<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 001-14057
VENCOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1323993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Vencor Place
680 South Fourth Street
Louisville, KY 40202-2412
(Address of principal executive offices) (Zip Code)
(502) 596-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 1999
----------------------------- -----------------------------
Common stock, $0.25 par value 70,426,335 shares
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1 of 39
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VENCOR, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations --
for the three months ended March 31, 1999 and 1998............... 3
Condensed Consolidated Balance Sheet -- March 31, 1999
and December 31, 1998............................................ 4
Condensed Consolidated Statement of Cash Flows -- for
the three months ended March 31, 1999 and 1998................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 31
Item 3. Defaults Upon Senior Securities.................................. 34
Item 6. Exhibits and Reports on Form 8-K................................. 37
2
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 1999 and 1998
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenues............................................................ $700,232 $823,316
-------- --------
Salaries, wages and benefits........................................ 403,894 480,364
Supplies............................................................ 68,664 76,052
Rent................................................................ 75,452 24,135
Other operating expenses............................................ 125,652 134,922
Depreciation and amortization....................................... 22,285 35,470
Interest expense.................................................... 19,536 37,195
Investment income................................................... (631) (1,180)
-------- --------
714,852 786,958
-------- --------
Income (loss) before income taxes................................... (14,620) 36,358
Provision for income taxes.......................................... 50 17,477
-------- --------
Income (loss) from operations....................................... (14,670) 18,881
Cumulative effect of change in accounting for start-up costs........ (8,923) -
-------- --------
Net income (loss)............................................. (23,593) 18,881
Preferred stock dividend requirements............................... (261) -
-------- --------
Income (loss) available to common stockholders...................... $(23,854) $ 18,881
======== ========
Earnings (loss) per common share:
Basic:
Income (loss) from operations................................. $ (0.21) $ 0.28
Cumulative effect of change in accounting for start-up costs.. (0.13) -
-------- --------
Net income (loss)....................................... $ (0.34) $ 0.28
======== ========
Diluted:
Income (loss) from operations................................. $ (0.21) $ 0.28
Cumulative effect of change in accounting for start-up costs.. (0.13) -
-------- --------
Net income (loss)....................................... $ (0.34) $ 0.28
======== ========
Shares used in computing earnings (loss) per common share:
Basic............................................................ 70,326 67,448
Diluted.......................................................... 70,326 67,857
</TABLE>
See accompanying notes.
3
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VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 16,284 $ 34,551
Accounts and notes receivable less allowance for loss............... 476,684 471,701
Inventories......................................................... 30,670 28,594
Income taxes........................................................ 11,894 15,315
Other............................................................... 62,114 78,317
---------- ----------
597,646 628,478
Property and equipment, at cost...................................... 773,427 749,867
Accumulated depreciation............................................. (278,960) (262,551)
---------- ----------
494,467 487,316
Goodwill less accumulated amortization............................... 450,680 456,644
Investments in affiliates............................................ 33,867 35,707
Assets held for sale................................................. 25,426 28,524
Other................................................................ 72,140 81,221
---------- ----------
$1,674,226 $1,717,890
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 132,945 $ 152,103
Salaries, wages and other compensation.............................. 157,148 150,906
Due to third party payors........................................... 23,792 98,851
Other accrued liabilities........................................... 139,755 139,254
Long-term debt due within one year.................................. 8,899 9,048
Long-term debt in default classified as current..................... 754,971 760,885
---------- ----------
1,217,510 1,311,047
Long-term debt....................................................... 80,770 6,600
Deferred credits and other liabilities............................... 84,003 85,255
Series A preferred stock............................................. 1,743 1,743
Stockholders' equity:
Common stock, $0.25 par value; authorized 180,000 shares;
issued 70,419 shares -- March 31 and 70,146 shares -- December 31.. 17,605 17,537
Capital in excess of par value...................................... 666,188 665,447
Accumulated deficit................................................. (393,593) (369,739)
---------- ----------
290,200 313,245
---------- ----------
$1,674,226 $1,717,890
========== ==========
</TABLE>
See accompanying notes.
4
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VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $(23,593) $ 18,881
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.............................................. 22,285 35,470
Provision for doubtful accounts............................................ 6,725 7,194
Unusual transactions....................................................... 1,389 4,221
Deferred income taxes...................................................... - 430
Cumulative effect of change in accounting for start-up costs............... 8,923 -
Other...................................................................... 1,871 (952)
Changes in operating assets and liabilities:
Accounts and notes receivable........................................... (11,472) (22,635)
Inventories and other assets............................................ 9,068 3,244
Accounts payable........................................................ (18,822) (8,090)
Income taxes............................................................ 3,421 15,631
Due to third party payors............................................... (194) -
Other accrued liabilities............................................... 6,700 3,976
======== ========
Net cash provided by operating activities............................ 6,301 57,370
-------- --------
Cash flows from investing activities:
Purchase of property and equipment............................................ (24,492) (78,732)
Acquisition of other healthcare businesses and previously leased facilities... - (12,275)
Sale of assets................................................................ 3,267 -
Net change in investments..................................................... 5,083 (262)
Other......................................................................... (767) (724)
-------- --------
Net cash used in investing activities................................ (16,909) (91,993)
-------- --------
Cash flows from financing activities:
Net change in borrowings under revolving lines of credit...................... - 5,600
Repayment of long-term debt................................................... (6,758) (1,895)
Payment of deferred financing costs........................................... (901) (1,115)
Issuances of common stock..................................................... - 103
-------- --------
Net cash provided by (used in) financing activities.................. (7,659) 2,693
-------- --------
Change in cash and cash equivalents.............................................. (18,267) (31,930)
Cash and cash equivalents at beginning of period................................. 34,551 55,627
-------- --------
Cash and cash equivalents at end of period....................................... $ 16,284 $ 23,697
======== ========
Supplemental information:
Interest payments............................................................... $ 11,324 $ 53,307
Income tax payments (refunds)................................................... (3,371) 1,896
</TABLE>
See accompanying notes.
5
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VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
Vencor Inc. (the "Company") operates an integrated network of healthcare
services in 46 states primarily focused on the needs of the elderly. At March
31, 1999, the Company operated 293 nursing centers (38,585 licensed beds), 57
long-term acute care hospitals (4,937 licensed beds), and a contract services
business ("Vencare") which primarily provided respiratory and rehabilitation
therapies, medical services and pharmacy management services to both Company-
operated and non-affiliated nursing centers.
In January 1998, the Board of Directors of Ventas, Inc. ("Ventas") (formerly
known as Vencor, Inc.) authorized its management to proceed with a plan to
separate Ventas into two publicly held corporations, one to operate the
nursing center, hospital and ancillary services businesses and the other to own
substantially all of the real property of Ventas and to lease such real property
to a new operating company (the "Reorganization Transactions"). On April 30,
1998, Ventas completed the spin off of its healthcare operations from its real
estate holdings through the distribution of the common stock of Vencor on a one-
for-one basis to stockholders of record of Ventas as of April 27, 1998 (the
"Distribution"). The Distribution was consummated on May 1, 1998 (the
"Distribution Date"). For accounting purposes, the consolidated historical
financial statements of Ventas became the historical financial statements of the
Company after the Distribution Date. Any discussion concerning events prior to
the Distribution Date refers to the Company's business as it was conducted prior
to the Reorganization Transactions.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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.
The accompanying unaudited condensed consolidated financial statements do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
1998 filed with the Securities and Exchange Commission on Form 10-K.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Notes 2 and 5, all such
adjustments are of a normal and recurring nature.
The accompanying condensed consolidated financial statements have been
prepared on the basis of accounting principles applicable to going concerns and
contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of uncertainties discussed
herein.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2 -- ACCOUNTING CHANGE
Effective January 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), which requires the Company to
expense start-up costs, including organizational costs, as incurred. In
accordance with the provisions of SOP 98-5, the Company wrote off $8.9 million
of such unamortized costs as a cumulative effect of change in accounting
principle in the first quarter of 1999. The pro forma effect of the change in
accounting for start-up costs, assuming the change occurred on January 1, 1998,
was not significant.
6
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VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion bank credit facility (the "Credit Agreement"). Namely, the
covenants regarding minimum net worth, total leverage ratio, senior leverage
ratio and fixed charge coverage ratio were not satisfied at December 31, 1998.
Following discussions with the Company's lead banks, the Company sought a
temporary waiver of these covenant violations. On February 3, 1999, the Company
announced that it had obtained the necessary approval from its bank lending
group (the "Senior Lenders") to secure a covenant waiver related to the Credit
Agreement through March 31, 1999. The waiver included certain borrowing
limitations under the $300 million revolving credit portion of the Credit
Agreement (the "Revolving Credit Facility"). Aggregate borrowings under the
Revolving Credit Facility initially were limited to $37.5 million and
subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million to $125 million. 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 May 13, 1999, there were approximately $23 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 four
master lease agreements (the "Master Lease Agreements"), the obligation to
continue funding under the Revolving Credit Facility will be frozen. In
addition, if the Company pays, or a right of setoff is asserted by the
appropriate third party payor seeking to recoup, reimbursement overpayments in
excess of $10 million, the obligation to continue funding under the Revolving
Credit Facility also will be frozen. The waiver also places additional
informational requirements and minimum daily census level requirements on the
Company's nursing centers and hospitals. The Company's failure to comply with
those covenants would result in the termination of the waiver.
In addition, the Company was informed on April 9, 1999 by the Health Care
Financing Administration ("HCFA") that the Medicare program had made a demand
for repayment of approximately $90 million of reimbursement overpayments by
April 23, 1999. On April 21, 1999, the Company announced that it had reached an
agreement with HCFA to extend the repayment of such amounts over 60 monthly
installments. Under the agreement, monthly payments of approximately $1.5
million commenced on May 8, 1999. After November 1999, the remaining balance of
the overpayments will bear interest at a statutory rate applicable to Medicare
overpayments, as in effect on November 30, 1999. Assuming that the current rate
of 13.375% is in effect on November 30, 1999, the monthly payment amount will be
approximately $2.0 million through March 2004. If the Company is delinquent
with two consecutive payments under the repayment plan, the plan will be
defaulted and all subsequent Medicare reimbursement payments to the Company will
be withheld. Amounts due to HCFA after one year aggregating $74.9 million have
been classified as long-term debt in the Company's consolidated balance sheet at
March 31, 1999.
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
7
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VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY (Continued)
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 97/8%
Guaranteed Senior 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.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The indenture under which
the 1998 Notes were issued provides for a 30-day grace period before an event of
default will occur due to the nonpayment of interest. If the interest payment
is not made within the 30-day grace period, the 1998 Notes may be declared
immediately due and payable. If the debt under the Credit Agreement has not
been accelerated, the 1998 Notes may not be accelerated until five days after
notice is given to the Senior Lenders.
If the Senior Lenders or holders of the 1998 Notes elect to exercise their
rights to accelerate the obligations under the Credit Agreement and the 1998
Notes (assuming the payment default is not cured), or if the Senior Lenders do
not continue to provide a covenant waiver, such events would have a material
adverse effect on the Company's liquidity and financial position. Under such
circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults with respect
to the Credit Agreement and the 1998 Notes, there can be no assurance that the
Company would succeed in formulating and consummating an acceptable alternative
financial structure. Under such circumstances, the Company likely would be
forced to file for protection under Chapter 11 of the Federal Bankruptcy Code
(the "Bankruptcy Code").
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($455 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's consolidated
balance sheet at March 31, 1999 and the Company has a deficit in working capital
aggregating $620 million. The financial statements do not include further
adjustments, if any, reflecting the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of these uncertainties.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the
Reorganization Transactions (the "Reorganization Agreement"). The Company is
seeking a reduction in rent and other concessions under the Master Lease
Agreements. 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 provided for the structured payment of approximately
$18.5 million of rental payments initially due on April 1. The Company paid $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 provided 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 complied with
the structured payment terms. The Second Standstill was scheduled to terminate
on May 5, 1999. The Company and Ventas also agreed that any statutes of
limitations or other time-related constraints in a bankruptcy or other
proceeding that might be asserted by one party against the other will be
extended and tolled from April 12, 1999 until May 5, 1999 or until the
termination of the Second Standstill (the "Tolling Agreement").
8
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 -- ISSUES AFFECTING LIQUIDITY (Continued)
On May 5, 1999, the parties agreed to extend the Second Standstill through
May 7, 1999. The parties initially did not extend the Tolling Agreement. On May
10, 1999, the Company announced that it did not pay the approximately $19
million in rent to Ventas that was due on May 7, 1999. Although Ventas served
the Company with notices of nonpayment under the Master Lease Agreements, the
parties subsequently entered into further amendments to the Second Standstill
and the Tolling Agreement extending the time during which no remedies may be
pursued by either party until June 6, 1999 and extending until June 11, 1999,
the date by which the Company may cure its failure to pay the May rent.
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may serve Ventas with a demand for arbitration
pursuant to the Reorganization Agreement with respect to claims by the Company
against Ventas arising out of the Reorganization Transactions and seek a
temporary restraining order or other interim judicial or arbitral relief barring
Ventas from exercising any remedies based on the Company's failure to pay some
or all of the rent to Ventas, pending final resolution of such arbitration.
Under such circumstances, the Company's continued failure to pay rent, in the
absence of such temporary restraining order or other interim relief, would
result in an "Event of Default" under the Master Lease Agreements. Upon an
Event of Default under the Master Lease Agreements, the remedies available to
Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (1) remain liable
for all obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (2) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements. Such
a failure to pay rent also would result in a credit freeze under the current
bank waiver. Considering the Company's limited financial resources, the existing
defaults under the Credit Agreement and the 1998 Notes, and 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.
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 and a reduction in the rents paid by the Company to Ventas. The Company
also intends to negotiate with the holders of the 1998 Notes as part of this
effort. Despite the Company's efforts, there can be no assurance that these
discussions will produce a sustainable capital structure.
NOTE 4 -- 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 first quarter revenues by payor type follows (in thousands):
1999 1998
-------- --------
Medicare............................................. $249,329 $298,837
Medicaid............................................. 211,112 208,406
Private and other.................................... 273,996 343,085
-------- --------
734,437 850,328
Elimination.......................................... (34,205) (27,012)
-------- --------
$700,232 $823,316
======== ========
9
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VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5 -- UNUSUAL TRANSACTIONS
In the first quarter of 1999, the Company recorded $2.3 million of
professional fees incurred in connection with its capital restructuring
activities. Operating income in the first quarter of 1998 was reduced by $7.7
million of professional fees incurred in connection with the Reorganization
Transactions. These transactions are included in other operating expenses in
the condensed consolidated statement of operations for the respective periods in
which they were recorded.
NOTE 6 -- BUSINESS SEGMENT DATA
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 three operating segments excludes
allocations of corporate overhead.
First Quarter
------------------------------
1999 1998
---------- ----------
(In thousands)
Revenues:
Nursing centers........................ $ 382,041 $ 434,190
Hospitals.............................. 238,522 246,365
Vencare................................ 113,874 169,773
---------- ----------
734,437 850,328
Elimination............................ (34,205) (27,012)
---------- ----------
$ 700,232 $ 823,316
========== ==========
Income (loss) from operations:
Operating income (loss):
Nursing centers.................... $ 59,122 $ 62,447
Hospitals.......................... 58,411 77,650
Vencare............................ 14,574 26,892
Corporate overhead................. (27,773) (27,347)
Unusual transactions............... (2,312) (7,664)
---------- ----------
Operating income............... 102,022 131,978
Rent............................... 75,452 24,135
Depreciation and amortization...... 22,285 35,470
Interest, net...................... 18,905 36,015
---------- ----------
Income (loss) before income taxes.. (14,620) 36,358
Provision for income taxes......... 50 17,477
---------- ----------
$ (14,670) $ 18,881
========== ==========
March 31, 1999 December 31, 1998
-------------- -----------------
Assets:
Nursing centers...................... $ 591,151 $ 594,727
Hospitals and Vencare................ 812,976 845,483
Corporate............................ 270,099 277,680
---------- ----------
$1,674,226 $1,717,890
========== ==========
10
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7 -- INCOME TAXES
The provision for income taxes in the first quarter of 1999 is based upon
management's estimate of taxable income (loss) for the year and includes the
effect of certain non-deductible items such as goodwill amortization and the
recording of additional deferred tax valuation allowances.
During the fourth quarter of 1998, the Company recorded a deferred tax
valuation allowance aggregating $203 million. The allowance was recorded based
upon management's belief that the Company was unlikely to generate sufficient
taxable income to realize the net deferred tax assets recorded at December 31,
1998. The provision for income taxes in the first quarter of 1999 includes a
deferred tax valuation loss of $1.9 million. In addition, the Company recorded
a valuation allowance of $3.4 million related to the change in accounting for
start-up costs. The deferred tax valuation allowance included in the condensed
consolidated balance sheet at March 31, 1999 totaled $208 million.
NOTE 8 -- LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow:
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. On March 31, 1999, the Company and
Ventas entered into the Standstill Agreement which provided that both companies
would postpone through April 12, 1999 any claims either may have against the
other, including any claims that Ventas would have for the Company's decision
not to pay rent due on April 1, 1999. The Standstill Agreement was entered into
in furtherance of the discussions between the Company and Ventas concerning
possible reductions in the rental payments and other concessions under the
Master Lease Agreements. On April 12, 1999, the Company and Ventas entered into
the Second Standstill which provided for the structured payment of approximately
$18.5 million of rental payments initially due on April 1. The Company paid
$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 provided 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 complied with
the structured payment terms. The Second Standstill was scheduled to terminate
on May 5, 1999. Pursuant to the Tolling Agreement, the Company and Ventas also
agreed that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other will be extended and tolled from April 12, 1999 until May 5, 1999 or until
the termination of the Second Standstill. On May 5, 1999, the parties agreed to
extend the Second Standstill through May 7, 1999. The parties initially did not
extend the Tolling Agreement. On May 10, 1999, the Company announced that it did
not pay the approximately $19 million in rent to Ventas that was due on May 7,
1999. Although Ventas served the Company with notices of nonpayment under the
Master Lease Agreements, the parties subsequently entered into further
amendments to the Second Standstill and the Tolling Agreement extending the time
during which no remedies may be pursued by either party until June 6, 1999 and
extending until June 11, 1999, the date by which the Company may cure its
failure to pay the May rent. If the parties are unable to resolve their
disputes or maintain an interim resolution, the Company's failure to pay the
rent, in the absence of a temporary restraining order or other interim relief,
would result in an Event of Default under the Master Lease Agreements. Upon an
Event of Default under the Master Lease Agreements, the remedies available to
Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (1) remain liable
for all obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (2) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements.
11
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (Continued)
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, pursuant to a management agreement. The
Company remains financially responsible for the Facility's operations under the
management agreement.
The Company's subsidiary, TheraTx, Incorporated ("TheraTx"), is a plaintiff
in a declaratory judgment action entitled TheraTx, Incorporated v. James W.
Duncan, Jr., et al. currently pending in the United States District Court for
the Northern District of Georgia. The defendants have asserted counterclaims
against TheraTx under breach of contract, securities fraud, negligent
misrepresentation and fraud theories for allegedly not performing as promised
under a merger agreement related to TheraTx's purchase of a company called
PersonaCare, Inc. and for allegedly failing to inform the
defendants/counterclaimants prior to the merger that TheraTx's possible
acquisition of Southern Management Services, Inc. might cause the suspension of
TheraTx's shelf registration under relevant rules of the Securities and Exchange
Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled 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 has appealed the court's rulings against TheraTx.
The Company is pursuing various claims against private insurance companies
who issued Medicare supplement insurance policies to individuals who became
patients of the Company's hospitals. After the patients' Medicare benefits are
exhausted, the insurance companies become liable to pay the insureds' bills
pursuant to the terms of these policies. The Company has filed numerous
collection actions against various of these insurers to collect the difference
between what Medicare would have paid and the hospitals' usual and customary
charges. These disputes arise from differences in interpretation of the policy
provisions and certain Federal and state regulations governing such policies.
Various courts have issued various rulings on the different issues, most of
which have been appealed. The Company intends to continue to pursue these
claims vigorously. If the Company does not prevail on these issues, future
results of operations may be materially adversely affected.
The Company received notice in June 1998 that the State of Georgia found
regulatory violations with respect to patient discharges, among other things, at
one of the Company's nursing centers in Savannah, Georgia. The state
recommended a Federal fine of $543,000 for these violations, which HCFA has
imposed. The Company has appealed this fine.
12
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (Continued)
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 a Tampa nursing center operated by the
Company and other residents in the Company's nursing centers nationwide. The
complaint alleges various breaches of contract, and statutory and regulatory
violations including violations of Federal and state RICO statutes. The
original complaint has been amended to delineate several purported subclasses.
The plaintiffs seek class certification, unspecified damages, attorneys' fees
and costs. The 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 (the "Exchange Act"), by, among other things,
issuing to the investing public a series of false and misleading statements
concerning the Company's current operations and the inherent value of the
Company's common stock. The complaint further alleges that as a result of these
purported false and misleading statements concerning the Company's revenues and
successful acquisitions, the price of the Company's common stock was
artificially inflated. In particular, the complaint alleges that the Company
issued false and misleading financial statements during the first, second and
third calendar quarters of 1997 which misrepresented and understated the impact
that changes in Medicare reimbursement policies would have on the Company's core
services and profitability. The complaint further alleges that the Company
issued a series of materially false statements concerning the purportedly
successful integration of its recent acquisitions and prospective earnings per
share for 1997 and 1998 which the Company knew lacked any reasonable basis and
were not being achieved. The suit seeks damages in an amount to be proven at
trial, pre-judgment and post-judgment interest, reasonable attorneys' fees,
expert witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has an
effective remedy. On January 22, 1999, the court granted the Company's motion to
dismiss the case. The plaintiff has appealed the dismissal to the United States
Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). The Company is
defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by engaging
in violations of the securities laws, engaging in insider trading, fraud and
securities fraud and damaging the reputation of the Company and Ventas. The
plaintiff asserts that such actions were taken deliberately, in bad faith and
constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., discussed
above. The suit seeks unspecified damages, interest, punitive damages,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the Company and Ventas have an effective remedy. On March 19, 1999,
the parties agreed to stay all proceedings in the action pending the resolution
of the appeal currently before the Sixth Circuit for the Helwig case described
above. The Company believes that the allegations in the complaint are without
merit and intends to defend this action vigorously.
13
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (Continued)
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a class
consisting of all persons who sold shares of Transitional Hospitals Corporation
("Transitional") common stock during the period from February 26, 1997 through
May 4, 1997, inclusive. The complaint alleges that Transitional purchased
shares of its common stock from members of the investing public after it had
received a written offer to acquire all of Transitional's common stock and
without making the required disclosure that such an offer had been made. The
complaint further alleges that defendants disclosed that there were "expressions
of interest" in acquiring Transitional when, in fact, at that time, the
negotiations had reached an advanced stage with actual firm offers at
substantial premiums to the trading price of Transitional's stock having been
made which were actively being considered by Transitional's Board of Directors.
The complaint asserts claims pursuant to Sections 10(b), 14(e) and 20(a) of the
Exchange Act, and common law principles of negligent misrepresentation and names
as defendants Transitional as well as certain former senior executives and
directors of Transitional. The plaintiff seeks class certification, unspecified
damages, attorneys' fees and costs. 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 is defending
this action vigorously.
The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a civil qui tam lawsuit which was filed in the United States District Court for
the Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice (the "DOJ") has intervened in the suit which
was brought under the Federal Civil False Claims Act. AXR provided portable X-
ray services to nursing facilities (including those operated by the Company) and
other healthcare providers. The Company acquired an interest in AXR when The
Hillhaven Corporation ("Hillhaven") was merged into the Company in September
1995 and purchased the remaining interest in AXR in February 1996. The civil
suit alleges that AXR submitted false claims to the Medicare and Medicaid
programs. The suit seeks damages in an amount of not less than $1,000,000,
treble damages and civil penalties. In a related criminal investigation, the
United States Attorney's Office for the Eastern District of Arkansas indicted
four former employees of AXR; those individuals were convicted of various fraud
related counts in January 1999. AXR had been informed previously that it was
not a target of the criminal investigation, and AXR was not indicted. The
Company cooperated fully in the criminal investigation. The Company is
defending vigorously the qui tam action.
On June 6, 1997, Transitional announced that it had been advised that it was
the target of a Federal grand jury investigation being conducted by the United
States Attorney's Office for the District of Massachusetts arising from
activities of Transitional's formerly owned dialysis business. The
investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon Corporation
and Transitional. Transitional spun off its dialysis business, now called
Vivra, Incorporated, on September 1, 1989. In January 1998, the Company was
informed that no criminal charges would be filed against the Company. In March
1998, the Company was added as a defendant to a previously pending qui tam
lawsuit against the other partners related to the partnership's former Medicare
billing practices. The Company has moved to dismiss the action. The Company
intends to defend vigorously the action.
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 million in earnout compensation
from TheraTx's purchase
14
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8 -- LITIGATION (Continued)
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 DOJ that it is the subject of ongoing
investigations into various Medicare reimbursement issues, including various
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in its hospitals and nursing centers. The Company is cooperating
fully in the investigations. The Company is engaged in active discussions with
the DOJ which may result in a resolution of some or all of the DOJ
investigations. Such a resolution could include a payment to the government
which could have a material adverse effect on the Company's liquidity and
financial position.
In connection with the Reorganization Transactions, liabilities arising from
various legal proceedings and other actions were assumed by the Company and the
Company agreed to indemnify Ventas against any losses, including any costs or
expenses, it may incur arising out of or in connection with such legal
proceedings and other actions. The indemnification provided by the Company also
covers losses, including costs and expenses, which may arise from any future
claims asserted against Ventas based on the former healthcare operations of
Ventas. In connection with its indemnification obligation, the Company has
assumed the defense of various legal proceedings and other actions.
The Company is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is unable to predict
the ultimate outcome of pending litigation and regulatory investigations. In
addition, there can be no assurance that HCFA or other regulatory agencies will
not initiate additional investigations related to the Company's business in the
future, nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position. In addition, the above litigation and investigations (as
well as future litigation and investigations) are expected to consume the time
and attention of senior management and may have a disruptive effect upon the
Company's operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
Certain statements made in this Form 10-Q, including, but not limited to,
statements containing the words "anticipates," "believes," "expects," "intends,"
"will," "may" and similar words constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements are based on management's current expectations and include
known and unknown risks, uncertainties and other factors, many of which the
Company is unable to predict or control, that may cause the Company's actual
results or performance to differ materially from any future results or
performance expressed or implied by such forward-looking statements. These
statements involve risks, uncertainties and other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission. Such
factors may include, without limitation, the Company's ability to amend or
refinance its existing debt and lease obligations or otherwise adjust its
current financial structure, the increase in the Company's cost of borrowing,
its ability to attract patients and the effects of healthcare reform and
legislation on the Company's business strategy and operations. The Company
cautions investors that any forward-looking statements made by the Company are
not guarantees of the future performance. The Company disclaims any obligation
to update any such factors or to announce publicly the results of any revisions
to any of the forward-looking statements included herein to reflect future
events or developments.
Background Information
The Business Segment Data in Note 6 of the Notes to Condensed Consolidated
Financial Statements should be read in conjunction with the following discussion
and analysis.
The accompanying condensed consolidated financial statements have been
prepared on the basis of accounting principles applicable to going concerns and
contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include further adjustments, if any, reflecting the possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of uncertainties discussed
herein.
General
The Company is one of largest providers of long-term healthcare services in
the United States. At March 31, 1999, the Company operated 293 nursing centers
(38,585 licensed beds), 57 long-term acute care hospitals (4,937 licensed beds),
and its Vencare ancillary services business which provided respiratory and
rehabilitation therapies, medical services and pharmacy management services to
both Company-operated and non-affiliated nursing centers.
In January 1998, the Board of Directors of Ventas (formerly known as Vencor,
Inc.) authorized its management to proceed with a plan to separate Ventas into
two publicly held corporations, one to operate the nursing center, hospital and
ancillary services businesses and the other to own substantially all of the real
property of Ventas and to lease such real property to a new operating company.
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 consummated on May 1, 1998. In connection with the
Reorganization Transactions, the Company continues to manage and operate the
real property which it leases from Ventas pursuant to the Master Lease
Agreements. For accounting purposes, the consolidated historical financial
statements of Ventas became the historical financial statements of the Company
after the Distribution Date. Any discussion concerning the events prior to the
Distribution Date refers to the Company's business as it was conducted prior to
the Reorganization Transactions.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
Nursing Center Division
Revenues declined 12% to $382 million in the first quarter of 1999 from $434
million in the same period last year. On a same-store basis, revenues declined
8%. The new Prospective Payment System ("PPS"), which became effective July 1,
1998, had a negative impact on nursing center Medicare revenues. First quarter
Medicare revenues per patient day declined 21% to $280 from $356 in the first
quarter of 1998. The revenue decline also was attributable to a 1% decline in
same-store patient days and a deterioration in the mix of patient days by payor
type. The percentage of Medicaid patient days (for which reimbursement rates
generally are less than Medicare and private) increased to 65% of total patient
days compared to 64% last year.
Operating income declined 5% to $59 million in the first quarter of 1999
compared to $62 million for the same period of 1998. The decline in operating
income was primarily attributable to reduced occupancy levels and deterioration
in patient mix. Overall occupancy levels were 87.0% and 88.6%, respectively.
Despite a decline in revenues and operating income, operating margins improved
in the first quarter of 1999 to 15.5% from 14.4% in the same quarter of the
prior year. The improvement in operating margins resulted primarily from lower
ancillary service costs. Total operating costs per patient day declined to $112
in the first quarter of 1999 compared to $122 for the same period a year ago.
Hospital Division
Revenues declined 3% to $239 million from $246 million in the first quarter
of 1998. While same-store patient days increased 2% in the first quarter of
1999, the decline in revenues resulted primarily from reductions in Medicare
reimbursement.
The Balanced Budget Act of 1997 (the "Budget Act") reduced Medicare
reimbursements to the Company's hospitals related to certain incentive payments,
allowable bad debts and capital costs, and payments for services to patients
transferred from general acute care hospitals. These reimbursement changes,
which became effective at various dates beginning in the fourth quarter of 1997,
reduced first quarter 1999 revenues by $9 million compared to the first quarter
of 1998. 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 declined 25% to $58 million in the first quarter of 1999
from $78 million last year. Operating margins were 24.5% and 31.5%,
respectively. Although operating costs per patient day did not increase
significantly in the first quarter of 1999 compared to last year, operating
margins were impacted adversely by the previously discussed Medicare
reimbursement reductions.
Operating income includes the Company's equity in the operations of
Behavioral Healthcare Corporation ("BHC"), of which the Company owns a 44%
voting interest. In the first quarter of 1999, the Company recorded a loss of
$2.0 million in connection with the operations of BHC, compared to income of
$800,000 for the same period of the prior year.
Vencare Ancillary Services Division
Revenues declined 33% to $114 million in the first quarter of 1999 from $170
million in the same quarter of 1998. Revenues from respiratory therapy declined
71% to $13 million, rehabilitation therapy revenues declined 29% to $50 million
and pharmacy revenues increased 15% to $46 million. Revenues related to other
Vencare services, including home health, hospice and diagnostic services,
declined to $5 million from $15 million last year. During 1998, the Company
sold or disposed of most of these businesses.
Vencare provides ancillary services to both Company-operated and non-
affiliated nursing centers. While all of the Company's nursing centers were
subject to PPS on July 1, 1998, most of its non-affiliated customers became
subject to PPS in January 1999. Under PPS, Medicare reimbursement to nursing
centers was changed from a system based upon reasonable direct and indirect
cost of providing care to patients to one in which nursing centers
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Vencare Ancillary Services Division (Continued)
receive a fixed per diem payment to cover substantially all services provided to
patients, including ancillary services such as respiratory, rehabilitation,
speech and occupational therapies and certain covered pharmaceuticals.
Management believes that the decline in demand for its Vencare services,
particularly respiratory and rehabilitation therapies, is attributable mostly to
efforts by nursing center customers to reduce operating costs. In addition, as
a result of these regulatory changes, many nursing centers may elect to provide
ancillary services to their patients through internal staff and may no longer
contract with outside parties for ancillary services.
Operating income declined 46% to $15 million in the first quarter of 1999
from $27 million last year. Operating income during the first quarter of 1999
was impacted adversely by a significant decline in demand for respiratory and
rehabilitation therapies. Management believes that such declines in demand will
continue in 1999 as most Vencare customers convert to PPS. Accordingly, the
Company believes that Vencare operating income in 1999 could decline materially.
Corporate Overhead
Operating income for the Company's three operating divisions excludes
allocations of corporate overhead. These costs aggregate $28 million and $27
million in the first quarters of 1999 and 1998, respectively. As a percentage
of revenues (before elimination), corporate overhead totaled 3.8% and 3.2%,
respectively.
Unusual Transactions
Operating results for both periods include certain unusual transactions. In
the first quarter of 1999, the Company recorded $2.3 million of professional
fees incurred in connection with its capital restructuring activities.
Operating income in the first quarter of 1998 was reduced by $7.7 million of
professional fees incurred in connection with the Reorganization Transactions.
These transactions are included in other operating expenses in the condensed
consolidated statement of operations for the respective periods in which they
were recorded.
Capital Costs
Upon completion of the Reorganization Transactions, the Company leased
substantially all of its facilities. Prior thereto, the Company owned 271
facilities and leased 80 facilities from third parties. Depreciation and
amortization, rent and net interest costs aggregated $117 million in the first
quarter of 1999 compared to $96 million for the same period last year. Rent
expense in the first quarter of 1999 included $56 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 the first quarter of
1999, including the impact of reduced depreciation and interest costs, were
increased by approximately $28 million as a result of the Reorganization
Transactions.
In connection with the Reorganization Transactions in 1998, approximately
$992 million of long-term debt was retained by Ventas.
Income Taxes
The provision for income taxes in the first quarter of 1999 is based upon
management's estimate of taxable income (loss) for the year and includes the
effect of certain non-deductible items such as goodwill amortization and the
recording of additional deferred tax valuation allowances.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Income Taxes (Continued)
During the fourth quarter of 1998, the Company recorded a deferred tax
valuation allowance aggregating $203 million. The allowance was recorded based
upon management's belief that the Company was unlikely to generate sufficient
taxable income to realize the net deferred tax assets recorded at December 31,
1998. The provision for income taxes in the first quarter of 1999 includes a
deferred tax valuation loss of $1.9 million. In addition, the Company recorded
a valuation allowance of $3.4 million related to the change in accounting for
start-up costs. The deferred tax valuation allowance included in the condensed
consolidated balance sheet at March 31, 1999 totaled $208 million.
Consolidated Results
The Company reported a pretax loss from operations of $15 million in the
first quarter of 1999 compared to income of $36 million in the first quarter of
1998.
The net loss from operations in the first three months of 1999, including the
impact of the deferred tax valuation allowance, aggregated $15 million. Net
income from operations in the first quarter a year ago aggregated $19 million.
Effective January 1, 1999, the Company adopted the provisions of SOP 98-5,
"Reporting on the Costs of Start-Up Activities," which requires the Company to
expense start-up costs, including organizational costs, as incurred. In
accordance with the provisions of SOP 98-5, the Company wrote off $8.9 million
of such unamortized costs as a cumulative effect of change in accounting
principle in the first quarter of 1999. The pro forma effect of the change in
accounting for start-up costs, assuming the change occurred on January 1, 1998,
was not significant.
Liquidity
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion Credit Agreement. Namely, the covenants regarding minimum net
worth, total leverage ratio, senior leverage ratio and fixed charge coverage
ratio were not satisfied at December 31, 1998. Following discussions with the
Company's lead banks, the Company sought a temporary waiver of these covenant
violations. On February 3, 1999, the Company announced that it had obtained the
necessary approval from its Senior Lenders to secure a covenant waiver related
to the Credit Agreement through March 31, 1999. The waiver included certain
borrowing limitations under the $300 million Revolving Credit Facility.
Aggregate borrowings under the Revolving Credit Facility initially were limited
to $37.5 million and subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million 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 May 13, 1999, there were approximately $23 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
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
continue funding under the Revolving Credit Facility will be frozen. In
addition, if the Company pays, or a right of setoff is asserted by the
appropriate third party payor seeking to recoup, reimbursement overpayments in
excess of $10 million, the obligation to continue funding under the Revolving
Credit Facility also will be frozen. The waiver also places additional
informational requirements and minimum daily census level requirements on the
Company's nursing centers and hospitals. The Company's failure to comply with
those covenants would result in the termination of the waiver.
In addition, the Company was informed on April 9, 1999 by HCFA that the
Medicare program had made a demand for repayment of approximately $90 million of
reimbursement overpayments by April 23, 1999. On April 21, 1999, the Company
announced that it had reached an agreement with HCFA to extend the repayment of
such amounts over 60 monthly installments. Under the agreement, monthly payments
of approximately $1.5 million commenced on May 8, 1999. After November 1999, the
remaining balance of the overpayments will bear interest at a statutory rate
applicable to Medicare overpayments, as in effect on November 30, 1999. Assuming
that the current rate of 13.375% is in effect on November 30, 1999, the monthly
payment amount will be approximately $2.0 million through March 2004. If the
Company is delinquent with two consecutive payments under the repayment plan,
the plan will be defaulted and all subsequent Medicare reimbursement payments to
the Company will be withheld. Amounts due to HCFA after one year aggregating
$74.9 million have been classified as long-term debt in the Company's
consolidated balance sheet at March 31, 1999.
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 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.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The indenture under which
the 1998 Notes were issued provides for a 30-day grace period before an event of
default will occur due to the nonpayment of interest. If the interest payment
is not made within the 30-day grace period, the 1998 Notes may be declared
immediately due and payable. If the debt under the Credit Agreement has not
been accelerated, the 1998 Notes may not be accelerated until five days after
notice is given to the Senior Lenders.
If the Senior Lenders or holders of the 1998 Notes elect to exercise their
rights to accelerate the obligations under the Credit Agreement and the 1998
Notes (assuming the payment default is not cured), or if the Senior Lenders do
not continue to provide a covenant waiver, such events would have a material
adverse effect on the Company's liquidity and financial position. Under such
circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults with respect
to the Credit Agreement and the 1998 Notes, there can be no assurance that the
Company would succeed in formulating and consummating an acceptable alternative
financial structure. Under such circumstances, the Company likely would be
forced to file for protection under Chapter 11 of the Bankruptcy Code.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($455 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's consolidated
balance sheet at March 31, 1999 and the Company has a deficit in working capital
aggregating $620 million. The financial statements do not include further
adjustments, if any, reflecting the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of these uncertainties
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. The Company is seeking a reduction in
rent and other concessions under the Master Lease Agreements. In view of
ongoing discussions, on March 31, 1999, the Company and Ventas entered into the
Standstill Agreement which provided that both companies would postpone through
April 12, 1999 any claims either may have against the other, including any
claims that Ventas would have for the Company's decision not to pay rent due on
April 1, 1999. On April 12, 1999, the Company and Ventas entered into the
Second Standstill which provided for the structured payment of approximately
$18.5 million of rental payments initially due on April 1. The Company paid $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 provided 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 complied with
the structured payment terms. The Second Standstill was scheduled to terminate
on May 5, 1999. Pursuant to the Tolling Agreement, the Company and Ventas also
agreed that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other will be extended and tolled from April 12, 1999 until May 5, 1999 or until
the termination of the Second Standstill.
On May 5, 1999, the parties agreed to extend the Second Standstill through
May 7, 1999. The parties initially did not extend the Tolling Agreement. On May
10, 1999, the Company announced that it did not pay the approximately $19
million in rent to Ventas that was due on May 7, 1999. Although Ventas served
the Company with notices of nonpayment under the Master Lease Agreements, the
parties subsequently entered into further amendments to the Second Standstill
and the Tolling Agreement extending the time during which no remedies may be
pursued by either party until June 6, 1999 and extending until June 11, 1999,
the date by which the Company may cure its failure to pay the May rent.
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may serve Ventas with a demand for arbitration
pursuant to the Reorganization Agreement with respect to claims by the Company
against Ventas arising out of the Reorganization Transactions and seek a
temporary restraining order or other interim judicial or arbitral relief barring
Ventas from exercising any remedies based on the Company's failure to pay some
or all of the rent to Ventas, pending final resolution of such arbitration.
Under such circumstances, the Company's continued failure to pay rent, in the
absence of such temporary restraining order or other interim relief, would
result in an "Event of Default" under the Master Lease Agreements. Upon an
Event of Default under the Master Lease Agreements, the remedies available to
Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (1) remain liable
for all obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (2) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements. Such
a failure to pay rent also would result in a credit freeze under the current
bank waiver. Considering the Company's limited financial resources, the existing
defaults under the Credit Agreement and the 1998 Notes, and 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.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
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 and a reduction in the rents paid by the Company to Ventas. The Company
also intends to negotiate with the holders of the 1998 Notes as part of this
effort. Despite the Company's efforts, there can be no assurance that these
discussions will produce a sustainable capital structure.
Cash provided by operations in the first quarter of 1999 aggregated $6
million compared to $57 million in the same period of 1998. The decline was
primarily attributable to the 1999 operating loss and the payment of
approximately $12 million in cash in connection with the settlement of a legal
action entitled Highland Pines Nursing Center Inc., et al. v. TheraTx,
Incorporated, et al. See Note 8 of the Notes to Condensed Consolidated
Financial Statements.
Capital Resources
Capital expenditures (excluding acquisitions) for the first quarter of 1999
aggregated $24 million compared to $79 million a year ago. Planned capital
expenditures in 1999 are expected to approximate $120 million to $140 million
and include significant expenditures related to information systems and
completion of nursing center improvement projects. Management believes that its
capital expenditure program is adequate to expand, improve and equip existing
facilities.
Capital expenditures in both periods were financed primarily through
internally generated funds and, in 1998, borrowings under a bank credit
agreement. At March 31, 1999, the estimated cost to complete and equip
construction in progress approximated $28 million. There can be no assurance
that the Company will have sufficient resources to finance its capital
expenditure program in 1999.
In the first quarter of 1998, the Company expended $12 million to acquire its
former information systems outsourcer and two previously leased nursing centers.
The Company does not intend to acquire any nursing centers, hospitals or
ancillary service businesses in 1999.
Healthcare Reform
The Budget Act, enacted in August 1997, contains extensive changes to the
Medicare and Medicaid programs intended to reduce the projected amount of
increase in payments under those programs over the next five years. Under the
Budget Act, annual growth rates for Medicare will be reduced from over 10% to
approximately 7.5% for the next five years based on specific program baseline
projections from the last five years. Virtually all spending reductions will
come from providers and changes in program components. The Budget Act has
affected adversely the revenues in each of the Company's operating divisions.
The Budget Act reduced payments made to the Company's hospitals by reducing
incentive payments pursuant to the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), allowable costs for capital expenditures and bad debts, and
payments for services to patients transferred from a 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
revenue in 1999 and may impact adversely the Company's ability to develop
additional long-term care hospitals in the future.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Healthcare Reform (Continued)
The Budget Act also established a prospective payment system for nursing
centers for cost reporting periods beginning on or after July 1, 1998. While
most nursing centers in the United States became subject to this new payment
system during the first quarter of 1999, all of the Company's nursing centers
were impacted by PPS on July 1, 1998. During the first three years, the per
diem rates for nursing centers are based on a blend of facility-specific costs
and Federal costs. Thereafter, the per diem rates will be based solely on
Federal costs. The rates for such services were made available by HCFA in May
1998. The payments received under PPS cover all services for Medicare patients
including all ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered pharmaceuticals.
The Budget Act is impacting adversely the Company's hospital division by
reducing payments previously described. The TEFRA limits will continue to have
a material adverse effect on the hospital division's results of operations in
1999. The reductions in the TEFRA incentive payments, which became effective
between May 1, 1998 and September 1, 1998 with respect to the Company's
hospitals, are having an adverse impact on hospital revenues and may impact
adversely the Company's ability to develop additional long-term care hospitals.
The revenues recorded by the Company under PPS in its nursing centers are
substantially less than the cost-based reimbursement it received before the
enactment of the Budget Act. Moreover, since the Company treats a greater
percentage of higher acuity patients than many nursing centers, the Company has
been impacted adversely since the Federal per diem rates for higher acuity
patients do not, in the Company's opinion, adequately compensate for the
additional expense and risks associated with caring for such patients.
As the nursing center industry transitions to PPS, the volume of ancillary
services provided per patient day to nursing center patients has declined and
continues to decline. As previously discussed, Medicare reimbursements to
nursing centers under PPS include substantially all services provided to
patients, including ancillary services. Management believes that the decline in
demand for its Vencare services, particularly respiratory therapy and
rehabilitation therapy, is mostly attributable to efforts by nursing center
customers to reduce operating costs. In addition, as a result of these changes,
many nursing centers may elect to provide ancillary services to their patients
through internal staff and may no longer contract with outside parties for
ancillary services. Given the importance of the ancillary services division to
the Company's profitability, there can be no assurance that the Company's
margins and its results of operations, liquidity and financial position will not
continue to be materially and adversely impacted by PPS.
There also continues to be state legislative proposals that would impose more
limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and to
make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
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
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Healthcare Reform (Continued)
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 34% and 35% for the
three months ended March 31, 1999 and 1998, respectively, while Medicaid
percentages of total revenues approximately 29% and 25% for the respective
periods.
Year 2000
The Year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the applicable
year. Without corrective action, computer programs and embedded chips could
potentially recognize the date ending in "00" as the year 1900 rather than 2000,
causing many computer applications to fail or to create erroneous results.
Certain of the Company's information technology systems ("IT") and non-IT
systems such as building infrastructure components (e.g. alarm systems, HVAC,
equipment and phone systems) and medical devices are affected by the Y2K issue.
The Company has developed a comprehensive compliance program to manage the Y2K
issue.
In response to the Y2K issue, the Company established five teams to address
Y2K issues in the following specific areas: (i) IT software and hardware; (ii)
third party relationships; (iii) facility components; (iv) medical equipment;
and (v) telephone systems. Each team is responsible for all phases of the
Company's Y2K compliance program for both IT and non-IT systems in its
designated area.
The Company's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business
assessment phase identified potential Y2K issues confronting the Company. The
inventory and assessment phase consisted of a company-wide assessment of all
facility systems and components, medical devices, and IT software and hardware.
During the remediation and testing phase, the Company is repairing, upgrading or
replacing any non-compliant IT and non-IT systems. Additionally, the Company is
performing verification and validation testing of IT and non-IT systems that
have been remediated and those the Company believes are Y2K compliant. For IT
and non-IT systems that are developed internally, the Company verifies
compliance status directly with the development staff and performs validation
testing to confirm its status. For IT and non-IT systems that are purchased
from outside vendors, the Company is requesting written assurances of compliance
directly from the vendors. When non-compliant systems are identified, the
Company will either replace, upgrade or remediate the system. The
implementation and rollout phase involves the installation of the new financial
information 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.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
All phases of the compliance program are on schedule to meet target
completion dates. 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 March 31, 1999:
- --------------------------------------------------------------------------------
Approximate Percentage
Phase Target Completion Date Completed
- --------------------------------------------------------------------------------
Business assessment May 1998 100%
- --------------------------------------------------------------------------------
Inventory and assessment December 1998 100%
- --------------------------------------------------------------------------------
Remediation and testing June 1999 85%
- --------------------------------------------------------------------------------
Implementation and rollout November 1999 60%
- --------------------------------------------------------------------------------
Post-implementation April 2000 0%
- --------------------------------------------------------------------------------
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 March 31, 1999:
---------------------------------------------------
Approximate Percentage
Designated Area Tested Y2K Compliant
---------------------------------------------------
---------------------------------------------------
IT software and hardware 75%
---------------------------------------------------
Facility components 70%
---------------------------------------------------
Medical equipment 90%
---------------------------------------------------
Telephone systems 95%
---------------------------------------------------
For Y2K issues involving third parties, the Company has separated these
issues between significant business partners (e.g. financial intermediaries and
insurance companies) and the Company's significant suppliers and vendors (e.g.
medical supplies, utilities, food, etc.). The Company has completed its
assessment of material third party relationships. The Company is using the
information from these assessments to develop and refine guidelines for
facilities to address the Y2K compliance status of local business partners and
suppliers.
At this stage in the Company's compliance program, the Company has identified
three critical risks caused by the Y2K issue: (i) unanticipated delays in the
implementation and rollout of the new financial information and patient
accounting systems; (ii) unanticipated system failures by third party
reimbursement sources including government payors and intermediaries; and (iii)
unanticipated system failures by third party suppliers and vendors which could
affect patient care.
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
completed. The Company has begun 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.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. The Company relies on these entities for accurate and
timely reimbursement of claims, often through the use of electronic data
interfaces. The Company believes that while many commercial insurance carriers
will be Y2K compliant, Federal and state agencies are more likely to have system
failures caused by Y2K issues. The Company is contacting all of its significant
reimbursement sources to determine their Y2K compliance status in order to make
a determination of this potential risk. The Company has not received assurance
that systems used by Medicare and Medicaid will be Y2K compliant. The failure
of information systems of Federal and state governmental agencies and other
third party payors could have a material adverse effect on the Company's
liquidity and financial position.
The Company also has initiated communications with its critical suppliers and
vendors. The Company is evaluating information provided by third party vendors
and is conducting limited independent testing of critical systems and
applications. In most cases, the Company is relying on information being
provided to it by such third parties. While the Company is attempting to
evaluate the information provided, there can be no assurance that in all
instances accurate information is being provided. If third party suppliers and
vendors fail to respond to the Company's request for information, the Company
may seek to procure other sources of supplies.
The Company continues to develop contingency plans to address the most
critical risks raised by the Y2K issue. These contingency plans will cover all
IT and non-IT systems for each of the five designated areas. The implementation
of the Company's new financial information and patient accounting systems is
proceeding as planned. Accordingly, the Company does not intend to remediate
other financial information and patient accounting systems that are currently in
place. If the rollout of the new financial information and patient accounting
systems experiences unanticipated delays, the Company plans to deploy additional
implementation teams to accelerate the process through the use of internal and,
if necessary and available, external personnel. As the Company contacts third
party reimbursement sources, it is developing contingency plans to receive
temporary reimbursement in the event of system failures by these entities. Such
contingency plans may include arranging for interim payments from Medicare and
submitting written requests for Medicaid payments.
The Company's contingency plans also cover failures by suppliers and vendors.
The Company's data network employs a variety of techniques such as alternative
routing, redundant equipment and dual backup to avoid system failures. Each of
the Company's facilities has a facility-specific emergency preparedness manual
to handle emergency situations such as a loss of utility services or supplies.
Local emergency plans also are being updated as Y2K related risks associated
with the facility are identified.
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 are currently estimated to be approximately $66 million, of
which the Company has expended approximately $40 million through March 31, 1999.
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 to be funded through operating
cash flows and available borrowings under the Credit Agreement. The Company
does not expect to incur any material information system costs other than the
new financial information and patient accounting systems and Y2K compliance
program during 1999.
Management's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or timely
assessed all Y2K issues or that the
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Year 2000 (Continued)
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.
Other Information
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. See Note 8 of the Notes to Condensed Consolidated
Financial Statements for a description of material litigation and regulatory
actions.
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 Quarters First
-------------------------------------------- Quarter
First Second Third Fourth Year 1999
-------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $823,316 $ 778,706 $718,115 $ 679,602 $2,999,739 $700,232
-------- --------- -------- ---------- ---------- --------
Salaries, wages and benefits........... 480,364 459,808 415,365 397,486 1,753,023 403,894
Supplies............................... 76,052 77,832 69,069 71,419 294,372 68,664
Rent................................... 24,135 59,076 75,063 75,870 234,144 75,452
Other operating expenses............... 134,922 156,736 108,097 588,317 988,072 125,652
Depreciation and amortization.......... 35,470 28,571 25,425 35,151 124,617 22,285
Interest expense....................... 37,195 28,394 22,294 19,125 107,008 19,536
Investment income...................... (1,180) (1,130) (990) (1,388) (4,688) (631)
-------- --------- -------- ---------- ---------- --------
786,958 809,287 714,323 1,185,980 3,496,548 714,852
-------- --------- -------- ---------- ---------- --------
Income (loss) before income taxes...... 36,358 (30,581) 3,792 (506,378) (496,809) (14,620)
Provision for income taxes............. 17,477 (7,129) (33,790) 99,541 76,099 50
-------- --------- -------- ---------- ---------- --------
Income (loss) from operations.......... 18,881 (23,452) 37,582 (605,919) (572,908) (14,670)
Cumulative effect of change in
accounting for start-up costs....... - - - - - (8,923)
Extraordinary loss on
extinguishment of debt, net
of income tax benefit............... - (77,937) - - (77,937) -
-------- --------- -------- ---------- ---------- --------
Net income (loss)................ 18,881 (101,389) 37,582 (605,919) (650,845) (23,593)
Preferred stock dividend
requirements......................... - (177) (266) (254) (697) (261)
-------- --------- -------- ---------- ---------- --------
Income (loss) available to
common stockholders........... $ 18,881 $(101,566) $ 37,316 $ (606,173) $ (651,542) $(23,854)
======== ========= ======== ========== ========== ========
Earnings (loss) per common share:
Basic:
Income (loss) from operations.... $ 0.28 $ (0.35) $ 0.55 $ (8.68) $ (8.39) $ (0.21)
Cumulative effect of change in
accounting for start-up costs.. - - - - - (0.13)
Extraordinary loss on
extinguishment of debt........ - (1.15) - - (1.14) -
-------- --------- -------- ---------- ---------- --------
Net income (loss)............. $ 0.28 $ (1.50) $ 0.55 $ (8.68) $ (9.53) $ (0.34)
======== ========= ======== ========== ========== ========
Diluted:
Income (loss) from operations.... $ 0.28 $ (0.35) $ 0.54 $ (8.68) $ (8.39) $ (0.21)
Cumulative effect of change in
accounting for start-up costs.. - - - - - (0.13)
Extraordinary loss on
extinguishment of debt........ - (1.15) - - (1.14) -
-------- --------- -------- ---------- ---------- --------
Net income (loss)............. $ 0.28 $ (1.50) $ 0.54 $ (8.68) $ (9.53) $ (0.34)
======== ========= ======== ========== ========== ========
Shares used in computing earnings
(loss) per common share:
Basic............................ 67,448 67,651 68,389 69,859 68,343 70,326
Diluted.......................... 67,857 67,651 68,554 69,859 68,343 70,326
</TABLE>
28
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Data
(Unaudited)
(In thousands, except statistics)
<TABLE>
<CAPTION>
1998 Quarters First
------------------------------------------------- Quarter
First Second Third Fourth Year 1999
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Nursing centers......................... $ 434,190 $ 413,600 $ 389,414 $ 384,458 $ 1,621,662 $ 382,041
Hospitals............................... 246,365 239,312 226,846 207,324 919,847 238,522
Vencare................................. 169,773 151,567 138,121 123,269 582,730 113,874
---------- ---------- ---------- ---------- ----------- ----------
850,328 804,479 754,381 715,051 3,124,239 734,437
Elimination............................. (27,012) (25,773) (36,266) (35,449) (124,500) (34,205)
---------- ---------- ---------- ---------- ----------- ----------
$ 823,316 $ 778,706 $ 718,115 $ 679,602 $ 2,999,739 $ 700,232
========== ========== ========== ========== =========== ==========
Income (loss) from operations:
Operating income (loss):
Nursing centers.................... $ 62,447 $ 49,964 $ 61,189 $ 42,975 $ 216,575 $ 59,122
Hospitals.......................... 77,650 67,328 63,774 40,231 248,983 58,411
Vencare............................ 26,892 23,125 20,840 (6,753) 64,104 14,574
Corporate overhead................. (27,347) (30,315) (26,399) (42,204) (126,265) (27,773)
Unusual transactions............... (7,664) (25,772) 6,180 (411,869) (439,125) (2,312)
---------- ---------- ---------- ---------- ----------- ----------
Operating income (loss)......... 131,978 84,330 125,584 (377,620) (35,728) 102,022
Rent............................... 24,135 59,076 75,063 75,870 234,144 75,452
Depreciation and amortization...... 35,470 28,571 25,425 35,151 124,617 22,285
Interest, net...................... 36,015 27,264 21,304 17,737 102,320 18,905
---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before income taxes.. 36,358 (30,581) 3,792 (506,378) (496,809) (14,620)
Provision for income taxes......... 17,477 (7,129) (33,790) 99,541 76,099 50
---------- ---------- ---------- ---------- ----------- ----------
$ 18,881 $ (23,452) $ 37,582 $ (605,919) $ (572,908) $ (14,670)
========== ========== ========== ========== =========== ==========
Nursing Center Data:
End of period data:
Number of nursing centers............ 305 296 292 291 293
Number of licensed beds.............. 39,960 39,094 38,578 38,362 38,585
Revenue mix %:
Medicare............................. 34 31 26 26 29 28
Medicaid............................. 41 43 47 48 45 47
Private and other.................... 25 26 27 26 26 25
Patient days:
Medicare............................. 408,002 374,244 354,285 362,437 1,498,968 380,748
Medicaid............................. 1,949,544 1,939,521 1,935,464 1,921,872 7,746,401 1,867,554
Private and other.................... 692,932 677,607 666,407 656,951 2,693,897 633,137
---------- ---------- ---------- ---------- ----------- ----------
3,050,478 2,991,372 2,956,156 2,941,260 11,939,266 2,881,439
========== ========== ========== ========== =========== ==========
Hospital Data:
End of period data:
Number of hospitals.................. 62 61 58 57 57
Number of licensed beds.............. 5,313 5,301 5,051 4,979 4,937
Revenue mix %:
Medicare............................. 60 59 62 52 59 59
Medicaid............................. 8 10 10 11 10 10
Private and other.................... 32 31 28 37 31 31
Patient days:
Medicare............................. 173,967 162,991 154,483 155,842 647,283 175,953
Medicaid............................. 28,535 31,422 30,618 30,963 121,538 29,939
Private and other.................... 45,747 43,974 43,100 45,846 178,667 49,924
---------- ---------- ---------- ---------- ----------- ----------
248,249 238,387 228,201 232,651 947,488 255,816
========== ========== ========== ========== =========== ==========
Ancillary Services Data:
Revenues:
Rehabilitation therapy............... $ 70,597 $ 60,161 $ 68,533 $ 50,719 $ 250,010 $ 49,997
Pharmacy............................. 40,058 40,248 36,394 42,923 159,623 46,080
Respiratory therapy.................. 44,135 39,803 30,161 27,069 141,168 12,604
Other................................ 14,983 11,355 3,033 2,558 31,929 5,193
---------- ---------- ---------- ---------- ----------- ----------
$ 169,773 $ 151,567 $ 138,121 $ 123,269 $ 582,730 $ 113,874
========== ========== ========== ========== =========== ==========
</TABLE>
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only significant exposure to market risk is changes in the
level of LIBOR interest rates. In this regard, changes in LIBOR interest rates
affect the interest paid on its borrowings. To mitigate the impact of
fluctuations in these interest rates, the Company generally maintains a
significant portion of its borrowings as fixed rate in nature either by
borrowing on a fixed rate long-term basis or entering into interest rate swap
transactions.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates 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 3/31/99
-------- -------- ------- -------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt, including
amounts due within one year:
Fixed rate (a)................. $ 10,649 $ 16,937 $17,763 $ 19,630 $21,638 $313,408 $400,025 $147,926
Average interest rate.......... 10.75% 10.75% 10.75% 10.75% 10.75% 9.00%
Variable rate.................. $ 5,230 $ 19,474 $61,974 $128,640 $27,700 $216,536 $459,554 $459,554
(b) Average interest rate
Interest rate derivative
financial instruments related
to debt:
Interest rate swaps:
Pay fixed/receive variable..... $200,000 $100,000 $300,000 $ 2,890
Average pay rate............... 6.4% 6.4%
(c) Average receive rate
</TABLE>
- --------------------
(a) Fixed rate indebtedness includes amounts due to HCFA approximating $90
million. Approximately $15 million of the repayment is due within one year and
is included in due to third party payors in the condensed consolidated balance
sheet. The remaining amount due after one year ($74.9 million) is included in
long-term debt in the condensed consolidated balance sheet. See Note 3 of the
Notes to Condensed Consolidated Financial Statements.
(b) Interest is payable, depending on certain leverage ratios and other
factors, at a rate of LIBOR plus 3/4% to 31/2%.
(c) The variable rate portion of the interest rate swap is 3-month LIBOR.
30
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Summary descriptions of various significant legal and regulatory activities
follow:
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. On March 31, 1999, the Company and
Ventas entered into the Standstill Agreement which provided that both companies
would postpone through April 12, 1999 any claims either may have against the
other, including any claims that Ventas would have for the Company's decision
not to pay rent due on April 1, 1999. The Standstill Agreement was entered into
in furtherance of the discussions between the Company and Ventas concerning
possible reductions in the rental payments and other concessions under the
Master Lease Agreements. On April 12, 1999, the Company and Ventas entered into
the Second Standstill which provided for the structured payment of approximately
$18.5 million of rental payments initially due on April 1. The Company paid
$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 provided that
neither party will pursue any claims against the other or any third party
related to the Reorganization Transactions as long as the Company complied with
the structured payment terms. The Second Standstill was scheduled to terminate
on May 5, 1999. Pursuant to the Tolling Agreement, the Company and Ventas also
agreed that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other will be extended and tolled from April 12, 1999 until May 5, 1999 or until
the termination of the Second Standstill. On May 5, 1999, the parties agreed to
extend the Second Standstill through May 7, 1999. The parties initially did not
extend the Tolling Agreement. On May 10, 1999, the Company announced that it did
not pay the approximately $19 million in rent to Ventas that was due on May 7,
1999. Although Ventas served the Company with notices of nonpayment under the
Master Lease Agreements, the parties subsequently entered into further
amendments to the Second Standstill and the Tolling Agreement extending the time
during which no remedies may be pursued by either party until June 6, 1999 and
extending until June 11, 1999, the date by which the Company may cure its
failure to pay the May rent. If the parties are unable to resolve their
disputes or maintain an interim resolution, the Company's failure to pay the
rent, in the absence of a temporary restraining order or other interim relief,
would result in an Event of Default under the Master Lease Agreements. Upon an
Event of Default under the Master Lease Agreements, the remedies available to
Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (1) remain liable
for all obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (2) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements.
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, pursuant to a management agreement. The
Company remains financially responsible for the Facility's operations under the
management agreement.
31
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 1. Legal Proceedings (Continued)
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 has appealed the court's rulings against TheraTx.
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 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. On March 19, 1999,
the parties agreed to stay all proceedings in the action pending the resolution
of the appeal currently before the Sixth Circuit for the Helwig case described
above. The Company believes that the allegations in the complaint are without
merit and intends to defend this action vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospitals
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a class
consisting of all persons who sold shares of Transitional 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
32
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 1. Legal Proceedings (Continued)
motion to dismiss the Section 14(e) and Section 20(a) claims, after which the
Company filed a motion for reconsideration. On March 23, 1999, the court
granted the Company's motion to dismiss all remaining claims and the case has
been dismissed. The plaintiff has appealed this ruling. The Company is
defending this action vigorously.
The Company's subsidiary, AXR, is the defendant in a civil qui tam lawsuit
which was filed in the United States District Court for the Eastern District of
Arkansas and served on the Company on July 7, 1997. The DOJ has intervened in
the suit which was brought under the Federal Civil False Claims Act. AXR
provided portable X-ray services to nursing facilities (including those operated
by the Company) and other healthcare providers. The Company acquired an
interest in AXR when 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.
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 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 DOJ that it is the subject of ongoing
investigations into various Medicare reimbursement issues, including various
hospital cost reporting issues, Vencare billing practices and various quality of
care issues in its hospitals and nursing centers. The Company is cooperating
fully in the investigations. The Company is engaged in active discussions with
the DOJ which may result in a resolution of some or all of the DOJ
investigations. Such a resolution could include a payment to the government
which could have a material adverse effect on the Company's liquidity and
financial position.
In connection with the Reorganization Transactions, liabilities arising from
various legal proceedings and other actions were assumed by the Company and the
Company agreed to indemnify Ventas against any losses, including any costs or
expenses, it may incur arising out of or in connection with such legal
proceedings and other actions. The indemnification provided by the Company also
covers losses, including costs and expenses, which may arise from any future
claims asserted against Ventas based on the former healthcare operations of
Ventas. In connection with its indemnification obligation, the Company has
assumed the defense of various legal proceedings and other actions.
The Company is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is unable to predict
the ultimate outcome of pending litigation and regulatory investigations. In
addition, there can be no assurance that HCFA or other regulatory agencies will
not initiate additional investigations related to the Company's business in the
future, nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position. In addition, the above litigation and investigations (as
well as future litigation and investigations) are expected to consume the time
and attention of senior management and may have a disruptive effect upon the
Company's operations.
33
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities
The Company reported a net loss from operations in 1998 aggregating $573
million, resulting in certain financial covenant violations under the Company's
$1.0 billion Credit Agreement. Namely, the covenants regarding minimum net
worth, total leverage ratio, senior leverage ratio and fixed charge coverage
ratio were not satisfied at December 31, 1998. Following discussions with the
Company's lead banks, the Company sought a temporary waiver of these covenant
violations. On February 3, 1999, the Company announced that it had obtained the
necessary approval from its Senior Lenders to secure a covenant waiver related
to the Credit Agreement through March 31, 1999. The waiver included certain
borrowing limitations under the $300 million Revolving Credit Facility.
Aggregate borrowings under the Revolving Credit Facility initially were limited
to $37.5 million and subsequently increased to $55 million during March.
During March 1999, the Company met with its Senior Lenders in an attempt to
amend or restructure the Credit Agreement to provide financial covenants
sustainable by the Company. On March 31, 1999, the Senior Lenders agreed to
provide the Company with an additional covenant waiver through May 28, 1999.
Pursuant to the waiver, the aggregate commitment under the Revolving Credit
Facility was permanently reduced from $300 million to $125 million. 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 May 13, 1999, there were approximately $23 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. The waiver also
places additional informational requirements and minimum daily census level
requirements on the Company's nursing centers and hospitals. The Company's
failure to comply with those covenants would result in the termination of the
waiver.
In addition, the Company was informed on April 9, 1999 by HCFA that the
Medicare program had made a demand for repayment of approximately $90 million of
reimbursement overpayments by April 23, 1999. On April 21, 1999, the Company
announced that it had reached an agreement with HCFA to extend the repayment of
such amounts over 60 monthly installments. Under the agreement, monthly
payments of approximately $1.5 million commenced on May 8, 1999. After November
1999, the remaining balance of the overpayments will bear interest at a
statutory rate applicable to Medicare overpayments, as in effect on November 30,
1999. Assuming that the current rate of 13.375% is in effect on November 30,
1999, the monthly payment amount will be approximately $2.0 million through
March 2004. If the Company is delinquent with two consecutive payments under
the repayment plan, the plan will be defaulted and all subsequent Medicare
reimbursement payments to the Company will be withheld. Amounts due HCFA after
one year aggregating $74.9 million have been classified as long-term debt in the
Company's consolidated balance sheet at March 31, 1999.
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 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.
34
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities (Continued)
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The indenture under which
the 1998 Notes were issued provides for a 30-day grace period before an event of
default will occur due to the nonpayment of interest. If the interest payment
is not made within the 30-day grace period, the 1998 Notes may be declared
immediately due and payable. If the debt under the Credit Agreement has not
been accelerated, the 1998 Notes may not be accelerated until five days after
notice is given to the Senior Lenders.
If the Senior Lenders or holders of the 1998 Notes elect to exercise their
rights to accelerate the obligations under the Credit Agreement and the 1998
Notes (assuming the payment default is not cured), or if the Senior Lenders do
not continue to provide a covenant waiver, such events would have a material
adverse effect on the Company's liquidity and financial position. Under such
circumstances, the financial position of the Company would necessitate the
development of an alternative financial structure. Considering the Company's
limited financial resources and the existence of certain defaults with respect
to the Credit Agreement and the 1998 Notes, there can be no assurance that the
Company would succeed in formulating and consummating an acceptable alternative
financial structure. Under such circumstances, the Company likely would be
forced to file for protection under Chapter 11 of the Bankruptcy Code.
As a result of the uncertainty related to the covenant defaults and
corresponding remedies described above, outstanding borrowings under the Credit
Agreement ($455 million) and the principal amount of the 1998 Notes ($300
million) are presented as current liabilities on the Company's consolidated
balance sheet at March 31, 1999 and the Company has a deficit in working capital
aggregating $620 million. The financial statements do not include further
adjustments, if any, reflecting the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of these uncertainties.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Reorganization Agreement. The Company is seeking a reduction in
rent and other concessions under the Master Lease Agreements. In view of
ongoing discussions, on March 31, 1999, the Company and Ventas entered into the
Standstill Agreement which provided that both companies would postpone through
April 12, 1999 any claims either may have against the other, including any
claims that Ventas would have for the Company's decision not to pay rent due on
April 1, 1999. On April 12, 1999, the Company and Ventas entered into the
Second Standstill which provided for the structured payment of approximately
$18.5 million of rental payments initially due on April 1. The Company paid $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 provided 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 complied with
the structured payment terms. The Second Standstill was scheduled to terminate
on May 5, 1999. Pursuant to the Tolling Agreement, the Company and Ventas also
agreed that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other will be extended and tolled from April 12, 1999 until May 5, 1999 or until
the termination of the Second Standstill.
On May 5, 1999, the parties agreed to extend the Second Standstill through
May 7, 1999. The parties initially did not extend the Tolling Agreement. On May
10, 1999, the Company announced that it did not pay the approximately $19
million in rent to Ventas that was due on May 7, 1999. Although Ventas served
the Company with notices of nonpayment under the Master Lease Agreements, the
parties subsequently entered into further amendments to the Second Standstill
and the Tolling Agreement extending the time during which no remedies may be
pursued by either party until June 6, 1999 and extending until June 11, 1999,
the date by which the Company may cure its failure to pay the May rent.
35
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 3. Defaults Upon Senior Securities (Continued)
If the Company and Ventas are unable to resolve their disputes or maintain an
interim resolution, the Company may serve Ventas with a demand for arbitration
pursuant to the Reorganization Agreement with respect to claims by the Company
against Ventas arising out of the Reorganization Transactions and seek a
temporary restraining order or other interim judicial or arbitral relief barring
Ventas from exercising any remedies based on the Company's failure to pay some
or all of the rent to Ventas, pending final resolution of such arbitration.
Under such circumstances, the Company's continued failure to pay rent, in the
absence of such temporary restraining order or other interim relief, would
result in an "Event of Default" under the Master Lease Agreements. Upon an
Event of Default under the Master Lease Agreements, the remedies available to
Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (1) remain liable
for all obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (2) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements. Such
a failure to pay rent also would result in a credit freeze under the current
bank waiver. Considering the Company's limited financial resources, the existing
defaults under the Credit Agreement and the 1998 Notes, and 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.
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 and a reduction in the rents paid by the Company to Ventas. The Company
also intends to negotiate with the holders of the 1998 Notes as part of this
effort. Despite the Company's efforts, there can be no assurance that these
discussions will produce a sustainable capital structure.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations Liquidity."
36
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 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.
10.2 Separation Agreement and Release of Claims entered into by W.
Bruce Lunsford and the Company.
10.3 Employment Agreement dated as of February 12, 1999 between Vencor
Operating, Inc. and Edward L. Kuntz.
10.4 Employment Agreement dated as of January 4, 1999 between Vencor
Operating, Inc. and Donald D. Finney.
10.5 Second Amendment to Master Lease Agreement No. 1 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.48 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.6 Second Amendment to Master Lease Agreement No. 2 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.49 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.7 Second Amendment to Master Lease Agreement No. 3 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.50 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.8 Second Amendment to Master Lease Agreement No. 4 dated April 12,
1999 by and among Ventas, Inc., Ventas Realty, Limited
Partnership, Vencor Operating, Inc. and the Company. Exhibit
10.51 to the Company's Form 10-K for the year ended December 31,
1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.9 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.
10.10 Second Standstill Agreement dated April 12, 1999 between the
Company and Ventas, Inc. Exhibit 10.57 to the Company's Form 10-K
for the year ended December 31, 1998 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.11 Tolling Agreement dated April 12, 1999 between the Company and
Ventas, Inc. Exhibit 10.58 to the Company's Form 10-K for the
year ended December 31, 1998 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.12 Amendment Number 1 to the Second Standstill Agreement dated April
12, 1999 dated as of May 5, 1999 between the Company and Ventas,
Inc.
10.13 Amendment Number 2 to the Second Standstill Agreement dated April
12, 1999 and Amendment Number 1 to the Tolling Agreement dated
April 12, 1999 dated as of May 8, 1999 between the Company and
Ventas, Inc.
27 Financial Data Schedule (included only in filings submitted under
the Electronic Data Gathering, Analysis, and Retrieval system).
37
<PAGE>
Part II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K (Continued)
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on January 25, 1999 reporting
the appointment of Edward L. Kuntz as Chairman of the Board and Chief Executive
Officer and the resignation of W. Bruce Lunsford as Chairman of the Board and
Chief Executive Officer. The Company filed a Current Report on Form 8-K on
January 26, 1999 reporting that it expected earnings for the fourth quarter,
exclusive of unusual transactions, to be substantially lower than the third
quarter of 1998. The Company also announced that it expected that reported 1998
results would be impacted adversely by certain recurring year-end adjustments
and that certain additional adjustments may be recorded in connection with asset
valuations in the fourth quarter. The Company further announced that it may be
required to renegotiate its bank credit facility since the previously discussed
operating results and adjustments would lead to covenant violations.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: May 14, 1999 /s/ EDWARD L. KUNTZ
- ------------------- -----------------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
Date: May 14, 1999 /s/ RICHARD A. SCHWEINHART
- ------------------- -----------------------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
39
<PAGE>
Exhibit 10.2
AGREEMENT
---------
This Separation Agreement and Release of Claims ("Agreement") is
entered into by W. Bruce Lunsford 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 January 22, 1999 ("Date of Termination").
2. Obligations of the Company. Following the execution of this
--------------------------
Agreement, the Company shall pay Employee his base salary through February 1,
1999 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 12), Employee shall be entitled to the
following additional payments and benefits:
(a) $550,000 representing an amount equal to 1.0 times
the Employee's base salary for 1999.
(b) $275,000 representing an amount equal to 1.0 times
the Employee's target bonus for 1999.
(c) 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, as amended, in an original principal amount of
$4,088,700 (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
-1-
<PAGE>
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.
(d) Employee shall be credited with an additional 36 months of
vesting for purposes of all outstanding stock option awards to purchase Vencor
common stock and Employee will have an additional 36 months in which to exercise
such stock options beginning on November 9, 1999.
(e) 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
February 1, 2001, the Employee shall be entitled to receive a payment of
$500,000 in immediately available funds. The payment of such amount shall be
made within 10 days of any such change in control.
(f) For a period of 36 months following the Date of Termination, the
Company shall maintain in force, at its expense, the Employee's existing
coverage 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 36 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 36 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.
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<PAGE>
(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) 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. In addition, for a period of three years following the Date of
Termination, the Company shall provide the Employee with an office suite and
administrative assistant substantially comparable to the office suite and
administrative assistant that were furnished to the Employee as of the Date of
Termination. Moreover, the Employee shall be entitled to the furniture in the
Employee's office suite as of the Date of Termination.
(l) 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.
(m) The Company shall provide Employee with assistance in preparing
his 1998 and 1999 tax returns. Such assistance also shall include the services
of the Company's outside tax advisors as is deemed necessary by the Employee.
(n) 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 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.
(o) All commitments made to Employee under paragraphs (a) and (b)
above shall be paid upon the later of 14 days from the Date of Termination or
the expiration of the seven day period referenced in Section 15.
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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<PAGE>
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.
(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
-4-
<PAGE>
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. 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 immediate family, 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.
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 aged claims before voluntarily
signing this Agreement.
-5-
<PAGE>
(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. 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.
9. 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.
10. 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.
11. Other Severance Benefits. Except as provided in this Agreement,
------------------------
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 Vencor Operating, Inc. and the Employee.
This Agreement does not affect the Employee's right to receive the benefits
accruing to the Employee under the Company's Supplemental Executive Retirement
Plan.
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<PAGE>
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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:
--------------
W. Bruce Lunsford
1400 Willow
Louisville, KY 40204
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: Legal Department
18. Governing Law. This Agreement shall be governed by the laws of
-------------
the Commonwealth of Kentucky.
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<PAGE>
19. 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.
20. 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.
21. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
22. 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/ R. Gene Smith
-----------------
Title: Vice Chairman
EMPLOYEE
/s/ W. Bruce Lunsford
---------------------
W. Bruce Lunsford
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<PAGE>
Exhibit 10.3
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
-1-
<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
-6-
<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
-7-
<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
/s/ Edward L. Kuntz
-------------------
EDWARD L. KUNTZ
-10-
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 4th day of January, 1999
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Donald D. Finney (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Executive will be employed by the Company, a wholly-owned
subsidiary of Vencor, Inc. ("Parent"), and the parties hereto desire to provide
for the terms of Executive's employment by the Company; and
WHEREAS, the Board of Directors of Parent (the "Board") have
determined that it is in the best interests of the Company to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and Executive agree as follows:
1. Employment. The Company hereby agrees to employ Executive and
----------
Executive hereby agrees to be employed by the Company on the terms and
conditions herein set forth. The initial term of this Agreement shall be for a
one-year period commencing on the Effective Date (the "Term").
2. Duties. Executive is engaged by the Company as President/Nursing
------
Center Division. Executive will report directly to the President and Chief
Operating Officer of the Company.
3. Extent of Services. Executive, subject to the direction and
------------------
control of the Board, shall have the power and authority commensurate with his
executive status and necessary to perform his duties hereunder. During the
Term, Executive shall devote his entire working time, attention, labor, skill
and energies to the business of the Company, and shall not, without the consent
of the Company, be actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or other pecuniary
advantage.
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than Two Hundred Seventy
Five Thousand Dollars ($275,000.00) per year payable in equal installments
in accordance with the Company's normal payroll procedures.
<PAGE>
Executive may receive increases in his Base Salary from time to time, as
approved by the Board.
(b) In addition to Base Salary, Executive will be eligible to receive
up to a 50% bonus of Base Salary and other incentive compensation as the
Board may approve from time to time.
(c) Upon commencement of employment, Executive will receive a one-
time, sign-on bonus of Ten Thousand Dollars ($10,000) which will be paid on
the Executive's first scheduled pay period.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit (e.g. Supplemental Executive Retirement Plan),
welfare benefit (including, without limitation, medical, dental, disability
and group life insurance coverages) and fringe benefit plans from time to
time in effect for Executives of the Company and its affiliates following
the Company's standard waiting periods.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacations in a
reasonable manner. The Executive may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
(e) The Company will reimburse Executive for all reasonable travel
expenses incurred in connection with Executive's employment in accordance
with its standard relocation policy which has been provided to Executive.
In addition, the Company will pay all reasonable expenses related to the
move of your household items and motorcycles from your Roanoke, Virginia
and Indianapolis, Indiana residences.
6. Termination of Employment.
-------------------------
2
<PAGE>
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
(b) Cause. The Company may terminate Executive's employment during
-----
the Term for Cause. For purposes of this Agreement, "Cause" shall mean the
Executive's (i) conviction of or plea of nolo contendere to a crime
---- ----------
involving moral turpitude; or (ii) willful and material breach by Executive
of his duties and responsibilities, which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best
interests of the Company and its affiliates, but with respect to (ii) only
if the Board adopts a resolution by a vote of at least 75% of its members
so finding after giving the Executive and his attorney an opportunity to be
heard by the Board. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon advice of
counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best interests of
the Company.
(c) Good Reason. Executive's employment may be terminated by
-----------
Executive for Good Reason. "Good Reason" shall exist upon the occurrence,
without Executive's express written consent, of any of the following
events:
(i) the Company shall assign to Executive duties of a
substantially nonexecutive or nonmanagerial nature;
(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
3
<PAGE>
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 10(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event
shall not constitute "Good Reason" provided that such event is remedied
within 60 days after receipt of such written notice.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by Executive for Good Reason, shall be communicated by Notice of
Termination given in accordance with this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the
provision so indicated and (iii) specifies the intended termination date
(which date, in the case of a termination for Good Reason, shall be not
more than thirty days after the giving of such notice). The failure by
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company, respectively,
hereunder or preclude Executive or the Company, 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
4
<PAGE>
Executive resigns without Good Reason, the Date of Termination shall be the
date on which the Company or Executive notified Executive or the Company,
respectively, of such termination and (iii) if Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall
be the date of death of Executive or the Disability Effective Date, as the
case may be.
7. Obligations of the Company Upon Termination. Following any
-------------------------------------------
termination of Executive's employment hereunder, the Company shall pay Executive
his Base Salary through the Date of Termination and any amounts owed to
Executive pursuant to the terms and conditions of the Executive benefit plans
and programs of the Company at the time such payments are due. In addition,
subject to Executive's execution of a general release of claims in form
satisfactory to the Company, Executive shall be entitled to the following
additional payments:
(a) Death or Disability. If, during the Term, Executive's employment
-------------------
shall terminate by reason of Executive's death or Disability, the Company
shall pay to Executive (or his designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus (as defined below)
Executive would have received for the year of termination of employment.
Such amount shall be paid within 30 days of the date when such amounts
would otherwise have been payable to the Executive if Executive's
employment had not terminated.
(b) Good Reason; Other than for Cause. If, during the Term, the
---------------------------------
Company shall terminate Executive's employment other than for Cause (but
not for Disability), or the Executive shall terminate his employment for
Good Reason:
(1) Within 14 days of Executive's Date of Termination, the
Company shall pay to Executive (i) the prorated portion of the Target
Bonus and Performance Share Award for Executive for the year in which
the Date of Termination occurs, and (ii) an amount equal to 1.0 times
the sum of (x) the Executive's Base Salary and Target Bonus as of the
Date of Termination, and (y) the number of performance shares awarded
to the Executive pursuant to the Vencor, Inc. 1998 Incentive
Compensation Plan (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
5
<PAGE>
(other than Base Salary and awards under the 1998 Plan) that would be
payable to the Executive, assuming all performance criteria on which
such bonus and/or performance compensation are based were deemed to be
satisfied, in respect of services for the calendar year in which the
date in question occurs.
(2) For a period of one year following the Date of Termination,
the Executive shall be treated as if he had continued to be an
Executive for all purposes under the Parent's Health Insurance Plan
and Dental Insurance Plan; or if the Executive is prohibited from
participating in such plan, the Company or Parent shall otherwise
provide such benefits. Following this continuation period, the
Executive shall be entitled to receive continuation coverage under
Part 6 of Title I or ERISA ("COBRA Benefits") treating the end of this
period as a termination of the Executive's employment if allowed by
law.
(3) For a period of one year following the Date of Termination,
Parent shall maintain in force, at its expense, the Executive's life
insurance in effect under the Vencor, Inc. Voluntary Life Insurance
Benefit Plan as of the Date of Termination.
(4) For a period of one year following the Date of Termination,
the Company or Parent shall provide short-term and long-term
disability insurance benefits to Executive equivalent to the coverage
that the Executive would have had he remained employed under the
disability insurance plans applicable to Executive on the Date of
Termination. Should Executive become disabled during such period,
Executive shall be entitled to receive such benefits, and for such
duration, as the applicable plan provides.
(5) To the extent not already vested pursuant to the terms of
such plan, the Executive's interests under the Vencor Retirement
Savings Plan shall be automatically fully (i.e., 100%) vested, without
regard to 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.
6
<PAGE>
(7) Executive shall be credited immediately with an additional
one year of vesting for purposes of all outstanding stock option
awards and restricted stock awards and Executive will have an
additional one year following the Date of Termination in which to
exercise such stock options.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Investment in Company. Within 60 days of your first day of
---------------------
employment, Executive agrees to purchase at least 20,000 shares of the Company's
common stock. Executive agrees to comply with the Company's standard trading
policies in acquiring such shares.
9. 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.
10. 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.
7
<PAGE>
(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.
11. 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 January 4, 1999 (the "Severance Agreement"); provided that
--------
any payments payable to Executive hereunder shall be offset by any payments
payable under the Severance Agreement.
12. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
13. 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.
14. 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:
---------------
Donald D. Finney
158 Summit Way, SW
Roanoke, VA 24014
If to Company:
-------------
Vencor Operating, Inc.
8
<PAGE>
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: General Counsel
15. 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.
16. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
17. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
18. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
-------------------
Edward L. Kuntz
President and Chief Operating
Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ Edward L. Kuntz
-------------------
Edward L. Kuntz
President and Chief Operating
Officer
/s/ Donald D. Finney
--------------------
DONALD D. FINNEY
10
<PAGE>
Exhibit 10.12
AMENDMENT NUMBER 1 TO THE SECOND
STANDSTILL AGREEMENT DATED APRIL 12, 1999
------------------------------------------
These amendments dated May 5, 1999 (the "Amendment") are 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 the Amendment 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").
NOW, THEREFORE, for good cause and adequate consideration, the parties
hereto agree as follows:
Extension of the Second Standstill Period
<PAGE>
The fifth numbered paragraph of the Second Standstill Agreement (annexed hereto
as Exhibit A) shall be deleted and replaced with the following paragraph:
During the period from the date of the Second Standstill Agreement,
April 12, 1999, through and including the earlier of (a) the
commencement by or against Vencor, as debtor, of a voluntary or
involuntary bankruptcy case under Title 11 of the United States Code,
or (b) 5:00 p.m. Eastern Daylight Savings Time on May 7, 1999 (such
period being referred to herein as the "Second Standstill Period"),
neither Vencor nor Ventas will file, commence, serve, or otherwise
initiate any civil action, arbitration proceeding, or other similar
action, litigation, case, or proceeding of any kind, character or
nature whatsoever (an "Action") against the other or any third party,
including, without limitation, any of Vencor's or Ventas' current or
former officers, directors, or employees, arising from or relating to
the Reorganization Agreement, any Ancillary Agreement, or any of the
Five Leases, or with respect to the various disputes identified in
Vencor's March 18, 1999 letter; nor shall Ventas exercise any rights
or remedies it may have against Vencor under any of the Five Leases
based on Vencor's late payment or non-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 31, 1999 and continuing to the date hereof.
Counterparts
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.
Choice of Law
This Amendment adopts the ninth numbered paragraph as the choice of law
provision provided for in the Amendment.
Dated: New York, New York
May 5, 1999
CONFIRMED AND AGREED TO:
VENCOR, INC. VENTAS, INC.
By: /s/ Edward L. Kuntz By: /s/ Debra A. Cafaro
Name: Edward L. Kuntz Name: Debra A. Cafaro
Title: CEO Title: CEO
2
<PAGE>
Exhibit 10.13
AMENDMENT NUMBER 2 TO THE SECOND STANDSTILL
AGREEMENT DATED APRIL 12, 1999 AND AMENDMENT
NUMBER 1 TO THE TOLLING AGREEMENT DATED APRIL 12, 1999
------------------------------------------------------
These amendments dated May 8, 1999 (the "Amendments") are 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 the Amendments are in the process of attempting to
resolve any and all existing and potential claims that Vencor has asserted or
might in the future assert against Ventas (the "Vencor Claims"), the validity of
which Ventas has disputed, and any and all existing and potential claims that
Ventas has asserted or might in the future assert against Vencor (the "Ventas
Claims"), the validity of which Vencor has disputed (the Vencor Claims and the
Ventas Claims are collectively referred to herein as the "Claims");
WHEREAS, on Friday May 7, 1999 after 5:00 p.m., Ventas, by letters of T.
Richard Riney, Vice President and General Counsel of Ventas, issued five notices
of non-payment of rent (the "Non-Payment Notices") pursuant to paragraph 16.1(b)
of the agreements
<PAGE>
referenced in the first paragraph of each Non-Payment Notice, such agreements
being collectively defined in the Second Standstill Agreement as the Five
Leases;
WHEREAS, the parties hereto wish to extend the cure period referred to in
Section 16.1(b) of the Five Leases with respect to the Non-Payment Notices so
that Vencor's cure period is coterminous with that provided to the Leasehold
Mortgagee pursuant to Section 22.4 of the Five Leases, subject to the conditions
set forth below;
NOW, THEREFORE, in consideration of the premises and other good cause and
adequate consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
Extension of the Second Standstill Period and Suspension of the Expiration of
the Cure Period in the Five Leases
1. The fifth numbered paragraph of the Second Standstill Agreement
dated April 12, 1999 shall be deleted and replaced with the following paragraph:
(a) Other than delivery of the Non-Payment Notices, during the period
from the date of the Second Standstill Agreement, April 12, 1999,
through and including the earlier of (a) the commencement by or
against Vencor, as debtor, of a voluntary or involuntary bankruptcy
case under Title 11 of the United States Code, or (b) 5:00 p.m.
Eastern Daylight Savings Time on June 6, 1999 (such period being
referred to herein as the "Second Standstill Period"), neither Vencor
nor Ventas will file, commence, serve, or otherwise initiate any civil
action, arbitration proceeding, or other similar action, litigation,
case, or proceeding of any kind, character or nature whatsoever (an
"Action") against the other or any third party, including, without
limitation, any of Vencor's or Ventas' current or former officers,
directors, or employees, arising from or relating to the
Reorganization Agreement, any Ancillary Agreement, or any of the Five
Leases, or with respect to the various disputes identified in Vencor's
March 18, 1999 letter; nor shall Ventas exercise any rights or
remedies it may have against Vencor under any of the Five Leases
(including the giving of notices of termination pursuant to Section
16.1 of the Five Leases or any of them) based on Vencor's late payment
or non-payment of Rent (as that term is defined in the Five Leases)
due under the Five Leases, or based on any default arising from or
related to the
2
<PAGE>
disclosures made by Vencor to Ventas commencing on or about March 30
and 31, 1999 and continuing to the date hereof.
(b) Ventas further agrees that if Vencor pays the Rent for the month
of May 1999 on or before June 11, 1999 at 5:00 p.m. Eastern Daylight
Savings Time then such payment shall be deemed to be a timely cure,
within the meaning of Section 16.1 of the Five Leases and the Notices
of Non-Payment, and that, in such event, no Event of Default (as that
term is used in the Notices of Non-Payment and defined in the Five
Leases) shall have occurred with respect to the late payment or non-
payment of Rent for the month of May 1999. It is the intention of the
parties that this Subparagraph 5(b) shall not affect in any way,
including, without limitation, to shorten or extend, the cure period
provided to the Leasehold Mortgagee, pursuant to Section 22.4 of the
Five Leases. This Subparagraph 5(b) shall apply only to the Non-
Payment Notices and to the non-payment or late payment of the May 1999
Rent under the Five Leases.
(c) The immediately preceding Subparagraph 5(b) shall not be
effective and shall be void ab initio unless on or prior to 5:00
-- ------
p.m. Eastern Daylight Savings Time on June 11, 1999, (i) Ventas is
paid the Rent for the month of May 1999 or (ii) Ventas has received
written confirmation from the Leasehold Mortgagee that it agrees that
the period of time by which it would be entitled to cure the failure
of Vencor to pay Rent for the month of May 1999 under Section 22.4 of
the Five Leases in order to prevent a termination of the Five Leases
is unchanged by Subparagraph 5(b) and such period of time is 35 days
beginning on May 7, 1999.
Amendment To Tolling Agreement
2. The first numbered paragraph of the Tolling Agreement dated April
12, 1999 shall be deleted and replaced with the following paragraph:
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 statues of limitations, repose, or other legal or equitable
constrains 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
April 12, 1999 to and including June 6, 1999 (the "Tolling Period").
For all purposes herein, both the
3
<PAGE>
first and last day of the Tolling Period shall be deemed to be
contained in the Tolling Period.
Counterparts
3. These Amendments may be executed in one or more counterparts and
by facsimile, each of which counterparts shall be deemed an original hereof but
all of which together shall constitute one agreement.
4
<PAGE>
Choice of Law
4. These Amendments adopt the ninth numbered paragraph of the Second
Standstill Agreement dated April 12, 1999 as the choice of law provision
provided for in the Amendments.
Dated: May 8, 1999
CONFIRMED AND AGREED TO:
VENCOR, INC. VENTAS, INC.
By:/s/ Edward L. Kuntz By:/s/ Debra A. Cafaro
Name: Edward L. Kuntz Name: Debra A. Cafaro
Title: CEO Title: CEO
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,284
<SECURITIES> 0
<RECEIVABLES> 476,684
<ALLOWANCES> (107,826)
<INVENTORY> 30,670
<CURRENT-ASSETS> 597,646
<PP&E> 773,427
<DEPRECIATION> (278,960)
<TOTAL-ASSETS> 1,674,226
<CURRENT-LIABILITIES> 1,217,510
<BONDS> 80,770
1,743
0
<COMMON> 17,605
<OTHER-SE> 272,595
<TOTAL-LIABILITY-AND-EQUITY> 1,674,226
<SALES> 0
<TOTAL-REVENUES> 700,232
<CGS> 0
<TOTAL-COSTS> 548,010
<OTHER-EXPENSES> 118,927
<LOSS-PROVISION> 6,725
<INTEREST-EXPENSE> 19,536
<INCOME-PRETAX> (14,620)
<INCOME-TAX> 50
<INCOME-CONTINUING> (14,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,923)
<NET-INCOME> (23,593)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
