a period of at least twenty one (21) days within which to consider this
Agreement, including waiver of any ADEA and OWBPA aged claims before voluntarily
signing this Agreement.
(b) Employee agrees and understands that he may revoke this
Agreement within seven (7) days after signing the Agreement, and that the
Agreement shall not become effective or enforceable until the revocation period
has expired.
(c) Any revocation of this Agreement must be made in writing and
delivered by hand or certified mail to Joseph L. Landenwich, Vencor, Inc., 3300
Aegon Center, 400 West Market Street, Louisville, Kentucky 40202, before the
expiration of the revocation period.
-6-
<PAGE>
9. Restrictive Covenants.
---------------------
(a) For a period of one year from the Date of Termination (the
"Restrictive Period"), the Employee shall not, directly or indirectly, own,
manage, operate, join, have an interest in, control or participate in the
ownership, management, operation or control of, or be employed or otherwise
connected in any manner with any Publicly Held Company (as defined herein) which
engages, within the United States, in the business of developing, advising,
managing or operating nursing centers, hospitals, or ancillary services. At no
time during or after the Restrictive Period shall Employee divulge, furnish, or
make accessible to anyone any knowledge or information about the Company's
businesses or operations (except as required by law or order of court or other
governmental agency) or any of the clients, patients, customers or suppliers of
the Company or with respect to any other aspect of the businesses of the
Company, including those learned in connection with any consulting services
provided by Employee. Notwithstanding anything to the contrary contained herein,
Employee may acquire five percent or less beneficial interest in the outstanding
securities of any Publicly Held Company without violating this Agreement. For
purposes of this Agreement, a "Publicly Held Company" shall mean any entity with
an equity security registered with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
(b) During the Restrictive Period, Employee agrees that he will
not, directly or indirectly or by action in concert with others, induce,
solicit, or influence or seek to induce or influence any person who has been
engaged as an employee, agent, independent contractor or otherwise by the
Company, to terminate his or her relationship with the Company.
(c) If the agreement set forth in this Section 9 would otherwise
be determined to be invalid or unenforceable by a court of competent
jurisdiction, the parties intend and agree that such court shall exercise its
discretion in reforming the provisions of this Agreement to the end that
Employee will be subject to restrictions which are reasonable under the
circumstances and enforceable by the Company.
(d) Employee understands and agrees that any violation of this
Agreement will cause the Company irreparable harm which cannot adequately be
compensated by an award of money damages. As a result, Employee agrees that, in
addition to any other remedy the Company may have, a violation of this Agreement
may be restrained by issuance of an injunction by any court of competent
jurisdiction. Employee further agrees to accept service of process by first
class or certified United States mail.
-7-
<PAGE>
(e) The running of the Restrictive Period shall be tolled for
any period of time during which Employee is in violation of any covenant
contained herein, for any reason whatsoever.
10. Cooperation. Employee agrees that should the Company request
-----------
Employee's cooperation in connection with litigation, government investigations
or other administrative or legal proceeding, Employee shall cooperate fully with
the Company or its designated agents. Employee further agrees to cooperate fully
in disclosing to the Company or its designated agents, any information which
Employee obtained during the course and scope of his employment with the
Company, and to which other employees of the Company were not privy.
11. 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. Each party shall pay
their costs of the arbitration and all reasonable attorneys' and accountants'
fees incurred in connection therewith, including any litigation to enforce any
arbitration award.
12. Successors. This Agreement is personal to Employee and without
----------
the prior written consent of the Company shall not be assignable by Employee
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Employee's legal
representatives. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
13. Other Severance Benefits. Employee hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Employee
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company that provide for severance payments or
benefits upon a termination of employment, including, without limitation, the
Employment Agreement between Employee and Vencor Operating, Inc. dated as of
July 28, 1998 and the Change in Control Severance Agreement between the Employee
and Vencor Operating, Inc.
14. Withholding. All payments, stock issuances and forgiveness of
-----------
debt to be made to Employee hereunder will be subject to all applicable required
withholding of taxes.
15. No Mitigation. Employee shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Employee actually receive
-8-
<PAGE>
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation.
16. Execution by Employee. Employee will execute this Agreement and
---------------------
deliver the executed Agreement to Joseph L. Landenwich, Vencor, Inc., 3300 Aegon
Center, 400 West Market Street, Louisville, Kentucky 40202.
17. Termination of Waiting Period. After receipt of the executed
-----------------------------
Agreement by Employee, and after the expiration of this seven (7) day waiting
period in Section 8(b) of this Agreement, the Company will execute the
Agreement.
18. Voluntary Action. Employee acknowledges that he has read and
----------------
fully understands all of the provisions of this Agreement and that he is
entering into this Agreement freely and voluntarily.
19. Notices. Except as expressly provided in this Agreement, 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:
If to Employee:
--------------
Michael R. Barr
5301 Springfarm Road
Prospect, KY 40059
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: Legal Department
20. Governing Law. This Agreement shall be governed by the laws of
-------------
the Commonwealth of Kentucky.
21. 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.
-9-
<PAGE>
22. Entire Agreement; Amendment. This Agreement 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 Employee and a designated officer of
the Company.
23. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
24. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR, INC.
By: /s/ W. BRUCE LUNSFORD
---------------------
Title: Chief Executive Officer
-----------------------
EMPLOYEE
/s/ MICHAEL R. BARR
-------------------
Michael R. Barr
-10-
<PAGE>
EXHIBIT 10.42
AGREEMENT
---------
This Separation Agreement and Release of Claims ("Agreement") is
entered into by W. Earl Reed, III and all of his agents, successors and assigns
("Employee"), and Vencor, Inc. ("Vencor") and all companies related to Vencor
and all of its affiliates, directors, officers, supervisors, employees, agents,
successors, assigns, representatives, subsidiaries or related companies, past
and present (collectively, the "Company").
WHEREAS, Employee and Company hereby desire to settle all disputes and
issues related to the resignation of Employee from his services to the Company.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
1. Resignation. Employee hereby resigns from all capacities and
------------
positions with the Company effective September 30, 1998 ("Date of Termination").
2. Obligations of the Company. Following the execution of this
--------------------------
Agreement, the Company shall pay Employee his base salary through the Date of
Termination and any amounts owed to Employee pursuant to the Company's standard
reimbursement procedures. In addition, subject to the terms and conditions of
this Agreement (including Section 13), Employee shall be entitled to the
following additional payments and benefits:
(a) $111,000 representing the prorated portion of the
Employee's target bonus for 1998.
(b) 13,876 shares of Vencor common stock representing the
prorated portion of his Performance Share Award for 1998.
(c) $499,500 representing an amount equal to 1.5 times the
Employee's base salary for 1998.
(d) $249,750 representing an amount equal to 1.5 times the
Employee's target bonus for 1998.
-1-
<PAGE>
(e) 31,221 shares of Vencor common stock representing an amount
equal to 1.5 times the number of performance shares to be awarded to the
Employee pursuant to the Vencor, Inc. 1998 Incentive Compensation Plan
(including assumed awards granted under the Vencor, Inc. 1987 Incentive
Compensation Program).
(f) For a period of 18 months following the Date of
Termination, the Employee shall be treated as if he had continued to be an
executive for all purposes under the Vencor Health Insurance Plan and Dental
Insurance Plan. Following this continuation period, the Employee shall be
entitled to receive continuation coverage under Part 6 of Title I of ERISA
("COBRA Benefits") treating the end of this period as a termination of the
Employee's employment if allowed by law.
(g) For a period of 18 months following the Date of
Termination, the Company shall maintain in force, at its expense, the Employee's
life insurance in effect under the Vencor, Inc. Voluntary Life Insurance Benefit
Plan as of the Date of Termination.
(h) For a period of 18 months following the Date of
Termination, the Company shall provide short-term and long-term disability
insurance benefits to Employee equivalent to the coverage that the Employee
would have had had he remained employed under the disability insurance plans
applicable to Employee on the Date of Termination. Should Employee become
disabled during such period, Employee shall be entitled to receive such
benefits, and for such duration, as the applicable plan provides.
(i) To the extent not already vested pursuant to the terms of
such plan, the Employee's interests under the Vencor Retirement Savings Plan
shall be automatically fully vested, without regard to otherwise applicable
percentages for the vesting of employer matching contributions based upon the
Employee's years of service with the Company.
(j) The Company shall adopt such resolutions and amendments to
its employee benefit plans, if any, as are necessary to effectuate the
provisions of this Agreement.
(k) The Company shall take such action as is required to cause
the promissory note, dated June 15, 1998 in an original principal amount of
$623,500 (the "Tax Loan") entered into in connection with the loan made to
Employee to cover certain taxes owed by Employee, to be amended to provide that
the Tax Loan and any payments scheduled to be made in respect thereof shall not
be due and payable prior to the fifth anniversary of the Date of Termination.
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<PAGE>
(l) The Company shall take such action as is required to cause
the promissory note entered into in connection with the loan to Employee, dated
April 30, 1998 in an original principal amount of $990,000 (the "Preferred Stock
Loan") to be amended to provide that (w) the Preferred Stock Loan shall not be
due and payable until April 30, 2008, (x) any payments scheduled to be made in
respect to the Preferred Stock Loan shall not be due and payable prior to the
fifth anniversary of the Date of Termination, (y) if the average closing price
of Vencor common stock for the 90 days prior to any interest payment date is
less than $8.00, such interest payment shall be forgiven and (z) during the
five-day period following the expiration of the fifth anniversary of the Date of
Termination, the Employee shall have the right to put the preferred stock
underlying the Preferred Stock Loan to the Company at a price of $1,000 per
share.
(m) Employee shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards to purchase Vencor
common stock and Employee will have an additional 18 months in which to exercise
such stock options.
(n) Employee shall receive the computer which Employee is
utilizing as of the Date of Termination. Employee shall provide the Company with
access to such computer so that Company files and information may be deleted
from the memory.
(o) Employee shall receive additional cash consideration of
$1,000.
(p) The Company shall provide Employee with assistance in
complying with his reporting obligations under Section 16 of the Securities Act
of 1934, as amended for a period of six months following the Date of
Termination.
(q) All commitments made to Employee under paragraphs (a)-(e)
and (o) above shall be paid or issued upon the later of 14 days from the Date of
Termination or the expiration of the seven day period referenced in Section 16.
3. Death after Resignation. In the event of the death of Employee
-----------------------
during the period Employee is receiving payments pursuant to this Agreement,
Employee'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 Employee's estate.
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4. Employee Acknowledgment and Release. Employee expressly
-----------------------------------
acknowledges that the above payments include consideration for the settlement,
waiver, release and discharge of any and all claims or actions arising from
Employee's employment, the terms and conditions of Employee's employment, or
Employee's termination of employment with the Company, including claims of
employment discrimination, wrongful termination, unemployment compensation or
any claim arising under law or equity, express or implied contract, tort, public
policy, common law or any federal, state or local statute, ordinance, regulation
or constitutional provision.
(a) The claims released and discharged by Employee include, but
are not limited to, claims arising under Title VII of the Civil Rights Act of
1964, as amended; the Civil Rights Act of 1991; The Older Workers Benefit
Protection Act ("OWBPA"); the Age Discrimination in Employment Act of 1967
("ADEA"), as amended; the Americans with Disabilities Act ("ADA"); the Fair
Labor Standards Act; the Employee Retirement Income and Security Act of 1974, as
amended; the National Labor Relations Act; the Labor Management Relations Act;
the Equal Pay Act of 1963; the Pregnancy Discrimination Act of 1978; the
Rehabilitation Act of 1973; workers' compensation laws; Kentucky Wage and Hours
Laws, claims before the Kentucky Commission for Human Rights and Kentucky
Revised Statutes sections 341 et seq.
(b) Employee recognizes that by signing this Agreement, he may
be giving up some claim, demand or cause of action which he now has, but which
is unknown to him. Employee also acknowledges that he is giving up any right to
seek future employment with the Company, that the Company has no obligation to
rehire him at any future date, and agrees that he will not apply for work with
the Company.
(c) Employee agrees not to file any charges, complaints,
lawsuits or other claims against the Company that relate in any manner to the
Employee's employment or the resignation or termination of Employee's employment
with the Company.
(d) Employee expressly waives any and all claims against the
Company for alleged race, color, religious, sex, national origin, age or
disability discrimination or harassment under Title VII of the Civil Rights Act
of 1964, as amended; the Civil Rights Act of 1991; the Equal Pay Act of 1963;
the Americans with Disabilities Act; the Family Medical Leave Act; the Age
Discrimination in Employment Act of 1967; the Older Workers Benefit Protection
Act; the Rehabilitation Act of 1973; or any other federal or state law
protecting against such discrimination or harassment.
(e) Employee acknowledges that the Company does not admit that
it engaged in any discrimination, wrong doing or violation of law on the
Company's
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part concerning Employee. Employee and the Company agree that by entering into
this Agreement no discrimination, wrong doing, or violation of law has been
acknowledged by the Company or assumed by Employee. Employee and the Company
further acknowledge that this Agreement is not an admission of liability.
5. Confidentiality. Employee and the Company agree to keep the
---------------
contents and terms of this Agreement confidential and not to voluntarily
disclose the terms or amount of settlement to third parties. The only exception
is that Employee may reveal the terms of this Agreement to his spouse, attorney,
tax preparer or as otherwise required by law. The Company may reveal the terms
of this Agreement to its attorneys, accountants, financial advisors, managerial
employees, and any disclosure required by law or business necessity. Employee
and the Company agree that in the event the terms of this Agreement are
disclosed to the third parties as allowed or required herein, the third parties
will be advised of the obligation to keep the terms of this Agreement
confidential, and will obtain the third party's Agreement to abide by the terms
of the confidentiality provisions set forth in this Agreement. In the event
that Employee breaches the confidentiality of this Agreement, Employee
understands that the Company shall have the right to pursue all appropriate
legal relief, including, but unlimited to, attorneys' fees and costs.
6. Public Statement. Employee further agrees not to make
----------------
derogatory or negative remarks or comments about the Company, its affiliates and
their respective directors, officers, shareholders, agents or employees, to any
third parties, and not to otherwise defame the Company in any manner. In the
event that Employee defames the Company, its affiliates and their respective
directors, officers, shareholders, agents or employees, Employee understands
that the Company shall have the right to pursue all appropriate legal relief,
including but not limited to, attorneys fees and costs, and reimbursement of all
monies paid hereunder. Company agrees not to make derogatory or negative remarks
or comments about Employee to any third parties, not to otherwise defame the
Employee in any manner. In the event that the Company defames Employee, Company
understands that the Employee shall have the right to pursue all appropriate
legal relief, including but not limited to, attorneys' fees and costs. If the
Company is contacted regarding a letter of reference for Employee, Company
agrees to provide the form of reference letter attached hereto as Exhibit A.
-5-
<PAGE>
7. Ability to Revoke.
-----------------
(a) Employee acknowledges and agrees of the Company has advised
him and encouraged him to consult with an attorney, and he has consulted with an
attorney regarding this Agreement prior to signing below, and that he has been
given a period of at least twenty one (21) days within which to consider this
Agreement, including waiver of any ADEA and OWBPA age claims before voluntarily
signing this Agreement.
(b) Employee agrees and understands that he may revoke this
Agreement within seven (7) days after signing the Agreement, and that the
Agreement shall not become effective or enforceable until the revocation period
has expired.
(c) Any revocation of this Agreement must be made in writing
and delivered by hand or certified mail to Joseph L. Landenwich, Vencor, Inc.,
3300 Aegon Center, 400 West Market Street, Louisville, Kentucky 40202, before
the expiration of the revocation period.
8. Restrictive Covenants.
---------------------
(a) At no time shall Employee divulge, furnish, or make
accessible to anyone any confidential knowledge or information about the
Company's businesses or operations (except as required by law or order of court
or other governmental agency) or any of the clients, patients, customers or
suppliers of the Company or with respect to any other confidential aspect of the
businesses of the Company.
(b) For a period of 12 months from the Date of Termination,
Employee agrees that he will not, directly or indirectly or by action in concert
with others, induce, solicit, or influence or seek to induce or influence any
person who has been engaged as an employee, agent, independent contractor or
otherwise by the Company, to terminate his or her relationship with the Company.
(c) If the agreement set forth in this Section 8 would
otherwise be determined to be invalid or unenforceable by a court of competent
jurisdiction, the parties intend and agree that such court shall exercise its
discretion in reforming the provisions of this Agreement to the end that
Employee will be subject to restrictions which are reasonable under the
circumstances and enforceable by the Company.
(d) Employee understands and agrees that any violation of this
Agreement will cause the Company irreparable harm which cannot adequately be
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compensated by an award of money damages. As a result, Employee agrees that, in
addition to any other remedy the Company may have, a violation of this Agreement
may be restrained by issuance of an injunction by any court of competent
jurisdiction. Employee further agrees to accept service of process by first
class or certified United States mail.
9. Cooperation. Employee agrees that should the Company request
-----------
Employee's cooperation in connection with litigation, government investigations
or other administrative or legal proceeding, Employee shall cooperate fully with
the Company or its designated agents. Employee further agrees to cooperate
fully in disclosing to the Company or its designated agents, any information
which Employee obtained during the course and scope of his employment with the
Company, and to which other employees of the Company were not privy.
10. 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. Each party shall pay
their costs of the arbitration and all reasonable attorneys' and accountants'
fees incurred in connection therewith, including any litigation to enforce any
arbitration award.
11. Successors. This Agreement is personal to Employee and without
----------
the prior written consent of the Company shall not be assignable by Employee
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Employee's legal
representatives. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
12. Other Severance Benefits. Employee hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Employee
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company that provide for severance payments or
benefits upon a termination of employment, including, without limitation, the
Employment Agreement between Employee and Vencor Operating, Inc. dated as of
July 28, 1998 and the Change in Control Severance Agreement between the Employee
and Vencor Operating, Inc.
13. Withholding. All payments and stock issuances to be made to
-----------
Employee hereunder will be subject to all applicable required withholding of
taxes.
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<PAGE>
14. No Mitigation. Employee shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Employee actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation.
15. Execution by Employee. Employee will execute this Agreement
---------------------
and deliver the executed Agreement to Joseph L. Landenwich, Vencor, Inc., 3300
Aegon Center, 400 West Market Street, Louisville, Kentucky 40202.
16. Termination of Waiting Period. After receipt of the executed
-----------------------------
Agreement by Employee, and after the expiration of this seven (7) day waiting
period in Section 7(b) of this Agreement, the Company will execute the
Agreement.
17. Voluntary Action. Employee acknowledges that he has read and
----------------
fully understands all of the provisions of this Agreement and that he is
entering into this Agreement freely and voluntarily.
18. 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:
If to Employee:
W. Earl Reed, III
1667 Spring Drive
Louisville, Kentucky 40205
With a copy to:
Benjamin P. Fishburne, III
Winston & Strawn
1400 L. Street, N.W.
Washington, D.C. 20005-3502
If to Company:
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: Legal Department
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<PAGE>
19. Governing Law. This Agreement shall be governed by the laws
-------------
of the Commonwealth of Kentucky.
20. 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.
21. Entire Agreement; Amendment. This Agreement 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 Employee and a designated officer of
the Company.
22. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
23. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR, INC.
By: /s/ W. Bruce Lunsford
---------------------------
Title: Chief Executive Officer
-----------------------
EMPLOYEE
/s/ W. Earl Reed, III
-----------------------------
W. EARL REED, III
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<PAGE>
EXHIBIT A
FORM OF REFERENCE LETTER
This letter will attest that W. Earl Reed, III was employed by Vencor,
Inc. from 1987 to September 30, 1998. During that time, Mr. Red served in
various executive capacities with the Company, most recently as Executive Vice
President and Chief Executive Officer since 1995. Mr. Reed was a member of the
Company's Board of Directors from 1987 to 1998. His departure from the Company
was under good and friendly terms.
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<PAGE>
EXHIBIT 10.43
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 12th day of February, 1999
by and between Vencor Operating, Inc., a Delaware corporation (the "Company"),
and Edward L. Kuntz (the "Executive").
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, the Executive is employed by the Company, a wholly owned
subsidiary of Vencor, Inc. ("Parent"), and the parties hereto desire to provide
for Executive's continued employment by the Company; and
WHEREAS, the Executive Compensation Committee of 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 its Chairman,
------
President and Chief Executive Officer.
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 full 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
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<PAGE>
business activity, whether or not such business activity is pursued for gain,
profit or other pecuniary advantage.
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than $750,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Such Base Salary shall be effective January 22, 1999.
Executive may receive increases in his Base Salary from time to time, as
approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive a
bonus in accordance with the Company's incentive compensation plan and such
other incentive compensation as the Board may approve from time to time.
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.
(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 manner. The Executive also may 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.
(e) The Company will pay Executive the amount due and owing on
November 1, 1999 under his consulting agreement with Mariner Post Acute
Network ("Mariner") in the event Mariner fails to make such payment.
Executive agrees to cooperate with the Company in any action to recover
such payment from Mariner.
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<PAGE>
(f) From January 1, 1999 through June 30, 1999, the Company will pay
executive $3,500 per month, grossed up for applicable taxes, to cover all
travel and living expense incurred by Executive. In addition, the Company
will reimburse all reasonable expenses incurred by Executive in connection
with his relocation to the Greater Louisville Area, including real estate
commissions, closing costs, actual moving expenses and other direct costs
associated with the sale of Executive's primary residence.
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:
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<PAGE>
(i) the Company shall assign to Executive duties of a
substantially nonexecutive or nonmanagerial nature;
(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
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<PAGE>
(iii) specifies the intended termination date (which date, in the case of a
termination for Good Reason, shall be not more than 30 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, respectively, 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:
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<PAGE>
(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 three
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 (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 bonuses 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 three years following the Date of
Termination, the Executive shall be treated as if he or she 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 three years 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 three years following the Executive's 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 had he remained employed
under the
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<PAGE>
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 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 with an additional three years of
vesting for purposes of all outstanding stock option and restricted
stock awards and Executive will have an additional three years in
which to exercise such stock options.
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination. In addition, the Executive shall be entitled to the
furniture in Executive's office suite as of the Date of Termination.
In addition, for a period of three years following the Executive's
Date of Termination, the Company shall provide the Executive with an
office suite and administrative assistant, each substantially
comparable to the office suite and administrative assistant that were
furnished to the Executive as of the date of the Executive's Date of
Termination.
(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
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<PAGE>
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.
(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 November 9, 1998 (the "Severance Agreement"); provided
--------
that any payments payable to Executive hereunder shall be offset by any payments
payable under the Severance Agreement.
-8-
<PAGE>
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:
If to Executive:
---------------
Edward L. Kuntz
8807 Stable Crest Blvd.
Houston, Texas 77024
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
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 (including the Agreement dated November 9, 1998
between the Company and the Executive), promises, covenants, arrangements,
communications, representations
-9-
<PAGE>
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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ RICHARD A. SCHWEINHART
---------------------------
Richard A. Schweinhart,
Senior Vice President and
Chief Financial Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ RICHARD A. SCHWEINHART
---------------------------
Richard A. Schweinhart,
Senior Vice President and
Chief Financial Officer
Edward L. Kuntz
---------------
EDWARD L. KUNTZ
-10-
<PAGE>
EXHIBIT 10.44
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE-IN-CONTROL SEVERANCE AGREEMENT (the "Agreement") is made as of
October 14, 1998, by and between VENCOR OPERATING, INC., a Delaware corporation,
(the "Company") and W. BRUCE LUNSFORD (the "Employee").
RECITALS:
--------
A. The Employee is employed by the Company, a wholly owned subsidiary of
Vencor, Inc. (the "Parent").
B. The Company recognizes that the Employee's contribution to the
Company's growth and success has been and continues to be significant.
C. The Company wishes to encourage the Employee to remain with and devote
full time and attention to the business affairs of the Company and wishes to
provide income protection to the Employee for a period of time in the event of a
Change in Control.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
AGREEMENT:
---------
1. DEFINITIONS.
-----------
a. "BASE SALARY" shall mean the Employee's regular annual rate of base
-----------
pay in gross as of the date in question as elected under Paragraph 3(a).
b. "CAUSE" shall mean 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, but with respect to (ii) only if the Board of
Directors of Parent (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.
c. "CHANGE IN CONTROL" The term "Change in Control" shall mean any one
-----------------
of the following events:
(i) An acquisition (other than directly from Parent) of any voting
securities of Parent (the "Voting Securities") by any "Person" (as defined in
Paragraph 1(f) hereof)
<PAGE>
immediately after which such Person has "Beneficial Ownership" (within the
meaning of Rule 13d-3 under the 1934 Act) of 20% or more of the combined voting
power of Vencor, Inc.'s then outstanding Voting Securities; provided, however,
that in determining whether a Change in Control has occurred, Voting Securities
which are acquired in an acquisition by (i) Parent or any of its subsidiaries,
(ii) an employee benefit plan (or a trust forming a part thereof) maintained by
Parent or any of its subsidiaries or (iii) any Person in connection with an
acquisition referred to in the immediately preceding clauses (i) and (ii) shall
not constitute an acquisition which would cause a Change in Control.
(ii) The individuals who, as of May 1, 1998, constituted the Board
of Directors of Parent (the "Incumbent Board") cease for any reason to
constitute over 50% of the Board; provided, however, that if the election, or
nomination for election by Vencor Inc.'s stockholders, of any new director was
approved by a vote of over 50% of the Incumbent Board, such new director shall,
for purposes of this Section 1(c)(ii), be considered as though such person were
a member of the Incumbent Board; provided, further, however, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of Parent (a "Proxy Contest"), including by reason
of any agreement intended to avoid or settle any Election Contest or Proxy
Contest.
(iii) Consummation of a merger, consolidation or reorganization
involving Parent, unless each of the following events occurs in connection with
such merger, consolidation or reorganization:
(A) the stockholders of Parent, immediately before such
merger, consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, over 50% of the combined
voting power of all voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving Company") over which
any Person has Beneficial Ownership in substantially the same proportion as
their ownership of the Voting Securities immediately before such merger,
consolidation or reorganization;
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute over 50% of the members of the board
of directors of the Surviving Company; and
(C) no Person (other than Parent, any of its subsidiaries, any
employee benefit plan (or any trust forming a part thereof) maintained by
Parent, the Surviving Company or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of 20% or more
of the then outstanding Voting Securities) has Beneficial Ownership of 20% or
more of the combined voting power of the Surviving Company's then outstanding
voting securities.
-2-
<PAGE>
(iv) Approval by Parent's stockholders of a complete liquidation or
dissolution of Parent.
(v) Approval by Parent's stockholders of an agreement for the sale
or other disposition of all or substantially all of the assets of Parent to any
Person (other than a transfer to a subsidiary of Parent).
(vi) Any other event that the Board shall determine constitutes an
effective Change in Control of Parent.
(vii) Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by Parent which,
by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person; provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Voting Securities by Parent, and after such
share acquisition by Parent, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
d. "CHANGE-IN-CONTROL DATE" shall mean the date immediately prior to
----------------------
the effectiveness of the Change in Control.
e. "GOOD REASON" The Employee shall have good reason to terminate
-----------
employment with the Company if (i) the Employee's title, duties,
responsibilities or authority is reduced or diminished from those in effect on
the Change-in-Control Date without the Employee's written consent; (ii) the
Employee's compensation is reduced; (iii) the Employee's benefits are reduced,
other than pursuant to a uniform reduction applicable to all managers of the
Company; or (iv) the Employee is asked to relocate his office to a place more
than 30 miles from his business office on the Change-in-Control Date.
f. "PERSON" shall have the meaning ascribed to such term in Section
------
3(a)(9) of the Securities Exchange Act of 1934 and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section 13(d).
g. "TARGET BONUS" shall mean the full amount of bonuses and/or
------------
performance compensation (other than Base Salary and awards under Parent's 1998
Incentive Compensation Plan (including assumed awards granted under the Vencor,
Inc. 1987 Incentive Compensation Program and the Vencor, Inc. 1997 Incentive
Compensation Plan)) that would be payable to the Employee, 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.
-3-
<PAGE>
h. "TERMINATION OF EMPLOYMENT" shall mean (i) the termination of the
-------------------------
Employee's employment by the Company other than such a termination in connection
with an offer of immediate reemployment by a successor or assign of the Company
or a purchaser of the Company or its assets under terms and conditions which
would not permit the Employee to terminate his employment for Good Reason or
otherwise during any Window Period; or (ii) the Employee's termination of
employment with the Company for Good Reason or during any Window Period.
i. "WINDOW PERIOD" shall mean either of two 30-day periods of time
-------------
commencing 30 days after (i) a Change in Control and (ii) one year after a
Change in Control.
2. TERM. The initial term of this Agreement shall be for a three-year
----
period commencing on May 1, 1998 (the "Effective Date"). The Term shall be
automatically extended by one additional day for each day beyond the Effective
Date that the Employee 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 Employee. In such event, the Agreement shall terminate on the third
anniversary of the effective date of such election notice. Notwithstanding the
foregoing, this Agreement shall automatically terminate if and when the Employee
terminates his employment with the Company or two years after the Change-in-
Control Date, whichever first occurs.
3. SEVERANCE BENEFITS. If at any time following a Change in Control and
------------------
continuing for two years thereafter, the Company terminates the Employee without
Cause, or the Employee terminates employment with the Company either for Good
Reason or during any Window Period, then as compensation for services previously
rendered the Employee shall be entitled to the following benefits:
a. CASH PAYMENT. The Employee shall be paid cash equal to three times
------------
the greater of:
(i) the sum of (x) the Employee's Base Salary and Target Bonus as
of the Termination of Employment, and (y) the fair market value (determined as
of the Termination of Employment) of the targeted number of performance shares
authorized to be issued to the Employee pursuant to a Performance Share Award
Agreement in respect of the year in which such Termination of Employment 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 Termination of Employment occurs were deemed to be
satisfied, or
(ii) the sum of (x) the Employee's Base Salary and Target Bonus as
of the Change-in-Control Date, and (y) the fair market value (determined as of
the Change-in-Control Date) of the targeted number of performance shares
authorized to be issued to the Employee pursuant to a Performance Share Award
Agreement in respect of the year in which such Change-in-Control Date occurs
(without regard to any acceleration of the award for such year), assuming
-4-
<PAGE>
for such purpose that all performance criteria applicable to such award with
respect to the year in which such Change-in-Control Date occurs were deemed to
be satisfied.
For purposes of this Agreement, "fair market value" shall have the meaning
ascribed to such term under the Parent's 1998 Incentive Compensation Plan.
Payment shall be made in a single lump sum upon the Employee's effective date of
termination.
b. CONTINUATION OF BENEFITS.
------------------------
(i) For a period of three years following the Termination of
Employment, the Employee shall be treated as if he or she had continued to be an
employee for all purposes under Parent's Health Insurance Plan and Dental
Insurance Plan; or if the Employee is prohibited from participating in such
plan, the Company or Parent shall otherwise provide such benefits. Following
this continuation period, the Employee 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 Employee's employment if allowed by law.
(ii) For a period of three years following the Termination of
Employment, Parent shall maintain in force, at its expense, the Employee's life
insurance in effect under Parent's Voluntary Life Insurance Benefit Plan as of
the Change-in-Control Date or as of the date of Termination of Employment,
whichever coverage limits are greater.
(iii) For a period of three years following the Employee's
Termination of Employment, the Company or Parent shall provide short-term and
long-term disability insurance benefits to Employee equivalent to the coverage
that the Employee would have had had he remained employed under the disability
insurance plans applicable to Employee on the date of Termination of Employment,
or, at the Employee's election, the plans applicable to Employee as of the
Change-in-Control Date. Should Employee become disabled during such period,
Employee shall be entitled to receive such benefits, and for such duration, as
the applicable plan provides.
c. RETIREMENT SAVINGS PLAN. To the extent not already vested pursuant
-----------------------
to the terms of such plan, the Employee's interests under the Parent's
Retirement Savings Plan shall be automatically fully (i.e., 100%) vested,
without regard to otherwise applicable percentages for the vesting of employer-
matching contributions based upon the Employee's years of service with the
Company.
d. PAYMENT OF TAX LOAN. The Company shall pay off the outstanding
-------------------
principal and interest of the Employee's Promissory Note dated June 15, 1998
made payable to Ventas, Inc., in the initial principal amount of $3,750,000 upon
Change in Control.
e. PLAN AMENDMENTS. Parent shall adopt such amendments to its employee
---------------
benefit plans, if any, as are necessary to effectuate the provisions of this
Agreement.
-5-
<PAGE>
f. FRINGE BENEFITS. Following the Employee's Termination of
---------------
Employment, the Employee shall receive the computer which Employee is utilizing
as of the date of such Termination of Employment. In addition, the Employee
shall have the right to purchase the furniture in Employee's office suite as of
the date of such Termination of Employment, at the book value thereof. In
addition, for a period of three years following the Employee's Termination of
Employment, the Company shall provide the Employee with an office suite and
administrative assistant, each substantially comparable to the office suite and
administrative assistant that were furnished to the Employee as of the date of
the Employee's Termination of Employment. Finally, for a period of one year
following Employee's Termination of Employment, Employee shall be entitled to be
reimbursed for any legal or accounting services utilized by Employee to minimize
any personal income tax obligations arising from the Change in Control, in an
amount not to exceed $25,000.
4. GOLDEN PARACHUTE TAX REIMBURSEMENT. Whether or not any payments are
----------------------------------
made pursuant to Section 3 above, if a Change in Control occurs at any time and
the Employee reasonably determines that any payment or distribution by the
Company or any of its affiliates to or for the benefit of the Employee, whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise pursuant to or by reason of any other agreement, policy,
plan, program or arrangement, including without limitation any restricted stock,
stock option, stock appreciation right or similar right, or the lapse or
termination of any restriction on or the vesting or exercisablility of any of
the foregoing (individually and collectively, the "Payment"), would be subject
to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code") (or any successor provision thereto) by reason of being
considered "contingent on a change in ownership or control," within the meaning
of Section 280G of the Code (or any successor provision thereto), or any
interest or penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, being hereinafter collectively referred to
as the "Excise Tax"), then the Company or Parent shall pay to the Employee an
additional payment or payments (individually and collectively, the "Gross-Up
Payment"). The Gross-Up Payment shall be in an amount such that, after payment
by the Employee of all taxes required to be paid by the Employee with respect to
the receipt thereof under the terms of any federal, state or local government or
taxing authority (including any interest or penalties imposed with respect to
such taxes), including any Excise Tax imposed with respect to the Gross-Up
Payment, the Employee retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment. The Gross-Up Payment shall be paid to the
Employee within 30 days of its receipt of written notice from the Employee that
such Excise Tax has been paid or will be payable at any time in the future.
5. NO MITIGATION REQUIRED OR SETOFF PERMITTED. In no event shall Employee
------------------------------------------
be obligated to seek other employment or take other action by way of mitigation
of the amounts payable to Employee under the terms of this Agreement, and all
such amounts shall not be reduced whether or not Employee obtains other
employment. 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 Employee
or others.
-6-
<PAGE>
6. WAIVER OF OTHER SEVERANCE BENEFITS. The benefits payable pursuant to
----------------------------------
this Agreement are in lieu of any other severance benefits which may otherwise
be payable by the Company or its affiliates to the Employee upon termination of
employment pursuant to a severance program of the Company or its affiliates
(including, without limitation, any benefits to which Employee might otherwise
be entitled under any other severance or change in control or similar agreement
previously entered into between Employee and the Company or any of its
affiliates).
7. EMPLOYMENT AT WILL. Notwithstanding anything to the contrary contained
------------------
herein, the Employee's employment with the Company is not for any specified term
and may be terminated by the Employee or by the Company at any time, for any
reason, with or without cause, without any liability, except with respect to the
payments provided hereunder or as required by law or any other contract or
employee benefit plan.
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 attorneys' and accountants' fees of the
Employee in connection therewith, including any litigation to enforce any
arbitration award.
9. SUCCESSORS; BINDING AGREEMENT. This Agreement shall not be terminated
-----------------------------
by the voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving corporation, or upon any
transfer of all or substantially all of the Company's stock or assets. In the
event of such merger, consolidation or transfer, the provisions of this
Agreement shall be binding upon and shall inure to the benefit of the surviving
corporation or corporation to which such stock or assets of the Company shall be
transferred.
10. NOTICES. Any notice or other communication hereunder shall be in
-------
writing and shall be effective upon receipt (or refusal of receipt) if delivered
personally, or sent by overnight courier if signature for the receiving party is
obtained, or sent by certified or registered mail, postage prepaid, to the other
party at the address set forth below:
If to the Company: Vencor Operating, Inc.
Suite 3300, 400 West Market Street
Louisville, KY 40202
Attention: General Counsel
If to Employee: W. Bruce Lunsford
1400 Willow
Louisville, KY 40204
-7-
<PAGE>
Either party may change its specified address by giving notice in
writing to the other.
11. INDEMNIFICATION. The Company shall indemnify, defend and hold the
---------------
Employee harmless from and against any liability, damages, costs and expenses
(including attorneys' fees) in connection with any claim, cause of action,
investigation, litigation or proceeding involving him by reason of his having
been an officer, director, employee or agent of the Company, except to the
extent it is judicially determined that the Employee was guilty of gross
negligence or willful misconduct in connection with the matter giving rise to
the claim for indemnification. This indemnification shall be in addition to and
shall not be substituted for any other indemnification or similar agreement or
arrangement which may be in effect between the Employee and the Company or may
otherwise exist. The Company also agrees to maintain adequate directors and
officers liability insurance, if applicable, for the benefit of Employee for the
term of this Agreement and for five years thereafter.
12. ERISA. Many or all of the employee benefits addressed in Paragraph
-----
3(b) and (c) exist under plans which constitute employee welfare benefit plans
("Welfare Plans") within the meaning of Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Any payments pursuant to
this Agreement which could cause any of such Plans not to constitute a Welfare
Plan shall be deemed instead to be made pursuant to a separate "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA or a "top hat" plan
under Section 201(2) of ERISA as to which the applicable portions of the
document constituting the Welfare Plan shall be deemed to be incorporated by
reference. None of the benefits hereunder may be assigned in any way.
13. SEVERABILITY. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision, which other provision shall remain in full force and effect.
14. INTERPRETATION. The headings used herein are for convenience only and
--------------
do not limit or expand the contents of this Agreement. Use of any male gender
pronoun shall be deemed to include the female gender also.
15. NO WAIVER. No waiver of a breach of any provision of this Agreement
---------
shall be construed to be a waiver of any other breach of this Agreement. No
waiver of any provision of this Agreement shall be enforceable unless it is in
writing and signed by the party against whom it is sought to be enforced.
16. SURVIVAL. Any provisions of this Agreement creating obligations
--------
extending beyond the term of this Agreement shall survive the expiration or
termination of this Agreement, regardless of the reason for such termination.
17. AMENDMENTS. Any amendments to this Agreement shall be effective only
----------
if in writing and signed by the parties hereto.
-8-
<PAGE>
18. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
----------------
the parties with respect to the subject matter hereof.
19. GOVERNING LAW. This Agreement shall be interpreted in accordance with
-------------
and governed by the law of the State of Delaware.
20. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
21. CANCELLATION OF PRIOR AGREEMENT. The Employee hereby acknowledges and
-------------------------------
agrees that this Agreement is intended to and does hereby replace that certain
change-in-control severance agreement, dated as of May 1, 1998, between Vencor
Operating, Inc. and the Employee, and that such agreement is cancelled,
terminated and of no further force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR OPERATING, INC.
/s/ Richard A. Schweinhart
-------------------------------
By: Richard A. Schweinhart
Chief Financial Officer and
Senior Vice President
Solely for the purposes of
Sections 3, 4, 5 and 11:
VENCOR, INC.
/s/ Richard A. Schweinhart
-------------------------------
By: Richard A. Schweinhart
Chief Financial Officer
Senior Vice President
W. Bruce Lunsford
------------------------------
W. BRUCE LUNSFORD
-9-
<PAGE>
EXHIBIT 10.47
FIRST AMENDMENT TO MASTER LEASE AGREEMENT
This FIRST AMENDMENT TO MASTER LEASE AGREEMENT, dated as of December 31,
1998, but effective as of April 30, 1998 (this "Amendment"), is entered into by
and among Ventas, Inc., formerly known as Vencor, Inc., a Delaware corporation
("Ventas") and Ventas Realty, Limited Partnership, a Delaware limited
partnership ("Ventas LP", and together with Ventas, "Lessor") and Vencor
Operating, Inc. ("Current Tenant"), a Delaware corporation and Vencor, Inc.,
formerly known as Vencor Healthcare, Inc., a Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation, Nationwide
Care, Inc., an Indiana Corporation, Northwest Health Care, Inc., an Idaho
corporation, Hillhaven of Central Florida, Inc., a Delaware corporation, Vencor
Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P. a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998
(the "Master Lease Agreement") pursuant to which, inter alia, Original Lessor
leased to Original Tenant and Original Tenant leased from Original Lessor the
Leased Properties (as defined in the Master Lease Agreement) (capitalized terms
used herein but not defined herein shall have the meanings assigned to them in
the Master Lease Agreement); and
WHEREAS, pursuant to that certain Assignment and Assumption of Master
Lease, dated April 30, 1998, by and between Vencor, as assignor, and Current
Tenant, as assignee, Vencor assigned all of its right, title and interest in, to
and under the Master Lease Agreement to Current Tenant; and
WHEREAS, Ventas is the successor by merger to each of the Subsidiaries; and
WHEREAS, Lessor and Current Tenant desire to amend the Master Lease
Agreement in the manner set forth herein.
<PAGE>
NOW THEREFORE, in consideration of the mutual agreements contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Article III of the Master Lease Agreement is hereby amended by
inserting in the first line of Section 3.1(a), immediately after the phrase
"$86,391,000" the following "("Minimum Rent")."
------------
2. Article VII of the Master Lease Agreement is hereby amended by
deleting the text of Section 7.4 in its entirety and substituting therefor the
following new Section 7.4:
"Section 7.4. Lessor and Tenant to Execute Lease Supplement. Lessor
---------------------------------------------
and Tenant agree that, with respect to those certain Leased Properties indicated
on Exhibit B hereto by the placement of a "Y" opposite the name of the Leased
Property under the column "Mgd" ("Deferred Leased Properties"), from time to
--------------------------
time, and as certain regulatory issues with respect to such properties are
resolved, Lessor and Tenant shall execute a Lease Supplement ("Lease
-----
Supplement") to provide that this Lease is effective as to such properties.
- ----------
Such Lease Supplement shall set forth the term of this Lease with respect to
each such Deferred Leased Property (including the applicable Commencement Date
for such Property). The Minimum Rent payable under this Lease shall be
increased, as of each such Commencement Date, by the amount set forth opposite
the name of such Leased Property under the column marked "Annual Rent" on
Exhibit C hereto."
- ---------
3. Except as set forth herein the Master Lease Agreement is
unmodified and remains in full force and effect. The Master Lease Agreement, as
amended hereby and each and every provision, covenant, representation, warranty,
condition and right contained therein, as amended by this Amendment, is hereby
ratified and affirmed as of the date hereof, and shall continue in full force
effect.
4. Vencor acknowledges that it has been fully informed of, consented
to and approved all of the amendments to the Master Lease Agreement set forth in
this Amendment.
5. This Amendment is binding upon the parties hereto and their
respective successors, executors, administrators, legal representatives, heirs
and legal assigns.
6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
7. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
[remainder of page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their authorized representatives, all as of the day and year
first above written.
LESSOR:
-------
Witnesses: VENTAS, INC., formerly known as
Vencor Inc.
/s/ JOHN C. THOMPSON By: /s/ T. RICHARD RINEY
- -------------------------- -----------------------
Name: John C. Thompson Name: T. Richard Riney
Title: Vice President
/s/ BARBARA F. THOMPSON
- -------------------------
Name: Barbara F. Thompson
VENTAS REALTY, LIMITED PARTNERSHIP
Witnesses: By: Ventas, Inc., its general
partner
/s/ JOHN C. THOMPSON By: /s/ T. RICHARD RINEY
- ----------------------- -----------------------
Name: John C. Thompson Name: T. Richard Riney
Title: Vice President
/s/ BARBARA F. THOMPSON
- --------------------------
Name: Barbara F. Thompson
4
<PAGE>
CURRENT TENANT:
---------------
Witnesses:
VENCOR OPERATING, INC.
/s/ JOSEPH L. LANDENWICH By: /s/ RICHARD A. LECHLEITER
- --------------------------- ----------------------------
Name: Joseph L. Landenwich Name: Richard A. Lechleiter
Title: Vice President
/s/ ADELE DEFOSSET
- ---------------------
Name: Adele DeFosset
Acknowledged and agreed to as of this
31st day of December, 1998 by:
VENCOR, INC., formerly known as
Vencor Healthcare, Inc.
By: /s/ RICHARD A. LECHLEITER
----------------------------
Name: Richard A. Lechleiter
Title: Vice President
5
<PAGE>
EXHIBIT 10.48
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 1
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 1, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 1 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
EXHIBIT 10.49
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 2
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 2, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 2 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
EXHIBIT 10.50
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 3
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 3, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 3 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
EXHIBIT 10.51
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 4
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 4, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 4 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
EXHIBIT 10.57
SECOND STANDSTILL AGREEMENT
---------------------------
This Agreement dated April 12, 1999 is made and entered into between
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. (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 (collectively, "Ventas").
WHEREAS, Vencor and Ventas entered into an Agreement And Plan Of
Reorganization, dated as of April 30, 1998 (the "Reorganization Agreement"), and
other Ancillary Agreements (as defined in the Reorganization Agreement),
including four Master Lease Agreements, dated as of April 30, 1998 (the "Master
Leases");
WHEREAS, Vencor Nursing Centers Limited Partnership (an affiliate of
Vencor) and Ventas Realty, Limited Partnership (an affiliate of Ventas) entered
into a Lease Agreement dated as of August 7, 1998, concerning a facility
commonly known as the Corydon, Indiana Skilled Nursing Center (the "Indiana
Lease," and, collectively with the Master Leases, the "Five Leases");
WHEREAS, on March 18, 1999, Vencor sent a letter to Ventas, invoking
the dispute resolution provisions of Section 6.01 of the Reorganization
Agreement and seeking, inter alia, to negotiate a settlement concerning various
disputes;
WHEREAS, on March 22, 1999, Ventas sent a letter to Vencor, inter
alia, denying the allegations in Vencor's March 18, 1999 letter but agreeing to
engage in a constructive dialogue with Vencor regarding the issues raised in
Vencor's letter;
<PAGE>
WHEREAS, Vencor and Ventas entered into a Standstill Agreement dated
March 31, 1999 (the "First Standstill Agreement"), in which the parties agreed
not to take certain actions or to exercise certain rights or remedies against
one another during a period through and including April 12, 1999;
WHEREAS, the parties desire to continue negotiations and, in
connection therewith, to enter into certain arrangements more particularly
identified herein, including, without limitation, certain arrangements for the
payment in full of the rent due to Ventas under the Five Leases for the month of
April 1999, for the tolling or suspending of limitations or repose periods
applicable to certain alleged claims arising out of the Reorganization
Agreement, the Ancillary Agreements or the transactions contemplated by or in
those agreements, and for other matters;
NOW, THEREFORE, in consideration of the premises and the agreements
and undertakings of the parties contained herein, the parties agree as follows:
1. Except as explicitly set forth in the Tolling Agreement, neither
this Second Standstill Agreement, the Tolling Agreement by and between Ventas
and Vencor of even date herewith, the four Second Amendment to Master Lease
Agreements by and between Ventas and Vencor (and the other related parties to
the Master Lease Agreements) of even date herewith, nor the First Amendment to
Corydon, Indiana Lease Agreement by and between Ventas Realty, Limited
Partnership and Vencor Nursing Centers Limited Partnership of even date herewith
(the "Contemporaneous Agreements"), nor any discussions in pursuance hereof or
thereof, shall constitute a waiver by either party of any claim or defense that
may be asserted against the other party (including, without limitation, any
claim or defense with respect to the legality, validity, or
-2-
<PAGE>
enforceability of the Master Leases), an admission of liability by either party
or an admission by either party of the propriety or validity of any claims or
defenses asserted by either other party, and neither this Second Standstill
Agreement nor the Tolling Agreement shall be offered or received in evidence in
any arbitration or litigation between or among the parties except to enforce the
terms of such agreements or, where the intent of the parties is clearly stated
in such agreements, to demonstrate the intent of the parties.
2. Any modifications to this Second Standstill Agreement shall be in
writing and signed by both parties hereto.
3. Each of the undersigned represents that he or she has the
authority to execute this Agreement on behalf of the party for whom it is
executed.
4. Simultaneously with the execution and delivery of this Second
Standstill Agreement, the parties shall execute and deliver the following
additional agreements: the Tolling Agreement set forth at Exhibit A hereto, the
four Second Amendment to Master Lease Agreements set forth at Exhibit B hereto,
and the First Amendment to Corydon, Indiana Lease Agreement set forth at Exhibit
C hereto. This Agreement shall not become effective prior to the execution and
delivery of all of the foregoing agreements.
5. During the period from the date hereof 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 May 5, 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
-3-
<PAGE>
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 based on Vencor's late payment of the rent due under the Five
Leases for the month of April 1999, based on Vencor's late payment of rent due
under the Five Leases for the month of May 1999, 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.
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 in the event that:
(i) prior to 5:00 p.m. Eastern Daylight Savings Time on April 13, 1999,
Vencor has not paid to Ventas, in immediately available funds, the sum
of $8,022,426.00, representing thirteen-thirtieths (13/30) of the rent
due to Ventas under the Five Leases for the month of April 1999; or
(ii) prior to 5:00 p.m. Eastern Daylight Savings Time on April 20, 1999,
Vencor has not paid to Ventas, in immediately available funds, an
additional sum of $4,319,767.85, representing seven-thirtieths (7/30)
of the rent due to Ventas under the Five Leases; or
-4-
<PAGE>
(iii) prior to 5:00 p.m. Eastern Daylight Savings Time on April 27, 1999,
Vencor has not paid to Ventas, in immediately available funds, an
additional sum of $4,319,767.85, representing seven-thirtieths (7/30)
of the rent due to Ventas under the Five Leases; or
(iv) prior to 5:00 p.m. Eastern Daylight Savings Time on April 30, 1999,
Vencor has not paid to Ventas, in immediately available funds, an
additional sum of $1,851,329.07, representing three-thirtieths (3/30)
of the rent due to Ventas under the Five Leases.
6. Notwithstanding anything contained in this Second Standstill
Agreement to the contrary, Vencor, subsequent to 5:00 p.m. Eastern Daylight
Savings Time on April 26, 1999, may commence an Action against those of the
three individuals who are identified in the letter from counsel for Ventas to
counsel for Vencor of even date herewith and who, prior to 5:00 p.m. Eastern
Daylight Savings Time on April 26, 1999, fail to execute and deliver a tolling
agreement with Vencor covering claims of each against the other that is
reasonably satisfactory in form and substance to Vencor and to such individuals.
7. This Second Standstill Agreement is binding upon the undersigned
parties and on any representatives, successors, heirs, and assigns of the
parties hereto.
8. This Second Standstill Agreement 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.
9. This Second Standstill Agreement shall be construed pursuant to
the laws of the State of New York, without giving effect to the choice-of-law
rules of New York law.
-5-
<PAGE>
10. Payments of funds due from Vencor to Ventas hereunder, including
payment of rent due under the Five Leases, shall be made by wire transfer to
Ventas through the following wire instructions:
SunTrust Bank, Nashville
ABA Routing No.: 064000046
Account: 7020226622
Credit Ventas Realty, Limited Partnership
CONFIRMED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN BY:
VENCOR, INC. VENTAS, INC.
By: By:
------------------------------- --------------------------------
Name: Name:
Title: Title:
-6-
<PAGE>
EXHIBIT A
TOLLING AGREEMENT
-----------------
This Agreement dated April 12, 1999 is made and entered into between
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
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").
WHEREAS, the parties to this Agreement 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"); and
WHEREAS, the parties desire to toll or suspend the limitations or
repose periods applicable to the Claims for the Tolling Period (defined below).
NOW, THEREFORE, for good cause and adequate consideration, including
forbearance by both Vencor and Ventas from pursuing certain remedies at this
time, the parties
<PAGE>
hereto agree as follows:
1. Any Vencor Claims, 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 the date hereof, 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 must be filed to assert such a 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 the date hereof
to and including the earlier of (i) 5:00 p.m. Eastern Daylight Savings Time on
May 5, 1999, or (ii) the earlier time and date on which the Second Standstill
Period (as defined in the Second Standstill Agreement) shall automatically and
immediately terminate as a result of Vencor's nonpayment of rent (as provided in
paragraph 5 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 the last day of the Tolling Period shall be deemed to
be contained in the Tolling Period.
2. Without limiting the generality of the foregoing, Ventas shall
not assert against any Vencor Claim brought by Vencor any statute of
limitations, laches, or other time-related defense or claim, including, but not
limited to the defense or claim that the limitations periods or other time
periods set forth in 11 U.S.C. (S)(S) 544, 546, 547, 548, 550, 551 or 553 (the
"Bankruptcy Avoidance Provisions") or Section 10(b) of the Securities Exchange
Act of 1934
-2-
<PAGE>
have expired, to the extent that such defenses or claims depend on the passage
of time during the Tolling Period. Additionally, for purposes of any action
pursuant to the Bankruptcy Avoidance Provisions, Vencor shall be deemed to have
commenced its bankruptcy case on the date that is calculated by going back in
time from the date it actually commenced such case by the number of days
contained in the Tolling Period.
3. Any Ventas Claims, including, without limitation, those arising
or available under the Bankruptcy Avoidance Provisions (defined below) that
Ventas could otherwise assert against Vencor if Ventas were a debtor in a case
under the Bankruptcy Code commenced on the date hereof, and whether arising
under the Bankruptcy Code or under other applicable federal or state law, shall
not be prejudiced, impaired, or waived by Ventas' 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 Ventas Claim must be filed to assert such a Ventas Claim
(including, without limitation, a cause of action under (S) 548 of the
Bankruptcy Code) shall be tolled during the Tolling Period.
4. Without limiting the generality of the foregoing, Vencor shall
not assert against any Ventas Claim brought by Ventas any statute of
limitations, laches, or other time-related defense or claim, including, but not
limited to the defense or claim that the limitations periods or other time
periods set forth in the Bankruptcy Avoidance Provisions or Section 10(b) of the
Securities Exchange Act of 1934 have expired, to the extent that such defenses
or claims depend on the passage of time during the Tolling Period.
Additionally, for purposes of any action pursuant to the Bankruptcy Avoidance
Provisions, Ventas shall be deemed to have commenced its bankruptcy case on the
date that is calculated by going back in time from the date
-3-
<PAGE>
it actually commenced such case by the number of days contained in the Tolling
Period.
5. For purposes of facilitating aspects of the foregoing, Ventas and
Vencor agree and stipulate that this Agreement shall create claims in favor of
Vencor, the substantive elements of which and the case law applicable to which
are in all respects identical to the Vencor Claims that would have arisen under
the Bankruptcy Avoidance Provisions had Vencor been a debtor in a bankruptcy
case commenced under the Bankruptcy Code on April 29, 1999. Any such claim may
be asserted by Vencor only in connection with and subsequent to a bankruptcy
case commenced by or against it, as debtor, under the Bankruptcy Code on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period. For purposes of each such claim
created in this paragraph, Vencor shall be conclusively and irrebuttably
presumed to have commenced its bankruptcy case within one year of April 29,
1998, if such case is, in fact, commenced on or before the date established by
taking April 29, 1999 and adding to it the actual number of days contained in
the Tolling Period.
6. For purposes of facilitating aspects of the foregoing, Ventas and
Vencor agree and stipulate that this Agreement shall create claims in favor of
Ventas, the substantive elements of which and the case law applicable to which
are in all respects identical to the Ventas Claims that would have arisen under
the Bankruptcy Avoidance Provisions had Ventas been a debtor in a bankruptcy
case commenced under the Bankruptcy Code on April 29, 1999. Any such claim may
be asserted by Ventas only in connection with and subsequent to a bankruptcy
case commenced by or against it, as debtor, under the Bankruptcy Code on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period. For purposes of each such claim
created in this paragraph, Ventas shall be
-4-
<PAGE>
conclusively and irrebuttably presumed to have commenced its bankruptcy case
within one year of April 29, 1998, if such case is, in fact, commenced on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period.
7. Ventas and Vencor agree that the stipulations in this Agreement
are binding and irrevocable, and either party shall have the right to introduce
a copy of this Agreement into evidence to enforce such stipulations in any
litigation or arbitration proceeding between Ventas and Vencor. Ventas
acknowledges that Vencor's forbearance from commencing a bankruptcy case prior
to April 29, 1999, will serve as sound, adequate, fair and sufficient
consideration for the foregoing agreements and stipulations. Vencor
acknowledges that Ventas' forbearance from commencing a bankruptcy case prior to
April 29, 1999, will serve as sound, adequate, fair and sufficient consideration
for the foregoing agreements and stipulations.
8. Neither this Agreement nor the circumstances leading to its
execution shall be construed to vitiate or waive (a) any statute of limitations,
laches, or other time-related defenses that are available prior to or after the
Tolling Period, provided that the passage of time during the Tolling Period is
not taken into account, or (b) any non-time-related defenses to any Vencor
Claim, Ventas Claim, or claim created by paragraph 5 or 6 of this Agreement.
9. Each of the undersigned represents that he or she has the
authority to execute this Agreement on behalf of the party or parties for whom
it is executed.
10. Any modifications to this Tolling Agreement shall be in writing
and signed by both parties hereto.
11. Simultaneously with the execution and delivery of this Agreement,
the parties shall execute and deliver that certain Second Standstill Agreement,
those four certain
-5-
<PAGE>
Second Amendment to Master Lease Agreements, and that certain First Amendment to
Corydon, Indiana Lease Agreement (collectively, the "Contemporaneous
Agreements"). This Agreement shall not become effective prior to the execution
and delivery of each of the foregoing Contemporaneous Agreements.
12. Paragraphs 1, 2, and 5 of this Agreement shall be void and
without effect in the event Vencor commences a voluntary bankruptcy case under
the Bankruptcy Code prior to April 29, 1999, and paragraphs 3, 4, and 6 of this
Agreement shall be void and without effect in the event Ventas commences a
voluntary bankruptcy case under the Bankruptcy Code prior to April 29, 1999.
13. This Agreement is binding on the undersigned parties and on the
representatives, successors, heirs, and assigns of the parties hereto.
14. This Agreement 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.
15. This Tolling Agreement shall be construed pursuant to the laws of
the State of New York, without giving effect to the choice-of-law rules of New
York law.
[INTENTIONALLY LEFT BLANK]
-6-
<PAGE>
CONFIRMED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN BY:
VENCOR, INC. VENTAS, INC.
By: By:
----------------------- -----------------------------
Name: Name:
Title: Title:
-7-
<PAGE>
EXHIBIT B
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 1
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 1, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 1 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 2
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 2, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 2 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 3
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 3, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 3 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 4
------------------------------------------------
THIS SECOND AMENDMENT TO MASTER LEASE AGREEMENT NO. 4, dated April 12,
1999 (the "Amendment"), is entered into by and among Ventas, Inc., formerly
known as Vencor, Inc., a Delaware corporation ("Ventas") and Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Ventas LP", and together
with Ventas, "Lessor") and Vencor Operating, Inc. ("Current Tenant"), a Delaware
corporation and Vencor, Inc., formerly known as Vencor Healthcare, Inc., a
Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P., a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998,
and commonly known as Master Lease No. 4 (the "Master Lease Agreement") pursuant
to
<PAGE>
which, inter alia, Original Lessor leased to Original Tenant and Original Tenant
leased from Original Lessor the Leased Properties (as defined in the Master
Lease Agreement) (capitalized terms used herein but not defined herein shall
have the meanings assigned to them in the Master Lease Agreement); and
WHEREAS, Ventas claims that pursuant to that certain Assignment and
Assumption of Master Lease, dated April 30, 1998, by and between Vencor, as
assignor, and Current Tenant, as assignee, Vencor assigned all of its right,
title, and interest in, to, and under the Master Lease Agreement to Current
Tenant; and
WHEREAS, Ventas claims that it is the successor by merger to each of
the Subsidiaries, and Ventas LP now has title to the Leased Properties; and
WHEREAS, Ventas claims that Vencor and Current Tenant executed and
delivered that certain Guaranty of Lease, dated as of April 30, 1998; and
WHEREAS, Ventas claims that it, Ventas LP, Current Tenant, and Vencor
entered into that certain First Amendment to Master Lease Agreement, dated as of
December 31, 1998 but effective as of April 30, 1998, pursuant to which the
Master Lease Agreement was amended in several respects; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas
and Vencor shall execute and deliver that certain Second Standstill Agreement;
that certain Tolling Agreement; and Amendments to the other Master Leases and to
the Lease Agreement for the facility commonly known as the Corydon, Indiana
Skilled Nursing Center, each containing substantive terms identical to the terms
of this Amendment (collectively, the "Contemporaneous Agreements"); and
-2-
<PAGE>
WHEREAS, the parties hereto desire to further amend the Master Lease
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Master Lease
Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Master Lease Agreement, as of April 30, 1998, as fully
as if such Section had never been contained in such Master Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Master Lease Agreement shall remain unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
WITNESS VENTAS, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
ORIGINAL TENANT:
---------------
WITNESS VENCOR, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
WITNESS VENCOR OPERATING, INC.
- -------------------------- By:
Name ---------------------------------
Name:
- -------------------------- Title:
Name
-4-
<PAGE>
EXHIBIT C
---------
FIRST AMENDMENT TO CORYDON, INDIANA LEASE AGREEMENT
---------------------------------------------------
THIS FIRST AMENDMENT TO CORYDON, INDIANA LEASE AGREEMENT, dated April
12, 1999 (the "Amendment"), is entered into by and between Ventas Realty,
Limited Partnership, a Delaware limited partnership ("Lessor"), and Vencor
Nursing Centers Limited Partnership, a Delaware limited partnership ("Tenant").
WHEREAS, Lessor and Tenant entered into that certain Lease Agreement,
dated as of August 7, 1998 (the "Corydon, Indiana Lease Agreement") pursuant to
which Lessor leased to Tenant and Tenant leased from Lessor a certain facility
commonly known as the Corydon, Indiana Skilled Nursing Center (capitalized terms
used herein but not defined herein shall have the meanings assigned to them in
the Corydon, Indiana Lease Agreement); and
WHEREAS, Ventas claims that Vencor, Inc. ("Vencor") and Vencor
Operating, Inc. executed and delivered that certain Guaranty of Lease, dated as
of August 7, 1998; and
WHEREAS, simultaneously with the execution of this Amendment, Ventas,
Inc. ("Ventas") and Vencor shall execute and deliver that certain Second
Standstill Agreement; that certain Tolling Agreement; and Amendments to those
four certain Master Leases dated as of April 30, 1998 between Ventas, Vencor,
and the other parties thereto, each containing substantive terms identical to
the terms of this Amendment (collectively, the "Contemporaneous Agreements");
and
WHEREAS, the parties hereto desire to amend the Corydon, Indiana Lease
Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the aforementioned Corydon,
Indiana Lease Agreement as follows:
1. Section 16.4, entitled "Tenant's Obligation to Purchase," is
hereby deleted from the Corydon, Indiana Lease Agreement, as of August 7, 1998,
as fully as if such Section had never been contained in such Corydon, Indiana
Lease Agreement.
2. The parties hereto intend that this Amendment shall become
effective simultaneously with the execution and delivery of the Contemporaneous
Agreements.
3. Except to the extent expressly modified herein, all other terms,
covenants, and conditions of the Corydon, Indiana Lease Agreement shall remain
unchanged.
4. Each of the undersigned represents that he or she has the
authority to execute this Amendment on behalf of the party or parties for whom
it is executed.
5. This Amendment 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.
[INTENTIONALLY LEFT BLANK]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and their respective corporate seals to be hereunto affixed and
attested by their respective officers hereunto duly authorized.
LESSOR:
------
VENTAS REALTY, LIMITED PARTNERSHIP
WITNESS By: Ventas, Inc., its general partner
By:
- --------------------- ---------------------
Name Name:
Title:
- ---------------------
Name
TENANT:
------
VENCOR NURSING CENTERS
LIMITED PARTNERSHIP
WITNESS By: Vencor Operating, Inc., its general partner
By:
- --------------------- ---------------------
Name Name:
Title:
- --------------------
Name
-3-
<PAGE>
EXHIBIT 10.58
TOLLING AGREEMENT
-----------------
This Agreement dated April 12, 1999 is made and entered into between
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
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").
WHEREAS, the parties to this Agreement 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"); and
WHEREAS, the parties desire to toll or suspend the limitations or
repose periods applicable to the Claims for the Tolling Period (defined below).
NOW, THEREFORE, for good cause and adequate consideration, including
forbearance by both Vencor and Ventas from pursuing certain remedies at this
time, the parties
<PAGE>
hereto agree as follows:
1. Any Vencor Claims, 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 the date hereof, 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 must be filed to assert such a 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 the date hereof
to and including the earlier of (i) 5:00 p.m. Eastern Daylight Savings Time on
May 5, 1999, or (ii) the earlier time and date on which the Second Standstill
Period (as defined in the Second Standstill Agreement) shall automatically and
immediately terminate as a result of Vencor's nonpayment of rent (as provided in
paragraph 5 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 the last day of the Tolling Period shall be deemed to
be contained in the Tolling Period.
2. Without limiting the generality of the foregoing, Ventas shall
not assert against any Vencor Claim brought by Vencor any statute of
limitations, laches, or other time-related defense or claim, including, but not
limited to the defense or claim that the limitations periods or other time
periods set forth in 11 U.S.C. (S)(S) 544, 546, 547, 548, 550, 551 or 553 (the
"Bankruptcy Avoidance Provisions") or Section 10(b) of the Securities Exchange
Act of 1934
-2-
<PAGE>
have expired, to the extent that such defenses or claims depend on the passage
of time during the Tolling Period. Additionally, for purposes of any action
pursuant to the Bankruptcy Avoidance Provisions, Vencor shall be deemed to have
commenced its bankruptcy case on the date that is calculated by going back in
time from the date it actually commenced such case by the number of days
contained in the Tolling Period.
3. Any Ventas Claims, including, without limitation, those arising
or available under the Bankruptcy Avoidance Provisions (defined below) that
Ventas could otherwise assert against Vencor if Ventas were a debtor in a case
under the Bankruptcy Code commenced on the date hereof, and whether arising
under the Bankruptcy Code or under other applicable federal or state law, shall
not be prejudiced, impaired, or waived by Ventas' 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 Ventas Claim must be filed to assert such a Ventas Claim
(including, without limitation, a cause of action under (S) 548 of the
Bankruptcy Code) shall be tolled during the Tolling Period.
4. Without limiting the generality of the foregoing, Vencor shall
not assert against any Ventas Claim brought by Ventas any statute of
limitations, laches, or other time-related defense or claim, including, but not
limited to the defense or claim that the limitations periods or other time
periods set forth in the Bankruptcy Avoidance Provisions or Section 10(b) of the
Securities Exchange Act of 1934 have expired, to the extent that such defenses
or claims depend on the passage of time during the Tolling Period.
Additionally, for purposes of any action pursuant to the Bankruptcy Avoidance
Provisions, Ventas shall be deemed to have commenced its bankruptcy case on the
date that is calculated by going back in time from the date
-3-
<PAGE>
it actually commenced such case by the number of days contained in the Tolling
Period.
5. For purposes of facilitating aspects of the foregoing, Ventas and
Vencor agree and stipulate that this Agreement shall create claims in favor of
Vencor, the substantive elements of which and the case law applicable to which
are in all respects identical to the Vencor Claims that would have arisen under
the Bankruptcy Avoidance Provisions had Vencor been a debtor in a bankruptcy
case commenced under the Bankruptcy Code on April 29, 1999. Any such claim may
be asserted by Vencor only in connection with and subsequent to a bankruptcy
case commenced by or against it, as debtor, under the Bankruptcy Code on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period. For purposes of each such claim
created in this paragraph, Vencor shall be conclusively and irrebuttably
presumed to have commenced its bankruptcy case within one year of April 29,
1998, if such case is, in fact, commenced on or before the date established by
taking April 29, 1999 and adding to it the actual number of days contained in
the Tolling Period.
6. For purposes of facilitating aspects of the foregoing, Ventas and
Vencor agree and stipulate that this Agreement shall create claims in favor of
Ventas, the substantive elements of which and the case law applicable to which
are in all respects identical to the Ventas Claims that would have arisen under
the Bankruptcy Avoidance Provisions had Ventas been a debtor in a bankruptcy
case commenced under the Bankruptcy Code on April 29, 1999. Any such claim may
be asserted by Ventas only in connection with and subsequent to a bankruptcy
case commenced by or against it, as debtor, under the Bankruptcy Code on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period. For purposes of each such claim
created in this paragraph, Ventas shall be
-4-
<PAGE>
conclusively and irrebuttably presumed to have commenced its bankruptcy case
within one year of April 29, 1998, if such case is, in fact, commenced on or
before the date established by taking April 29, 1999 and adding to it the actual
number of days contained in the Tolling Period.
7. Ventas and Vencor agree that the stipulations in this Agreement
are binding and irrevocable, and either party shall have the right to introduce
a copy of this Agreement into evidence to enforce such stipulations in any
litigation or arbitration proceeding between Ventas and Vencor. Ventas
acknowledges that Vencor's forbearance from commencing a bankruptcy case prior
to April 29, 1999, will serve as sound, adequate, fair and sufficient
consideration for the foregoing agreements and stipulations. Vencor
acknowledges that Ventas' forbearance from commencing a bankruptcy case prior to
April 29, 1999, will serve as sound, adequate, fair and sufficient consideration
for the foregoing agreements and stipulations.
8. Neither this Agreement nor the circumstances leading to its
execution shall be construed to vitiate or waive (a) any statute of limitations,
laches, or other time-related defenses that are available prior to or after the
Tolling Period, provided that the passage of time during the Tolling Period is
not taken into account, or (b) any non-time-related defenses to any Vencor
Claim, Ventas Claim, or claim created by paragraph 5 or 6 of this Agreement.
9. Each of the undersigned represents that he or she has the
authority to execute this Agreement on behalf of the party or parties for whom
it is executed.
10. Any modifications to this Tolling Agreement shall be in writing
and signed by both parties hereto.
11. Simultaneously with the execution and delivery of this Agreement,
the parties shall execute and deliver that certain Second Standstill Agreement,
those four certain
-5-
<PAGE>
Second Amendment to Master Lease Agreements, and that certain First Amendment to
Corydon, Indiana Lease Agreement (collectively, the "Contemporaneous
Agreements"). This Agreement shall not become effective prior to the execution
and delivery of each of the foregoing Contemporaneous Agreements.
12. Paragraphs 1, 2, and 5 of this Agreement shall be void and
without effect in the event Vencor commences a voluntary bankruptcy case under
the Bankruptcy Code prior to April 29, 1999, and paragraphs 3, 4, and 6 of this
Agreement shall be void and without effect in the event Ventas commences a
voluntary bankruptcy case under the Bankruptcy Code prior to April 29, 1999.
13. This Agreement is binding on the undersigned parties and on the
representatives, successors, heirs, and assigns of the parties hereto.
14. This Agreement 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.
15. This Tolling Agreement shall be construed pursuant to the laws of
the State of New York, without giving effect to the choice-of-law rules of New
York law.
[INTENTIONALLY LEFT BLANK]
-6-
<PAGE>
CONFIRMED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN BY:
VENCOR, INC. VENTAS, INC.
By: By:
----------------------- -----------------------------
Name: Name:
Title: Title:
-7-
<PAGE>
EXHIBIT 21
REGISTRANT'S SUBSIDIARIES
Corporations and Limited Liability Companies
- --------------------------------------------
Vencor Operating, Inc., a Delaware corporation
Vencor Hospitals East, L.L.C., a Delaware limited liability company
Vencor Hospitals West, L.L.C., a Delaware limited liability company
Vencor Nursing Centers East, L.L.C., a Delaware limited liability company
Vencor Nursing Centers West, L.L.C., a Delaware limited liability company
Vencor Nursing Centers South, L.L.C., a Delaware limited liability company
Vencor Nursing Centers North, L.L.C., a Delaware limited liability company
Vencor Nevada, L.L.C., a Delaware limited liability company
Vencor Holdings, L.L.C., a Delaware limited liability company
Vencor Investment Company, a Delaware corporation
Ventech Systems, Inc., a Delaware corporation
Vencare, Inc., a Delaware corporation
Vencor Hospice, Inc., a Kentucky corporation
Vencor Facility Services, Inc., a Delaware corporation
Vencor Insurance Holdings, Inc., a Delaware corporation
Vencor Provider Network, Inc., a Delaware corporation
Vencor Insurance Company, an Indiana corporation
Vencor Pediatric Care, Inc., a Delaware corporation
Vencor Home Care Services, Inc., a Delaware corporation
Ledgewood Health Care Corporation, a Massachusetts corporation (1)
Cornerstone Insurance Company, a Cayman Islands corporation
Medisave Pharmacies, Inc., a Delaware corporation
Medisave of Tennessee, Inc., a Delaware corporation
American X-Rays, Inc., a Louisiana corporation
<PAGE>
First Rehab, Inc., a Delaware corporation
Advanced Infusion Systems, Inc., a California corporation
TheraTx, Incorporated, a Delaware corporation
Health Care Holdings, Inc., a Delaware corporation
Health Care Technology, Inc., a Delaware corporation
Helian Health Group, Inc., a Delaware corporation
Helian ASC of Northridge, Inc., a California corporation
MedEquities, Inc., a California corporation
Helian Recovery Corporation, a California corporation
Recovery Inns of America, Inc., a California corporation
VC - OIA, Inc., an Arizona corporation
Palo Alto Surgecenter Corporation, a California corporation
VC - TOCH, Inc., an Arizona corporation
Horizon Healthcare Services, Inc., a Georgia corporation
Tunstall Enterprises, Inc., a Georgia corporation
PersonaCare, Inc., a Delaware corporation
Lafayette Health Care Center, Inc., a Georgia corporation
PersonaCare Living Center of Clearwater, Inc., a Delaware
corporation
PersonaCare of Bradenton, Inc., a Delaware corporation
PersonaCare of Clearwater, Inc., a Delaware corporation
PersonaCare of Connecticut, Inc., a Connecticut corporation
Courtland Gardens Health Center, Inc., a Connecticut
corporation
Homestead Health Center, Inc., a Connecticut corporation
Stamford Health Facilities, Inc., a Connecticut corporation
PersonaCare of Georgia, Inc., a Delaware corporation
PersonaCare of Huntsville, Inc., a Delaware corporation
PersonaCare of Little Rock, Inc., a Delaware corporation
2
<PAGE>
PersonaCare of Ohio, Inc., a Delaware corporation
PersonaCare of Owensboro, Inc., a Delaware corporation
PersonaCare of Pennsylvania, Inc., a Delaware corporation
PersonaCare of Pompano East, Inc., a Delaware corporation
PersonaCare of Pompano West, Inc., a Delaware corporation
PersonaCare of Reading, Inc., a Delaware corporation
PersonaCare of San Antonio, Inc., a Delaware corporation
PersonaCare of San Pedro, Inc., a Delaware corporation
PersonaCare of Shreveport, Inc., a Delaware corporation
PersonaCare of St. Petersburg, Inc., a Delaware corporation.
PersonaCare of Warner Robbins, Inc., a Delaware corporation
PersonaCare of Wisconsin, Inc., a Delaware corporation
PersonaCare Properties, Inc., a Georgia corporation
Tucker Nursing Center, Inc., a Georgia corporation
Respiratory Care Services, Inc., a Delaware corporation
TheraTx Health Services, Inc., a Delaware corporation
TheraTx Rehabilitation Services, Inc., a Delaware corporation
TheraTx Healthcare Management, Inc., a Delaware corporation
TheraTx Management Services, Inc., a California corporation
TheraTx Medical Supplies, Inc., a Delaware corporation
TheraTx Staffing, Inc., an Illinois corporation
VC - WM, Inc., a Florida corporation
Transitional Hospitals Corporation, a Nevada corporation
Community Psychiatric Centers of Oklahoma, Inc., an Oklahoma
corporation
Community Psychiatric Centers Properties of Oklahoma, Inc., an Oklahoma
corporation
CPC of Georgia, Inc., a Georgia corporation
Peachtree - Parkwood Hospital, Inc., a Georgia corporation
3
<PAGE>
Interamericana Health Care Group, a Nevada corporation
Caribbean Behavioral Health Systems, Inc., a Nevada corporation
InteHgro Holdings, Ltd., a Cayman Islands corporation
Gorgas International Medical Center, LLC, a Delaware limited
liability company
Transitional Hospitals Corporation, a Delaware corporation
JB Thomas Hospital, Inc., a Maine corporation
THC - Chicago, Inc., an Illinois corporation
THC - North Shore, Inc., an Illinois corporation
THC - Hollywood, Inc., a Florida corporation
THC - Houston, Inc., a Texas corporation
THC - Minneapolis, Inc., a Minnesota corporation
THC - Orange County, Inc., a California corporation
THC - San Diego, Inc., a California corporation
THC - Seattle, Inc., a Washington corporation
Transitional Hospitals Corporation of Indiana, Inc., an Indiana
corporation
Transitional Hospitals Corporation of Louisiana, Inc., a Louisiana
corporation
Transitional Hospitals Corporation of New Mexico, Inc., a New
Mexico corporation
Transitional Hospitals Corporation of Nevada, Inc., a Nevada
corporation
Transitional Hospitals Corporation of Tampa, Inc., a Florida
corporation
Transitional Hospitals Corporation of Texas, Inc., a Texas
corporation
Transitional Hospitals Corporation of Wisconsin, Inc., a Wisconsin
corporation
Transitional Hospitals Corporation of Michigan, Inc., a Michigan
corporation
Community Psychiatric Centers of Arkansas, Inc., an Arkansas
corporation
Community Psychiatric Centers of California, a California corporation
Community Psychiatric Centers Properties Incorporated, a
California corporation
CPC Investment Corp., a California corporation
CPC Properties of Illinois, Inc., an Illinois corporation
4
<PAGE>
CPC Properties of Missouri, Inc., a Missouri corporation
Community Psychiatric Centers of Florida, Inc., a Florida corporation
Community Psychiatric Centers of Idaho, Inc., an Idaho corporation
Community Psychiatric Centers of Indiana, Inc., an Indiana corporation
Community Psychiatric Centers of Kansas, Inc., a Kansas corporation
Community Psychiatric Centers of Mississippi, Inc., a Mississippi
corporation
Community Psychiatric Centers of Missouri, Inc., a Missouri corporation
Community Psychiatric Centers of North Carolina, Inc., a North Carolina
corporation
Community Psychiatric Centers of Utah, Inc., a Utah corporation
Community Psychiatric Centers Properties of Texas, Inc., a Texas
corporation
Community Psychiatric Centers Properties of Utah, Inc., a Utah
corporation
C.P.C. of Louisiana, Inc., a Louisiana corporation
CPC Managed Care Health Services, Inc., a Delaware corporation
Community Behavioral Health System, Inc., a Louisiana corporation
CPC Properties of Arkansas, Inc., an Arkansas corporation
CPC Properties of Indiana, Inc., an Indiana corporation
CPC Properties of Kansas, Inc., a Kansas corporation
CPC Properties of Louisiana, Inc., a Louisiana corporation
CPC Properties of Mississippi, Inc., a Mississippi corporation
CPC Properties of North Carolina, Inc., a North Carolina corporation
Florida Hospital Properties, a Florida corporation
Old Orchard Hospital, Inc., an Illinois corporation
Partnerships
- ------------
Vencor Hospitals Limited Partnership, a Delaware limited partnership
Vencor Nursing Centers Limited Partnership, a Delaware limited partnership
Vencor Nursing Centers Central Limited Partnership, a Delaware limited
partnership
Vencor Home Care and Hospice Indiana Partnership, an Indiana general partnership
ProData Systems, Inc., an Alabama corporation
5
<PAGE>
Foothill Nursing Company Partnership, a California general partnership (1)
Fox Hill Village Partnership, a Massachusetts general partnership (1)
Starr Farm Partnership, a Vermont general partnership (1)
Hillhaven-MSC Partnership, a California general partnership (1)
Pharmaceutical Infusion Therapy, a California general partnership (2)
CPS-Sacramento, a California general partnership (3)
California Respiratory Care Partnership, a California general partnership (2)
Visiting Nurse Advanced Infusion Systems - Anaheim, a California general
partnership (1)
Visiting Nurse Advanced Infusion Systems - Colton, a California general
partnership (2)
Visiting Nurse Advanced Infusion Systems - Newbury Park, a California general
partnership (2)
Stamford Health Associates, L.P., a Connecticut limited partnership
Northridge Surgery Center, Ltd., a California limited partnership (4)
Northridge Surgery Center Development Ltd., a California limited partnership (5)
Recovery Inn of Menlo Park, L.P., a California limited partnership (6)
(1) Only fifty percent (50%) is owned by one of the Registrant's subsidiaries
(2) Only fifty-one percent (51%) is owned by one of the Registrant's
subsidiaries
(3) Only sixty percent (60%) is owned by one of the Registrant's subsidiaries
(4) Only seventy percent (70%) is owned by the Registrant's subsidiaries
(5) Only forty-three percent (43%) general partnership interest is owned by the
Registrant's subsidiaries
(6) Only forty-five percent (45%) is owned by the Registrant's subsidiaries
6
<PAGE>
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-51363) pertaining to the Vencor, Inc. 1998 Incentive Compensation
Plan; in the Registration Statement (Form S-8 No. 333-51361) pertaining to the
Vencor, Inc. 1988 Non-Employee Directors Stock Option Plan; in the Registration
Statement (Form S-8 No. 333-51359) pertaining to the Vencor Retirement Savings
Plan; in the Registration Statement (Form S-8 No. 333-64897) pertaining to the
Vencor Retirement Savings Plan - additional shares; in the Registration
Statement (Form S-8 No. 333-61387) pertaining to the TheraTx Retirement Savings
Plan; in the Registration Statement (Form S-8 No. 333-61385) pertaining to the
THC Retirement Savings Plan, of our report dated March 12, 1999, with respect to
the consolidated financial statements and schedules of Vencor, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
April 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 34,551
<SECURITIES> 0
<RECEIVABLES> 471,701
<ALLOWANCES> (106,471)
<INVENTORY> 28,594
<CURRENT-ASSETS> 628,478
<PP&E> 749,867
<DEPRECIATION> (262,551)
<TOTAL-ASSETS> 1,717,890
<CURRENT-LIABILITIES> 1,311,047
<BONDS> 6,600
0
0
<COMMON> 17,537
<OTHER-SE> 295,708
<TOTAL-LIABILITY-AND-EQUITY> 1,717,890
<SALES> 0
<TOTAL-REVENUES> 2,999,739
<CGS> 0
<TOTAL-COSTS> 2,281,539
<OTHER-EXPENSES> 932,511
<LOSS-PROVISION> 55,561
<INTEREST-EXPENSE> 107,008
<INCOME-PRETAX> (496,809)
<INCOME-TAX> 76,099
<INCOME-CONTINUING> (572,908)
<DISCONTINUED> 0
<EXTRAORDINARY> (77,937)
<CHANGES> 0
<NET-INCOME> (650,845)
<EPS-PRIMARY> (9.53)
<EPS-DILUTED> (9.53)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR,
INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS .
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 90,507
<SECURITIES> 0
<RECEIVABLES> 420,758
<ALLOWANCES> (23,915)
<INVENTORY> 24,939
<CURRENT-ASSETS> 661,133
<PP&E> 1,609,770
<DEPRECIATION> (416,608)
<TOTAL-ASSETS> 1,968,856
<CURRENT-LIABILITIES> 341,010
<BONDS> 710,507
0
0
<COMMON> 18,154
<OTHER-SE> 778,937
<TOTAL-LIABILITY-AND-EQUITY> 1,968,856
<SALES> 0
<TOTAL-REVENUES> 2,577,783
<CGS> 0
<TOTAL-COSTS> 1,830,354
<OTHER-EXPENSES> 515,996
<LOSS-PROVISION> 15,001
<INTEREST-EXPENSE> 45,922
<INCOME-PRETAX> 83,180
<INCOME-TAX> 35,175
<INCOME-CONTINUING> 48,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,005
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.68
</TABLE>
