<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14057
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VENCOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 61-1323993
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
<CAPTION>
One Vencor Place
680 South Fourth Street
Louisville, Kentucky 40202-2412
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
(502) 596-7300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
<S> <C>
Common Stock, par value $.25 per share None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10-K. [X]
As of February 29, 2000, there were 70,201,727 shares of the Registrant's
Common Stock, $.25 par value, outstanding. The aggregate market value of the
shares of the Registrant held by non-affiliates of the Registrant, based on
the closing price of such stock on the OTC Bulletin Board on February 29,
2000, was approximately $12,498,000. For purposes of the foregoing calculation
only, all directors and executive officers of the Registrant have been deemed
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 35
Item 3. Legal Proceedings............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders........... 41
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 42
Item 6. Selected Financial Data....................................... 43
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 62
Item 8. Financial Statements and Supplementary Data................... 62
Changes in and Disagreements With Accountants on Accounting
Item 9. and Financial Disclosure...................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant............ 64
Item 11. Executive Compensation........................................ 67
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 76
Item 13. Certain Relationships and Related Transactions................ 77
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K........................................................... 79
</TABLE>
2
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PART I
Item 1. Business
GENERAL
Vencor, Inc. ("Vencor" or the "Company") provides long-term healthcare
services primarily through the operation of nursing centers and hospitals. At
December 31, 1999, the Company's health services division operated 295 nursing
centers (38,573 licensed beds) in 31 states and a rehabilitation therapy
business. The Company's hospital division operated 56 hospitals (4,931
licensed beds) in 23 states and an institutional pharmacy business.
During 1999, the Company operated its Vencare ancillary services business
which provided respiratory and rehabilitation therapies and medical and
pharmacy management services to nursing centers and other healthcare
providers. As a result of significant declines in the demand for ancillary
services caused by the Balanced Budget Act of 1997 (the "Budget Act"),
management completed a realignment of its Vencare division in the fourth
quarter of 1999. Vencare's rehabilitation, speech and occupational therapies
were integrated into the Company's nursing center division and the division
was renamed to the health services division. Vencare's institutional pharmacy
business was assigned to the hospital division. Vencare's respiratory therapy
and other ancillary businesses have been discontinued. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company and substantially all of its subsidiaries filed voluntary
petitions for protection under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code") on September 13, 1999. The Company currently is
operating its businesses as a debtor-in-possession subject to the jurisdiction
of the United States Bankruptcy Court in Delaware (the "Bankruptcy Court").
See "--Proceedings under Chapter 11 of the Bankruptcy Code."
On May 1, 1998, Ventas, Inc. ("Ventas" or the "Company's predecessor")
(formerly known as Vencor, Inc.) completed the spin-off (the "Spin-off") of
its healthcare operations to its stockholders through the distribution of
Vencor common stock (the "Common Stock"). Ventas retained ownership of
substantially all of its real property and leases such real property to the
Company pursuant to four master lease agreements. In anticipation of the Spin-
off, the Company was incorporated on March 27, 1998 as a Delaware corporation.
For accounting purposes, the consolidated historical financial statements of
Ventas became the historical financial statements of the Company upon
consummation of the Spin-off. Any discussion concerning events prior to May 1,
1998 refers to the Company's business as it was conducted by Ventas prior to
the Spin-off. See "--Proceedings under Chapter 11 of the Bankruptcy Code" and
"--Master Lease Agreements."
On September 28, 1995, The Hillhaven Corporation ("Hillhaven") merged with
and into the Company (the "Hillhaven Merger"). On March 21, 1997, the Company
acquired TheraTx, Incorporated ("TheraTx"), a provider of rehabilitation and
respiratory therapy program management services to nursing centers and an
operator of 26 nursing centers (the "TheraTx Merger"). On June 24, 1997, the
Company acquired a controlling interest in Transitional Hospitals Corporation
("Transitional"), an operator of 19 long-term acute care hospitals located in
13 states. The Company completed the merger of its wholly owned subsidiary
with and into Transitional on August 26, 1997 (the "Transitional Merger").
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. See "--
Cautionary Statements."
Proceedings under Chapter 11 of the Bankruptcy Code
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 cases have been consolidated for purposes of joint
administration under Case Nos. 99-3199 (MFW) through 99-3327 (MFW)
(collectively, the "Chapter 11 Cases"). The Company currently is operating its
businesses as a debtor-in-possession subject to the jurisdiction of the
Bankruptcy Court.
3
<PAGE>
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the consolidated balance sheet as liabilities
subject to compromise. The Company currently is paying the post-petition
claims of all vendors and providers in the ordinary course of business.
In connection with the Chapter 11 Cases, the Company entered into a $100
million debtor-in-possession financing agreement (the "DIP Financing") with a
bank group led by Morgan Guaranty Trust Company of New York (collectively, the
"DIP Lenders"). The Bankruptcy Court granted final approval of the DIP
Financing on October 1, 1999. The DIP Financing, which was initially scheduled
to mature on March 13, 2000, is comprised of a $75 million tranche A revolving
loan (the "Tranche A Loan") and a $25 million tranche B revolving loan (the
"Tranche B Loan"). Interest is payable at prime rate plus 2 1/2% on the
Tranche A Loan and prime rate plus 4 1/2% on the Tranche B Loan.
Available aggregate borrowings under the Tranche A Loan were initially
limited to $45 million in September 1999 and increased to $65 million in
October, $70 million in November and $75 million thereafter. Pursuant to a
recent amendment to the DIP Financing, the aggregate borrowing limitations
under the Tranche A Loans are limited to approximately $68 million until
maturity. Borrowings under the Tranche B Loan require the approval of lenders
holding at least 75% of the credit exposure under the DIP Financing. The DIP
Financing is secured by substantially all of the assets of the Company and its
subsidiaries, including certain owned real property. The DIP Financing
contains standard representations and warranties and other affirmative and
restrictive covenants. As of March 29, 2000, there were no outstanding
borrowings under the DIP Financing.
Since the consummation of the DIP Financing, the Company and the DIP Lenders
have agreed to five amendments to the DIP Financing. These amendments approved
various changes to the DIP Financing including (i) extending the period of
time for the Company to file its plan of reorganization, (ii) approving
certain transactions and (iii) revising the Company's cash plan originally
submitted with the DIP Financing. In December 1999, the Company informed the
DIP Lenders that it planned to record a significant charge to earnings in the
fourth quarter of 1999 related to the valuation of accounts receivable that
could have resulted in noncompliance with certain covenants in the DIP
Financing requiring minimum Consolidated EBITDAR and a minimum Net Amount of
Eligible Accounts (both as defined in the DIP Financing). In connection with
the third amendment to the DIP Financing, the Company received a waiver from
compliance with these covenants of the DIP Financing through February 14,
2000. The Company received subsequent waivers from compliance with these
covenants in later amendments. In connection with the most recent amendment to
the DIP Financing dated February 23, 2000, the parties agreed, among other
things, to (i) extend the maturity date of the DIP Financing until June 30,
2000, (ii) extend the period of time for the Company to file its plan of
reorganization to May 1, 2000, and (iii) revise certain financial covenants.
The Bankruptcy Court granted approval of this amendment to the DIP Financing
on March 10, 2000.
At December 31, 1999, the Company was not in compliance with the DIP
Financing covenant related to the minimum Net Amount of Eligible Accounts
(accounts receivable). The Company intends to seek an amendment or waiver to
the DIP Financing to remedy this event of default. Since there were no
outstanding borrowings under the DIP Financing at December 31, 1999, the event
of default had no effect on the Company's consolidated financial statements.
However, if the Company is not successful in obtaining an amendment or waiver
to remedy the event of default, its ability to borrow under the DIP Financing
to finance its operations during the pendency of the Chapter 11 Cases may be
limited. See"--Cautionary Statements."
On November 4, 1999, the Company received approval (subject to certain
conditions) to implement a management retention plan (the "Management
Retention Plan") to enhance the ability of the Company to retain key
management employees during the reorganization period. Under the Management
Retention Plan, bonuses aggregating $7.3 million will be awarded to certain
key management employees based upon various percentages of their annual
salary. The Management Retention Plan provides that the retention bonuses will
be paid in three equal amounts upon: (i) the Bankruptcy Court's approval of
the Management Retention Plan, (ii) the effective date of the Plan of
Reorganization (as defined) and (iii) three months following the effective
date of the Plan of Reorganization. See "Executive Compensation--Management
Retention Plan."
4
<PAGE>
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. The automatic stay does
not necessarily apply to certain actions against Ventas for which the Company
has agreed to indemnify Ventas in connection with the Spin-off. See "--
Agreements with Ventas" and "Legal Proceedings." In addition, the Company may
assume or reject executory contracts, including lease obligations, under the
Bankruptcy Code. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process.
As previously disclosed, the Company is developing a plan of reorganization
(the "Plan of Reorganization") through negotiations with key parties including
its senior bank lenders (the "Senior Lenders"), the holders of the Company's
$300 million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "1998
Notes"), Ventas and the Department of Justice (the "DOJ"), acting on behalf of
the Health Care Financing Administration ("HCFA") and the Department of Health
and Human Services' Office of the Inspector General ("HHS"). A substantial
portion of pre-petition liabilities are subject to settlement under the Plan
of Reorganization to be submitted by the Company.
The Plan of Reorganization must be voted upon by the impaired creditors of
the Company and approved by the Bankruptcy Court. There can be no assurance
that the Plan of Reorganization to be proposed by the Company will be approved
by the requisite holders of claims, confirmed by the Bankruptcy Court or that
it will be consummated. If the Plan of Reorganization is not accepted by the
required number of impaired creditors and the Company's exclusive right to
file and solicit acceptance of a plan of reorganization ends, any party in
interest may subsequently file its own plan of reorganization for the Company.
The Bankruptcy Court currently has extended the Company's exclusive right to
submit a plan of reorganization until May 16, 2000. A plan of reorganization
must be confirmed by the Bankruptcy Court after certain findings required by
the Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the
plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are satisfied. As previously announced,
the Company has indicated that any Plan of Reorganization will result in the
Company's Common Stock having little, if any, value.
Events Leading to Reorganization
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. Prior to the commencement of the Chapter 11 Cases, the Company
received a series of temporary waivers of these covenant violations. The
waivers generally included certain borrowing limitations under the $300
million revolving credit portion of the Credit Agreement. The final waiver was
scheduled to expire on September 24, 1999.
The Company was informed on April 9, 1999 by HCFA that the Medicare program
had made a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. On April 21, 1999, the Company reached an
agreement with HCFA to extend the repayment of such amounts over 60 monthly
installments (the "HCFA Agreement"). Under the HCFA Agreement, monthly
payments of approximately $1.5 million commenced in May 1999. Beginning in
December 1999, the balance of the overpayments bears interest at a statutory
rate approximating 13.4%, resulting in a monthly payment of approximately $2.0
million through March 2004. If the Company is delinquent with two consecutive
payments, the HCFA Agreement will be defaulted and all subsequent Medicare
reimbursement payments to the Company may be withheld. Amounts due under the
HCFA Agreement aggregate $80.3 million and have been classified as liabilities
subject to compromise in the Company's consolidated balance sheet at December
31, 1999. The Company has received Bankruptcy Court approval to continue to
make the monthly payments under the HCFA Agreement during the pendency of the
Chapter 11 Cases.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The failure to pay interest
resulted in an event of default under the 1998 Notes.
In accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), outstanding
5
<PAGE>
borrowings under the Credit Agreement ($506 million) and the principal amount
of the 1998 Notes ($300 million) are presented as liabilities subject to
compromise in the Company's consolidated balance sheet at December 31, 1999.
If the Chapter 11 Cases had not been filed, the Company would have reported a
working capital deficit approximating $1 billion at December 31, 1999. The
consolidated financial statements do not include any adjustments that might
result from the resolution of the Chapter 11 Cases or other matters discussed
herein. During the pendency of the Chapter 11 Cases, the Company is continuing
to record the contractual amount of interest expense related to the Credit
Agreement. No interest costs have been recorded related to the 1998 Notes
since the filing of the Chapter 11 Cases. Contractual interest expense for the
1998 Notes for this period was $8.9 million.
As previously reported, the Company has been informed by the DOJ that the
Company and Ventas are the subjects of ongoing investigations into various
Medicare reimbursement issues, including hospital cost reporting issues,
Vencare billing practices and various quality of care issues in the hospitals
and nursing centers formerly operated by Ventas and currently operated by the
Company. The Company has cooperated fully in these investigations. The DOJ has
informed the Company that it has intervened in several pending qui tam actions
asserted against the Company and/or Ventas in connection with these
investigations. The Company and Ventas are engaged in active discussions with
the DOJ that may result in a resolution of some or all of the DOJ
investigations including the pending qui tam actions. In addition, the DOJ has
filed proofs of claims with respect to certain alleged claims in the Chapter
11 Cases. The Company believes that the DOJ's intervention in these actions
will facilitate the ability of the parties to reach a final resolution. Such a
resolution with the DOJ could include a payment to the Federal government
which could have a material adverse effect on the Company's liquidity and
financial position. See "Legal Proceedings."
Agreements with Ventas
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off
(the "Spin-off Agreement"). The Company was seeking a reduction in rent and
other concessions under its Master Lease Agreements (as defined) with Ventas.
On March 31, 1999, the Company and Ventas entered into a standstill agreement
(the "Standstill Agreement") which provided that both companies would postpone
through April 12, 1999 any claims either may have against the other. On April
12, 1999, the Company and Ventas entered into a second standstill agreement
(the "Second Standstill") which provided that neither party would pursue any
claims against the other or any other third party related to the Spin-off as
long as the Company complied with certain rent 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 would be extended and tolled from April 12, 1999 until May
5, 1999 or until the termination of the Second Standstill (the "Tolling
Agreement").
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently,
the Company and Ventas entered into further amendments to the Second
Standstill and the Tolling Agreement to extend the time during which no
remedies may be pursued by either party and to extend the date by which the
Company may cure its failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
a stipulation (the "Stipulation") which provides for the payment by the
Company of a reduced monthly rent of approximately $15.1 million beginning in
September 1999. The Stipulation was approved by the Bankruptcy Court. The
difference between the $18.9 million base rent under the Master Lease
Agreements and the reduced monthly rent is being accrued as an administrative
expense subject to compromise in the Chapter 11 Cases. Unpaid August 1999 rent
of approximately $18.9 million will constitute a claim by Ventas in the
Chapter 11 Cases which claim is potentially subject to dispute. During the
pendency of the Chapter 11 Cases, the Company is recording the contractual
amount of the $18.9 million monthly base rent.
The Stipulation also continues to toll any statutes of limitations or other
time constraints in a bankruptcy proceeding for claims that might be asserted
by the Company against Ventas. The Stipulation automatically renews for one-
month periods unless either party provides a 14-day notice of termination. The
Stipulation also may be terminated prior to its expiration upon a payment
default by the Company, the consummation of the Plan of Reorganization or the
occurrence of certain defaults under the DIP Financing.
6
<PAGE>
The Stipulation also provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may seek to pursue claims against Ventas
arising out of the Spin-off and seek judicial relief barring Ventas from
exercising any remedies based on the Company's failure to pay some or all of
the rent to Ventas. The Company's failure to pay rent or otherwise comply with
the Stipulation, in the absence of judicial relief, would result in an "Event
of Default" under the Master Lease Agreements. Upon an Event of Default under
the Master Lease Agreements, assuming Ventas were to be granted relief from
the automatic stay by the Bankruptcy Court, the remedies available to Ventas
include, without limitation, terminating the Master Lease Agreements,
repossessing and reletting the leased properties and requiring the Company to
(i) remain liable for all obligations under the Master Lease Agreements,
including the difference between the rent under the Master Lease Agreements
and the rent payable as a result of reletting the leased properties or (ii)
pay the net present value of the rent due for the balance of the terms of the
Master Lease Agreements. Such remedies, however, would be subject to the
supervision of the Bankruptcy Court. See "--Master Lease Agreements."
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims, treatment under the Plan of Reorganization and other events.
Payment terms for these amounts will be established in connection with the
Plan of Reorganization.
The Company has received approval from the Bankruptcy Court to pay pre-
petition and post-petition employee wages, salaries, benefits and other
employee obligations. The Bankruptcy Court also approved orders granting
authority, among other things, to pay pre-petition claims of certain critical
vendors, utilities and patient obligations. All other pre-petition liabilities
are classified in the consolidated balance sheet as liabilities subject to
compromise.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases follows (in thousands):
<TABLE>
<S> <C>
Long-term debt:
Credit Agreement............................................... $ 506,114
1998 Notes..................................................... 300,000
Amounts due under the HCFA Agreement........................... 80,296
8 5/8% Senior Subordinated Notes............................... 2,391
Unamortized deferred financing costs........................... (12,626)
Other.......................................................... 4,592
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880,767
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Due to third-party payors........................................ 112,694
Accounts payable................................................. 33,693
Accrued liabilities:
Interest....................................................... 45,521
Ventas rent.................................................... 33,884
Other.......................................................... 52,858
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132,263
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$1,159,417
==========
</TABLE>
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
7
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HEALTHCARE OPERATIONS
The Company currently is organized into two operating divisions: (i) the
health services division, which provides long-term care services through the
operation of nursing centers and a rehabilitation therapy business and (ii)
the hospital division, which provides long-term acute care to medically
complex patients through the operation of hospitals and an institutional
pharmacy business. The Company believes that the independent focus of each
division on the unique aspects and quality concerns of their respective
businesses enhance their ability to attract patients, improve operations and
achieve cost containment objectives.
The Company believes that the demand for long-term care is increasing.
Improved medical care and advances in medical technology continue to increase
the survival rates for victims of disease and trauma. Many of these patients
never fully recover and require long-term care. The incidence of chronic
medical complications increases with age, particularly in connection with
certain degenerative conditions. As the average age of the United States
population increases, the Company believes that there will be an increase in
the demand for long-term care at all levels of the continuum of care.
At the same time, the long-term care industry continues to experience
significant change. Some of the significant factors affecting the long-term
care industry include the implementation of a Medicare prospective payment
system ("PPS") for nursing centers and other cost containment measures
contained in the Budget Act, heightened regulatory scrutiny by Federal and
state regulators, the dramatic increase in the costs of defending and insuring
against alleged patient care liability claims, the expansion of managed care,
and a growing public awareness of healthcare spending by governmental agencies
at Federal and state levels.
As a result of reimbursement reductions caused by the Budget Act, most
providers will be required to deliver quality patient care more efficiently.
The revenues recorded under PPS in the Company's health services division are
substantially less than the cost-based reimbursement it received before the
enactment of the Budget Act. PPS has had a dramatic effect on the operations
of substantially all companies in the long-term care industry. The Budget Act
also reduced payments made to the Company's hospitals by reducing incentive
payments, allowable costs for capital expenditures and bad debts, and payments
for services to patients transferred from a general acute care hospital.
Increased regulatory scrutiny and costs associated with patient care liability
claims, particularly on large for-profit, multi-facility providers, also have
had a significant negative impact on the long-term care industry.
HEALTH SERVICES DIVISION
At December 31, 1999, the health services division provided long-term
healthcare and rehabilitation services in 295 nursing centers containing
38,573 licensed beds located in 31 states. At December 31, 1999, the Company
owned six nursing centers, leased 276 nursing centers from third parties and
managed 13 nursing centers. During 1999, the Company opened three nursing
centers and assumed operation of a nursing center that was previously leased
to a third party.
The Company's nursing centers provide rehabilitation services, including
physical, occupational and speech therapies. In addition, management believes
that the Company is a leading provider of care for patients with Alzheimer's
disease. The Company offers specialized programs at more than 80 nursing
centers for patients suffering from Alzheimer's disease. Most of these
patients reside in separate units within the nursing centers and are cared for
by teams of professionals specializing in the unique problems experienced by
Alzheimer's patients.
As a result of the Vencare realignment, the health services division now
provides physical, occupational and speech therapies primarily to nursing
center patients. At December 31, 1999, the Company had entered into contracts
to provide rehabilitation services to patients at 356 facilities not operated
by the Company.
8
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Health Services Division Strategy
The factors which affect consumers' selection of a nursing center vary by
community and include a nursing center's competitive position and its
relationships with local referral sources. Competition creates the standards
against which nursing centers in a given market are judged by various referral
sources, which include physicians, hospital discharge planners, community
organizations and families. The strategy of the health services division is to
improve its patient census by providing quality, clinical-based services. The
health services division is focused on qualitative and quantitative
performance indicators with the goal of providing quality care under the cost
containment objectives imposed by government and private payors. The health
services division continues to refine and examine its method of delivering
services to create the optimal strategy of providing quality care, based on
clinical outcomes, within the constraints of PPS. The health services
division's ability to control costs, including its labor costs, will
significantly impact its future operating results.
Nursing center marketing efforts are conducted at the local market level by
the nursing center administrators and admissions coordinators. Nursing center
personnel are assisted in carrying out their marketing strategies by regional
marketing staffs. The marketing efforts of the health services division
focuses on the quality of care provided at its facilities with the goal of
increasing patient census levels. In addition, the Company believes there will
be an increase in the need for nursing center services as the average age of
the United States population increases.
The health services division is evaluating the model of delivering ancillary
services to Company operated nursing centers and to external clients. The
Company continues to refine the delivery of these services to maintain
profitability under the cost constraints of PPS. As part of the Vencare
realignment completed in the fourth quarter of 1999, the Company's nursing
centers generally provide ancillary services to patients through the use of
internal staff. The health services division has terminated many unprofitable
external ancillary services contracts in response to the economic conditions
facing the long-term care industry.
Selected Health Services Division Operating Data
The following table sets forth certain operating data for the health
services division after reflecting the realignment of the former Vencare
businesses for all periods presented (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Nursing centers:
Revenues............................. $ 1,594,244 $ 1,667,343 $ 1,766,403
Operating income..................... $ 185,764 $ 216,575 $ 242,889
Facilities in operation at end of
period.............................. 295 291 309
Licensed beds at end of period....... 38,573 38,362 40,383
Patient days......................... 11,656,439 11,939,266 12,622,238
Average daily census................. 31,935 32,710 34,581
Occupancy %.......................... 86.8 87.3 90.5
Rehabilitation services:
Revenues............................. $ 195,731 $ 264,574 $ 230,525
Operating income..................... $ 3,233 $ 18,594 $ 47,683
Other ancillary services:
Revenues............................. $ 43,527 $ 168,165 $ 244,303
Operating income..................... $ 4,166 $ 30,183 $ 39,653
</TABLE>
9
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As used in the above table, the term "operating income" is defined as
earnings before interest, income taxes, depreciation, amortization, rent,
corporate overhead and unusual transactions. The term "licensed beds" refers
to the maximum number of beds permitted in the facility under its license
regardless of whether the beds are actually available for patient care.
"Patient days" refers to the total number of days of patient care provided for
the periods indicated. "Average daily census" is computed by dividing each
facility's patient days by the number of calendar days the respective facility
is in operation. "Occupancy %" is computed by dividing average daily census by
the number of licensed beds, adjusted for the length of time each facility was
in operation during each respective period.
Sources of Nursing Center Revenues
Nursing center revenues are derived principally from Medicare and Medicaid
programs and from private payment patients. Consistent with the nursing center
industry, changes in the mix of the health services division's patient
population among these three categories significantly affect the profitability
of its operations. Although Medicare and higher acuity patients generally
produce the most revenue per patient day, profitability with respect to higher
acuity patients is reduced by the costs associated with the higher level of
nursing care and other services generally required by such patients. The
Company believes that private payment patients generally constitute the most
profitable category and Medicaid patients generally constitute the least
profitable category.
The following table sets forth the approximate percentages of nursing center
patient days and revenues derived from the payor sources indicated:
<TABLE>
<CAPTION>
Medicare Medicaid Private and Other
---------------- ---------------- ---------------------
Patient Patient Patient
Year Days Revenues Days Revenues Days Revenues
---- ------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999............. 12% 26% 66% 49% 22% 25%
1998............. 13 29 65 45 22 26
1997............. 13 32 65 43 22 25
</TABLE>
For the year ended December 31, 1999, revenues of the health services
division totaled approximately $1.7 billion, or 63% of the Company's total
revenues (before eliminations).
Both governmental and private third-party payors employ cost containment
measures designed to limit payments made to healthcare providers. Those
measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage
criteria which limit the services that will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all
of which may materially increase or decrease the rate of program payments to
the health services division for its services.
Medicare. The Medicare Part A program provides reimbursement for extended
care services furnished to Medicare beneficiaries who are admitted to nursing
centers after at least a three-day stay in an acute care hospital. Covered
services include supervised nursing care, room and board, social services,
physical and occupational therapies, pharmaceuticals, supplies and other
necessary services provided by nursing centers.
Prior to the implementation of PPS, nursing center reimbursement was based
upon reasonable direct and indirect costs of services provided to patients.
The Budget Act established PPS for nursing centers for cost reporting periods
beginning on or after July 1, 1998. All of the nursing centers operated by the
health services division were subject to PPS on July 1, 1998. During the first
three years, the per diem rates for nursing centers are based on a blend of
facility-specific costs and Federal costs. Thereafter, the per diem rates will
be based solely on Federal costs. The payments received under PPS cover all
services for Medicare patients including all
10
<PAGE>
ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered pharmaceuticals. The
Medicare revenues recorded by the health services division under PPS in its
nursing centers are substantially less than the cost-based reimbursement
received before the enactment of the Budget Act. See "--Governmental
Regulation--Healthcare Reform," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Medicaid. Medicaid is a state-administered program financed by state funds
and matching Federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
Federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. Accordingly, these
programs differ from state to state in many respects.
Prior to the Budget Act, Federal law, generally referred to as the "Boren
Amendment," required Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically
operated nursing center providing quality care and services in conformity with
all applicable laws and regulations. Despite the Federal requirements,
disagreements frequently arose between nursing centers and states regarding
the adequacy of Medicaid payments. By repealing the Boren Amendment, the
Budget Act eases the restrictions on the states' ability to reduce their
Medicaid reimbursement levels for such services. In addition, Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and certain
government funding limitations, all of which may materially increase or
decrease the level of program payments to nursing centers operated by the
health services division. Management believes that the payments under many of
these programs may not be sufficient on an overall basis to cover the costs of
serving certain patients participating in these programs. Furthermore, the
Omnibus Budget Reconciliation Act of 1987, as amended ("OBRA"), mandates an
increased emphasis on ensuring quality patient care, which has resulted in
additional expenditures by nursing centers. The health services division
provides to eligible individuals Medicaid-covered services consisting of
nursing care, room and board and social services. In addition, states may at
their option cover other services such as physical, occupational and speech
therapies and pharmaceuticals.
Private Payment. The health services division seeks to maximize the number
of private payment patients admitted to its nursing centers, including those
covered under private insurance and managed care health plans. Private payment
patients typically have financial resources (including insurance coverage) to
pay for their monthly services and do not rely on government programs for
support.
There can be no assurance that payments under governmental and private
third-party payor programs will remain at levels comparable to present levels
or will be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In addition, there can be no
assurance that facilities operated by the health services division, or the
provision of services and supplies by the health services division, will meet
the requirements for participation in such programs. The Company could be
affected adversely by the continuing efforts of governmental and private
third-party payors to contain the amount of reimbursement for healthcare
services.
11
<PAGE>
Nursing Center Facilities
The following table lists by state the number of nursing centers and related
licensed beds owned by the Company or leased from Ventas and other third
parties as of December 31, 1999:
<TABLE>
<CAPTION>
Number of Facilities
---------------------------------------------------
Licensed Owned by Leased from Leased from
State Beds the Company Ventas (2) Other Parties Managed Total
- ----- -------- ----------- ----------- ------------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama(1).............. 592 - 3 1 - 4
Arizona................. 823 - 6 - - 6
California.............. 2,303 1 11 5 2 19
Colorado................ 695 - 4 1 - 5
Connecticut(1).......... 983 - 8 - - 8
Florida(1).............. 2,713 2 15 1 2 20
Georgia(1).............. 1,211 - 5 4 - 9
Idaho................... 903 1 8 - - 9
Indiana................. 4,496 - 14 15 - 29
Kentucky(1)............. 2,080 1 12 4 - 17
Louisiana(1)............ 485 - - 1 2 3
Maine(1)................ 776 - 10 - - 10
Massachusetts(1)........ 4,039 - 31 3 2 36
Mississippi(1).......... 125 - - 1 - 1
Montana(1).............. 446 - 2 1 - 3
Nebraska(1)............. 163 - 1 - - 1
Nevada(1)............... 180 - 2 - - 2
New Hampshire(1)........ 622 - 3 - 1 4
North Carolina(1)....... 2,764 - 19 4 - 23
Ohio(1)................. 2,155 - 11 4 1 16
Oregon(1)............... 358 - 2 1 - 3
Pennsylvania............ 200 - 1 1 - 2
Rhode Island(1)......... 201 - 2 - - 2
Tennessee(1)............ 2,551 - 4 11 - 15
Texas................... 623 - 1 1 1 3
Utah.................... 848 - 5 1 1 7
Vermont(1).............. 310 - 1 - 1 2
Virginia(1)............. 749 - 4 1 - 5
Washington(1)........... 1,437 1 9 3 - 13
Wisconsin(1)............ 2,291 - 12 2 - 14
Wyoming................. 451 - 4 - - 4
------ --- --- --- --- ---
Totals................ 38,573 6 210 66 13 295
====== === === === === ===
</TABLE>
- --------
(1) These states have Certificate of Need ("CON") regulations. See "--
Governmental Regulation--Health Services Division."
(2) See "--Master Lease Agreements."
Health Services Division Management and Operations
The health services division is managed by a divisional president and a
chief financial officer. The nursing center operations of the division are
divided into four geographic regions with each region headed by an operational
vice president, each of whom reports to the divisional president.
Rehabilitation services operations also are managed by a vice president who
reports to the divisional president. Each nursing center is managed by a
state-licensed administrator who is supported by other professional personnel,
including a director of nursing, staff development professional (responsible
for employee training), activities director, social services director,
12
<PAGE>
licensed dietitian, business office manager and, in general, physical,
occupational and speech therapists. The directors of nursing are state-
licensed nurses who supervise nursing staff which include registered nurses,
licensed practical nurses and nursing assistants. Staff size and composition
vary depending on the size and occupancy of each nursing center and on the
level of care provided by the nursing center. The nursing centers contract
with physicians who serve as medical directors and serve on quality assurance
committees.
The health services division is supported by district and/or regional staff
in the areas of nursing, dietary and rehabilitation services, maintenance,
sales and financial services. In addition, corporate staff provide other
services in the areas of sales assistance, information systems, human resource
management, state and Federal reimbursement, state licensing and
certification, legal, finance and accounting support. Financial control is
maintained principally through fiscal and accounting policies.
Quality Assessment and Improvement
Quality of care is monitored and enhanced by quality assurance committees
and family satisfaction surveys. The quality assurance committees oversee
patient healthcare needs and patient and staff safety. Additionally,
physicians serve on the quality assurance committees as medical directors and
advise on healthcare policies and practices. Regional nursing professionals
visit each nursing center periodically to review practices and recommend
improvements where necessary in the level of care provided and to assure
compliance with requirements under applicable Medicare and Medicaid
regulations. Surveys of patients' families are conducted from time to time in
which the families are asked to rate various aspects of service and the
physical condition of the nursing centers. These surveys are reviewed by
nursing center administrators to help ensure quality patient care.
The health services division provides training programs for nursing center
administrators, managers, nurses and nursing assistants. These programs are
designed to maintain high levels of quality patient care.
Substantially all of the nursing centers currently are certified to provide
services under Medicare and Medicaid programs. A nursing center's
qualification to participate in such programs depends upon many factors, such
as accommodations, equipment, services, safety, personnel, physical
environment and adequate policies and procedures.
Health Services Division Competition
The nursing centers operated by the health services division compete on a
local and regional basis with other nursing centers. The competitive position
varies within each community served. The Company believes that the quality of
care provided, reputation, location and physical appearance of its nursing
centers and, in the case of private patients, the charges for services, are
significant competitive factors. Some competing facilities are located in
buildings that are newer than those operated by the health services division
and may provide services not offered by the health services division. Although
there is limited, if any, price competition with respect to Medicare and
Medicaid patients (since revenues received for services provided to such
patients are based generally on fixed rates), there is significant competition
for private payment patients.
Although the rehabilitation services markets are fragmented, significant
competition exists for these services. The primary competitive factors for the
rehabilitation services markets are quality of services, charges for services
and responsiveness to the needs of patients, families and the facilities in
which the services are provided. Certain hospitals operate their own step-down
and subacute facilities. Other hospital companies have entered the
rehabilitation services markets through affiliation agreements and management
contracts. In addition, many nursing centers are developing internal staff to
provide these services, particularly in response to the implementation of PPS.
13
<PAGE>
The long-term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, assisted living facilities, home health
agencies and similar institutions. The industry includes government-owned,
church-owned, secular not-for-profit and for-profit institutions. Many of
these competitors have greater financial and other resources than the Company.
HOSPITAL DIVISION
The hospitals operated by the Company's hospital division primarily provide
long-term acute care to medically complex patients. These hospitals have the
capability to treat patients who suffer from multiple systemic failures or
conditions such as neurological disorders, head injuries, brain stem and
spinal cord trauma, cerebral vascular accidents, chemical brain injuries,
central nervous system disorders, developmental anomalies and cardiopulmonary
disorders. Medically complex patients are often dependent on technology for
continued life support, such as mechanical ventilators, total parental
nutrition, respiration or cardiac monitors and dialysis machines. Generally,
approximately 60% of the hospital division's medically complex patients are
ventilator-dependent for some period of time during their hospitalization. The
hospital division's patients suffer from conditions which require a high level
of monitoring and specialized care, yet may not necessitate the continued
services of an intensive care unit. Due to their severe medical conditions,
the hospital division's patients generally are not clinically appropriate for
admission to a nursing center or rehabilitation hospital. The medical
condition of most of the hospital patients is periodically or chronically
unstable. By combining general acute care services with the ability to care
for medically complex patients, the Company believes that its long-term care
hospitals provide its patients with high quality, cost-effective care. During
1999, the average length of stay for medically complex patients in the long-
term care hospitals operated by the hospital division was approximately 32
days. Although the hospital division's patients range in age from pediatric to
geriatric, typically approximately 70% of the hospital division's patients are
over 65 years of age. Hospital operations are subject to regulation by a
number of government and private agencies. See "--Governmental Regulation--
Hospital Division."
Services Provided by Hospital Division
Medically Complex. The hospital division has devised a comprehensive program
of care for its medically complex patients that draws upon the talents of
interdisciplinary teams, including licensed pulmonary specialists. The teams
evaluate medically complex patients upon admission to determine treatment
programs. Where appropriate, the treatment programs may involve the services
of several disciplines, such as pulmonary and physical therapy. Individual
attention to patients who have the cognitive and physical abilities to respond
to therapy is emphasized. Patients who successfully complete treatment
programs are discharged to nursing centers, rehabilitation hospitals or home
care settings.
General Acute Care. The hospital division operates two general acute care
hospitals. Certain of the hospital division's long-term care hospitals also
provide general acute care and outpatient services in support of their long-
term care services. General acute care and outpatient services may include
inpatient services, diagnostic services, emergency services, CT scanning, one-
day surgery, laboratory, X-ray, respiratory therapy, cardiology and physical
therapy. The hospital division may expand its general acute care and
outpatient services in the future.
Pharmacies. In connection with the Vencare realignment, the hospital
division now provides institutional pharmacy services. The institutional
pharmacy business focuses on providing a full array of institutional pharmacy
services to nursing centers and specialized care centers, including nursing
centers operated by the Company. Institutional pharmacy sales encompass a wide
variety of products including prescription medication, prosthetics and
respiratory services. In addition, the hospital division provides a variety of
pharmaceutical consulting services designed to assist hospitals, nursing
centers and home health agencies in program administration.
14
<PAGE>
Hospital Division Strategy
The hospital division differentiates its hospitals as a result of its
ability to care for medically complex patients in a high quality, cost-
effective setting. The hospital division is committed to maintaining its
quality of care by dedicating appropriate resources to each of its hospitals.
In addition, the hospital division is focusing its efforts on containing and
reducing costs to operate competitively under the reduced Medicare
reimbursement established by the Budget Act while maintaining quality care.
The hospital division's ability to control costs, including its labor costs,
will significantly impact its future operating results. The hospital division
intends to market aggressively its quality of care standards and broaden its
expertise beyond non-pulmonary services in specific markets to increase
patient census and establish a greater census band of admissions.
The hospital division's emphasis on long-term hospital care allows it to
provide high quality care to medically complex patients on a cost-effective
basis. The Company also believes that the following factors may contribute to
growth in demand for long-term hospital care.
Increased Patient Population. Improved medical care and advancements in
medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital
care. The incidence of respiratory problems increases with age, particularly
in connection with certain degenerative conditions. As the average age of the
United States population increases, the Company believes there will be an
increase in the need for long-term hospital care.
Medically Displaced Patients. The hospital division's patients require a
high level of monitoring and specialized care, yet may not require the
continued services of an intensive care unit. Due to their extended recovery
period, these patients generally would not receive specialized multi-
disciplinary treatment focused on the unique aspects of a long-term recovery
program in a general acute care hospital, and yet are not appropriate for
admission to a nursing center or rehabilitation hospital.
Economically Displaced Patients. Historically, reimbursement policies and
practices designed to control healthcare costs have made it difficult to place
medically complex patients in an appropriate healthcare setting. Under the
Medicare program, general acute care hospitals are reimbursed under a
prospective payment system or a fixed payment system which provides an
economic incentive to general acute care hospitals to minimize the length of a
patient's stay. As a result, these hospitals generally receive less than full
cost for providing care to patients with extended lengths of stay.
Furthermore, the prospective payment system does not provide for reimbursement
more frequently than once every 60 days, placing an additional economic burden
on a general acute care hospital providing long-term care. The long-term care
hospitals operated by the hospital division, however, are excluded from the
prospective payment system and generally receive reimbursement on a more
favorable basis for providing long-term hospital care to Medicare patients.
Commercial reimbursement sources, such as insurance companies and health
maintenance organizations ("HMOs"), some of which pay based on established
hospital charges, typically seek the most economical source of care available.
15
<PAGE>
Selected Hospital Division Operating Data
The following table sets forth certain operating data for the hospital
division after reflecting the realignment of the former Vencare businesses for
all periods presented (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Hospitals:
Revenues....................................... $850,548 $919,847 $785,829
Operating income............................... $136,903 $248,983 $237,445
Facilities in operation at end of period....... 56 57 60
Licensed beds at end of period................. 4,931 4,979 5,273
Patient days................................... 982,301 947,488 767,810
Average daily census........................... 2,691 2,596 2,104
Occupancy %.................................... 56.9 54.0 52.9
Pharmacy:
Revenues....................................... $171,493 $149,991 $167,643
Operating income............................... $ 719 $ 15,327 $ 27,209
</TABLE>
Sources of Hospital Revenues
The hospital division receives payment for hospital services from third-
party payors, including government reimbursement programs such as Medicare and
Medicaid and nongovernment sources such as commercial insurance companies,
HMOs, preferred provider organizations ("PPOs") and contracted providers.
Patients covered by non-government payors generally will be more profitable to
the hospital division than those covered by Medicare and Medicaid programs.
The following table sets forth the approximate percentages of the hospital
patient days and revenues derived from the payor sources indicated:
<TABLE>
<CAPTION>
Medicare Medicaid Private and Other
---------------- ---------------- ---------------------
Patient Patient Patient
Year Days Revenues Days Revenues Days Revenues
---- ------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999............. 68% 58% 12% 11% 20% 31%
1998............. 68 59 13 10 19 31
1997............. 68 63 12 8 20 29
</TABLE>
For the year ended December 31, 1999, revenues of the hospital division
totaled approximately $1 billion, or 37% of the Company's total revenues
(before eliminations). Changes caused by the Budget Act have reduced Medicare
payments made to the hospital division related to incentive payments under the
Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), allowable costs
for capital expenditures and bad debts, and payments for services to patients
transferred from a general acute care hospital. See "--Governmental
Regulation--Healthcare Reform" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
16
<PAGE>
Hospital Facilities
The following table lists by state the number of hospitals and related
licensed beds owned by the Company or leased from Ventas and other third
parties as of December 31, 1999:
<TABLE>
<CAPTION>
Number of Facilities
-------------------------------------------
Licensed Owned by Leased from Leased from
State Beds the Company Ventas (2) Other Parties Total
- ----- -------- ----------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Arizona.................... 109 - 2 - 2
California................. 543 2 6 - 8
Colorado................... 68 - 1 - 1
Florida(1)................. 536 - 6 1 7
Georgia(1)................. 72 - - 1 1
Illinois(1)................ 616 - 4 1 5
Indiana.................... 167 - 2 1 3
Kentucky(1)................ 374 - 1 - 1
Louisiana.................. 168 - 1 - 1
Massachusetts(1)........... 86 - 2 - 2
Michigan(1)................ 400 - 2 - 2
Minnesota.................. 111 - 1 - 1
Missouri(1)................ 227 - 2 - 2
Nevada..................... 52 - 1 - 1
New Mexico................. 61 - 1 - 1
North Carolina(1).......... 124 - 1 - 1
Oklahoma................... 59 - 1 - 1
Pennsylvania............... 115 - 2 - 2
Tennessee(1)............... 49 - 1 - 1
Texas...................... 716 2 6 2 10
Virginia(1)................ 164 - 1 - 1
Washington(1).............. 80 1 - - 1
Wisconsin.................. 34 1 - - 1
----- --- --- --- ---
Totals................... 4,931 6 44 6 56
===== === === === ===
</TABLE>
- --------
(1) These states have CON regulations. See "--Governmental Regulation--
Hospital Division."
(2) See "--Master Lease Agreements."
Hospital Patient Admissions
Substantially all of the acute and medically complex patients admitted to
the hospitals are transferred from other healthcare providers. Patients are
referred from general acute care hospitals, rehabilitation hospitals, nursing
centers and home care settings. Referral sources include discharge planners,
case managers of managed care plans, social workers, physicians, third party
administrators, HMOs and insurance companies.
The hospital division employs case managers who educate healthcare
professionals from other referral sources as to the unique nature of the
services provided by its long-term care hospitals. The case managers develop
an annual admission plan for each hospital with assistance from the hospital's
administrator. To identify specific service opportunities, the admission plan
for each hospital is based on a variety of factors, including population
characteristics, physician characteristics and incidence of disability
statistics. The admission plans involve ongoing education of local physicians,
utilization review and case management personnel, acute care hospitals, HMOs
and PPOs. The hospital division maintains a pre-admission assessment system at
its regional referral centers to evaluate certain clinical and other
information in determining the appropriateness of each patient referred to its
hospitals.
17
<PAGE>
Professional Staff
Each hospital is staffed with a multi-disciplinary team of healthcare
professionals. A professional nursing staff trained to care for the long-term
acute patient is on duty 24 hours each day in the hospitals. Other
professional staff includes respiratory therapists, physical therapists,
occupational therapists, speech therapists, pharmacists, registered dietitians
and social workers.
The physicians at the hospitals generally are not employees of the Company
and may be members of the medical staff of other hospitals. Each of the
hospitals has a fully credentialed, multi-specialty medical staff to meet the
needs of the medically complex, long-term acute patient. Typically, each
patient is visited at least once a day by a physician. A broad range of
physician services is available including, but not limited to, pulmonology,
internal medicine, infectious diseases, neurology, nephrology, cardiology,
radiology and pathology. Generally, the hospital division does not enter into
exclusive contracts with physicians to provide services to its patients.
The hospital division believes that its future success will depend in part
upon its continued ability to hire and retain qualified personnel.
Accordingly, the hospital division seeks the highest quality of professional
staff within each market.
Hospital Division Management and Operations
The hospital division is headed by a divisional president and a chief
financial officer. The operations of the hospitals are divided into five
geographic regions with each region headed by an operational vice president,
each of whom reports to the divisional president. Institutional pharmacy
operations also are managed by a vice president who reports to the divisional
president. A hospital administrator supervises and is responsible for the day-
to-day operations at each of the hospitals. Each hospital also employs a
controller who monitors the financial matters of each hospital, including the
measurement of actual operating results compared to budgets. In addition, each
hospital employs an assistant administrator to oversee the clinical operations
of the hospital and a quality assurance manager to direct an integrated
quality assurance program. The Company's corporate headquarters also provides
services in the areas of information systems design and development, training,
human resource management, reimbursement expertise, legal advice, technical
accounting support, purchasing and facilities management. Financial control is
maintained through fiscal and accounting policies. The hospital division has
standardized operating procedures and monitors its hospitals to assure
consistency of operations.
Quality Assessment and Improvement
The hospital division maintains a strategic outcome program which includes a
centralized pre-admission evaluation program and concurrent review of all of
its patient population against utilization and quality screenings, as well as
quality of life outcomes data collection and patient and family satisfaction
surveys. In addition, each hospital has an integrated quality assessment and
improvement program administered by a quality review manager which encompasses
utilization review, quality improvement, infection control and risk
management. The objective of these programs is to ensure that patients are
admitted appropriately to its hospitals and that quality healthcare is
provided in a cost-effective manner.
The hospital division has implemented a program whereby its hospitals are
reviewed by internal quality auditors for compliance with standards of the
Joint Commission on Accreditation of Health Care Organizations ("JCAHO"). The
purposes of this internal review process are to (i) ensure ongoing compliance
with industry recognized standards for hospitals, (ii) assist management in
analyzing each hospital's operations and (iii) provide consulting and
educational programs for each hospital to identify opportunities to improve
patient care.
Hospital Division Competition
As of December 31, 1999, the hospitals operated by the hospital division
were located in 45 geographic markets in 23 states. In each geographic market,
there are general acute care hospitals which provide services comparable to
those offered by the Company's hospitals. In addition, the hospital division
believes that as of December 31, 1999 there were approximately 300 hospitals
in the United States certified by Medicare as general long-term hospitals,
some of which provide similar cardiopulmonary services to those provided by
the hospital division. Many of these general acute care hospitals and long-
term hospitals are larger and more established than the hospitals operated by
the hospital division. Certain competing hospitals are operated by not-for-
profit,
18
<PAGE>
nontaxpaying or governmental agencies, which can finance capital expenditures
on a tax-exempt basis, and which receive funds and charitable contributions
unavailable to the hospital division. Cost containment efforts by Federal and
state governments and other third-party payors designed to encourage more
efficient utilization of hospital services generally have resulted in lower
hospital industry occupancy rates in recent years. As a result of these
efforts, a number of acute care hospitals have converted to specialized care
facilities. Some hospitals have developed step-down units which attempt to
serve the needs of patients who require care at a level between that provided
by an intensive care unit and a general medical/surgical floor. This trend may
continue due to the current oversupply of acute care hospital beds and the
increasing consolidation and affiliation of free-standing hospitals into
larger systems. As a result, the hospital division may experience increased
competition from existing hospitals and converted facilities.
Competition for patients covered by non-government reimbursement sources is
intense. The primary competitive factors in the long-term intensive care
business include quality of services, charges for services and responsiveness
to the needs of patients, families, payors and physicians. Other companies
have entered the long-term intensive care market with licensed hospitals that
compete with the Company's hospitals.
Some nursing centers, while not licensed as hospitals, have developed units
which provide a greater intensity of care than typically provided by a nursing
center. The condition of patients in these nursing centers is less acute than
the condition of patients in the hospitals operated by the hospital division.
The competitive position of any hospital also is affected by the ability of
its management to negotiate contracts with purchasers of group healthcare
services, including private employers, PPOs and HMOs. Such organizations
attempt to obtain discounts from established hospital charges. The importance
of obtaining contracts with PPOs, HMOs and other organizations which finance
healthcare, and its effect on a hospital's competitive position, vary from
market to market, depending on the number and market strength of such
organizations.
The hospital division also competes with other companies in providing
institutional pharmacy services. Many of these companies have greater
financial and other resources than the Company.
MASTER LEASE AGREEMENTS
As part of the Spin-off, the Company and Ventas entered into four master
lease agreements that set forth the material terms governing the lease of
substantially all of the real property, buildings and other improvements
(primarily long-term hospitals and nursing centers) used by the Company. The
leased properties are divided into groups of properties and a master lease
agreement was entered into with respect to each such group of properties. In
August 1998, the Company and Ventas entered into a fifth lease agreement with
respect to a nursing center in Corydon, Indiana (the "Corydon Lease"). The
provisions of the Corydon Lease, except for the provisions relating to rental
amounts and the termination date, are substantially similar to the terms of
the other master lease agreements with Ventas. The four master lease
agreements, as amended, and the Corydon Lease shall be referred to herein
collectively as the "Master Lease Agreements" and each, a "Master Lease
Agreement." The following description of the Master Lease Agreements does not
purport to be complete but contains a summary of the material provisions of
the Master Lease Agreements.
Each Master Lease Agreement includes land, buildings, structures and other
improvements on the land, easements and similar appurtenances to the land and
improvements, and permanently affixed equipment, machinery and other fixtures
relating to the operation of the leased properties. There are multiple bundles
of leased properties under each Master Lease Agreement (other than the Corydon
Lease) with each bundle containing approximately seven to twelve leased
properties. All leased properties within a bundle have primary terms ranging
from 10 to 15 years (the "Base Term"). At the option of the Company, all, but
not less than all, of the leased properties in a bundle, may be extended for
one five-year renewal term beyond the Base Term (the "First Renewal Term") at
the then existing rental rate plus 2% per annum. At the option of the Company,
all, but not less than all, of the leased properties in a bundle, may be
extended for two additional five-year renewal terms beyond the First Renewal
Term (together with the First Renewal Term, the "Renewal Term") at the then
fair market value rental rate. The Base Term and Renewal Term of each leased
property are subject to termination upon default by either party and certain
other conditions described in the Master Lease Agreements.
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Rental Amounts
Each Master Lease Agreement is commonly known as a triple-net lease or an
absolute-net lease. The Annual Base Rent (as defined in the Master Lease
Agreements) for the twelve-month period commencing immediately following the
Spin-off for the leased properties was approximately $222 million, with a 2%
per annum escalator over the previous twelve-month period if certain lessee
revenue parameters are obtained. During 1999, the Annual Base Rent was
approximately $225 million. In addition, the Company is required to pay for
(i) all insurance required in connection with the leased properties and the
business conducted on the leased properties, (ii) all taxes levied on or with
respect to the leased properties (other than taxes on the net income of
Ventas) and (iii) all utilities and other services necessary or appropriate
for the leased properties and the business conducted on the leased properties.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the Stipulation which provides for the payment by the Company of a reduced
monthly rent of approximately $15.1 million beginning in September 1999. The
difference between the $18.9 million base monthly rent under the Master Lease
Agreements and the reduced monthly rent is being accrued as an administrative
expense subject to compromise in the Chapter 11 Cases. During the pendency of
the Chapter 11 Cases, the Company is recording the contractual amount of the
$18.9 million monthly base rent.
Use of the Leased Property
The Master Lease Agreements require that the Company utilize the leased
properties solely for the provision of healthcare services and related uses
and as Ventas may otherwise consent (which consent may not be unreasonably
withheld). The Company is responsible for maintaining or causing to be
maintained all licenses, certificates and permits necessary for it to comply
with various healthcare regulations. The Company is obligated to operate
continuously each leased property as a provider of healthcare services.
Events of Default
An "Event of Default" will be deemed to have occurred under any Master Lease
Agreement if, among other things, the Company fails to pay rent or other
amounts within five days after notice; the Company fails to comply with
covenants continuing for 30 days or, so long as diligent efforts to cure such
failure are being made, such longer period (not to exceed 180 days) as is
necessary to cure such failure; certain bankruptcy or insolvency events occur,
including filing a petition of bankruptcy or a petition for reorganization
under the Bankruptcy Code; the Company ceases to operate any leased property
as a provider of healthcare services for a period of 30 days; the Company
loses any required healthcare license, permit or approval; the Company fails
to maintain insurance; the Company creates or allows to remain certain liens;
a reduction occurs in the number of licensed beds in excess of 10% of the
number of licensed beds in the applicable facility on the date the applicable
facility was leased; certification for reimbursement under Medicare with
respect to a participating facility is revoked; any breach of any material
representation or warranty of the tenant; a tenant becomes subject to
regulatory sanctions and has failed to cure or satisfy such regulatory
sanctions within its specified cure period in any material respect with
respect to any facility; or a default under any guaranty of the lease or under
certain indemnity agreements between the Company and Ventas.
Except as noted below, upon an Event of Default under a particular Master
Lease Agreement, Ventas may, at its option, exercise the following remedies:
(i) after not less than ten (10) days' notice to the Company, terminate the
Master Lease Agreement, repossess the leased property and relet the leased
property to a third party and require the Company pay to Ventas, as liquidated
damages, the net present value of the rent for the balance of the term,
discounted at the prime rate; (ii) without terminating the Master Lease
Agreement, repossess the leased property and relet the leased property with
the Company remaining liable under the Master Lease Agreement for all
obligations to be performed by the Company thereunder, including the
difference, if any, between the rent under the Master Lease Agreement and the
rent payable as a result of the reletting of the leased property; and (iii)
seek any and all other rights and remedies available under law or in equity.
If an Event of Default is caused by (i) the loss of any required healthcare
license, permit or approval, (ii) a reduction in the number of licensed beds
in excess of 10% of the number of licensed beds in the applicable
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facility or a revocation of certification for reimbursement under Medicare
with respect to any facility that participates in such programs, or (iii) the
tenant becoming subject to regulatory sanctions and failing to cure or satisfy
such regulatory sanctions within its specified cure period, Ventas may, if it
so desires, terminate the lease with respect to only the applicable facility
that is the subject of the Event of Default and collect liquidated damages
attributable to such facility multiplied by the number of years remaining on
the applicable lease; provided, however, that upon the occurrence of the fifth
Event of Default as set forth in this paragraph, determined on a cumulative
basis, Ventas would be permitted to exercise all of the rights and remedies
set forth in the Master Lease Agreement with respect to all facilities covered
under the Master Lease Agreement, without regard to the facility from which
the Event of Default emanated.
Any remedies provided under the Master Lease Agreements currently are
subject to the supervision of the Bankruptcy Court. See "--Proceedings under
Chapter 11 of the Bankruptcy Code--Agreements with Ventas."
Maintenance, Modification and Capital Additions
The Company is required to maintain the leased properties in good repair and
condition, making all repairs, modifications and additions required by law,
including any Capital Addition (as defined). The Company is required to pay
for all capital expenditures and other expenses for the maintenance, repair,
restoration or refurbishment of a leased property (and any Capital Addition).
The Company also is required to maintain all personal property at each of the
leased properties in good order, condition and repair, as is necessary to
operate the leased property in compliance with all applicable licensure and
certification requirements, in compliance with all applicable legal
requirements and insurance requirements and otherwise in accordance with
customary practice in the industry. The Company may undertake any capital
addition that materially adds to or improves a leased property (a "Capital
Addition") without the consent of Ventas, subject to the Company delivering to
Ventas the plans and specifications and the Company's compliance with
customary construction requirements.
Insurance
The Company is required to maintain liability, all risk property and
workers' compensation insurance for the leased properties at a level at least
comparable to those in place with respect to the leased properties prior to
the Spin-off.
Environmental Matters
The Master Lease Agreements provide that the Company will indemnify Ventas
(and its officers, directors and stockholders) against any environmental
claims (including penalties and clean up costs) resulting from any condition
arising on or under, or relating to, the leased properties at any time on or
after the date of the Master Lease Agreements. The Company also will indemnify
Ventas (and its officers, directors and stockholders) against any
environmental claim (including penalties and clean up costs) resulting from
any condition permitted to deteriorate on or after the date of the Master
Lease Agreements. Ventas has agreed to indemnify the Company (and its
officers, directors and stockholders) against any environmental claims
(including penalties and clean-up costs) resulting from any condition arising
on or under, or relating to, the leased properties at any time before the date
of the Master Lease Agreements.
Assignment and Subletting
The Master Lease Agreements provide that the Company may not assign,
sublease or otherwise transfer any leased property or any portion of a leased
property as a whole (or in substantial part), including upon a change of
control (as defined in the Master Lease Agreements), without the consent of
Ventas, which may not be unreasonably withheld if the proposed assignee is a
creditworthy entity with sufficient financial stability to satisfy its
obligations under the Master Lease Agreement, has not less than four years
experience in operating healthcare facilities, has a favorable business and
operational reputation and character and agrees to comply
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with the use restrictions in the Master Lease Agreements. The obligation of
Ventas to consent to a subletting or assignment is subject to the reasonable
approval rights of any mortgagee and/or the lenders under its credit
agreement. The Company may sublease up to 20% of each leased property for
restaurants, gift shops and other stores or services customarily found in
hospitals or nursing centers without the consent of Ventas, subject, however,
to there being no material alteration in the character of the leased property
or in the nature of the business conducted on such leased property.
Right of First Refusal to Purchase
The Master Lease Agreement provides that if Ventas receives a bona fide
offer from a third party to purchase any leased property during the first
three years of the Base Term and Ventas wishes to accept the offer, prior to
entering into a contract of sale with the third party, Ventas must first offer
the Company the right to purchase the leased property on substantially the
same terms and conditions as are contained in the third party offer.
MANAGEMENT INFORMATION SYSTEMS
The Company's information systems are centralized at its corporate
headquarters. These information systems enable the Company to monitor
information technology and other operational systems for each of its
facilities. In addition, these systems allow the Company to analyze and manage
the financial performance of each facility. In connection with its Year 2000
compliance program, the Company replaced its financial information system and
replaced or remediated the patient accounting systems for the health services
and hospital divisions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
The Company's hospitals utilize VenTouch(TM), an internally developed
electronic patient medical record system. VenTouch(TM) is a software
application which allows nurses, physicians and other clinicians to manage
clinical information utilized in the patient care delivery process. Among the
features of VenTouch(TM) are on-line access and update of an electronic
patient chart, an on-line trend analysis using electronic flowsheets and
graphs, and remote access for authorized users. The system is designed to
decrease administrative time, reduce paper and support the delivery of quality
patient care. The Company intends to implement Ventouch(TM) in 13 additional
hospitals in 2000 and continues to update and enhance existing facilities
using VenTouch(TM).
The Company's nursing centers currently use an internally developed
application named Resident Care System ("RCS") for data entry of resident
clinical information. RCS includes state-specific Minimum Data Set ("MDS")
assessment forms, and is integrated with an internally developed resource
utilization group tool. The combination of these applications allows for the
timely and accurate electronic data transfer of MDS forms to HCFA in each
state. During 2000, the Company intends to fully integrate RCS with the
patient accounting system employed by the health services division.
During 1997, the Company began the installation of a customized version of
VenTouch(TM) in several of its nursing centers. During this pilot process, the
Company determined that VenTouch(TM) did not support effectively the nursing
center operational processes, especially in facilities with lower acuity
patients. Accordingly, the Company determined in the fourth quarter of 1998 to
remove VenTouch(TM) from these facilities in 1999 and continue to standardize
the RCS application for all nursing centers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Unusual
Transactions."
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GOVERNMENTAL REGULATION
Medicare and Medicaid
Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over and certain disabled persons.
Medicaid is a medical assistance program administered by each state pursuant
to which healthcare benefits are available to certain indigent patients.
Within the Medicare and Medicaid statutory framework, there are substantial
areas subject to administrative rulings, interpretations and discretion which
may affect payments made under Medicare and Medicaid. A substantial portion of
the Company's revenues are derived from patients covered by Medicare and
Medicaid. See "--Health Services Division--Sources of Nursing Center Revenues"
and "--Hospital Division--Sources of Hospital Revenues."
Health Services Division
The health services division is subject to various Federal and state
regulations. In particular, the development and operation of nursing centers
and the provision of healthcare services are subject to Federal, state and
local laws relating to the adequacy of medical care, equipment, personnel,
operating policies, fire prevention, rate-setting and compliance with building
codes and environmental laws. Nursing centers are subject to periodic
inspection by governmental and other authorities to assure continued
compliance with various standards, their continued licensing under state law,
certification under the Medicare and Medicaid programs and continued
participation in the Veterans Administration program. The failure to obtain,
retain or renew any required regulatory approvals or licenses could affect
adversely nursing center operations.
The nursing centers managed and operated by the health services division are
licensed either on an annual or bi-annual basis and certified annually for
participation in Medicare and Medicaid programs through various regulatory
agencies which determine compliance with Federal, state and local laws. These
legal requirements relate to the quality of the nursing care provided, the
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers. Federal
regulations under OBRA affect the survey process for nursing centers and the
authority of state survey agencies and HCFA to impose sanctions on facilities
based upon noncompliance with certain requirements. Available sanctions
include imposition of civil monetary penalties, temporary suspension of
payment for new admissions, appointment of a temporary manager, suspension of
payment for eligible patients and suspension or decertification from
participation in the Medicare and/or Medicaid programs.
The Company believes that substantially all of its nursing centers currently
are in material compliance with applicable Medicare and Medicare conditions of
participation. In the ordinary course of business, however, the nursing
centers receive statements of deficiencies from regulatory agencies. In
response, the health services division will implement plans of correction to
address the alleged deficiencies. In most instances, the health services
division and the regulatory agency will agree upon the plan of correction to
bring the nursing center into compliance with regulatory requirements. In some
cases or upon repeat violations, the regulatory agency may take a number of
adverse actions against the nursing center. These adverse actions may include
the imposition of fines, temporary suspension of admission of new patients to
the nursing center, decertification from participation in the Medicaid and/or
Medicare programs and, in extreme circumstances, revocation of the nursing
center's license.
The health services division also is subject to Federal and state laws which
govern financial and other arrangements between healthcare providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between healthcare providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the Medicare and
Medicaid antikickback, antifraud and abuse amendments codified under Section
1128(B)(b) of the Social Security Act ("Antikickback Amendments"). These
provisions prohibit, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. The health services division also is subject to additional
antifraud and abuse provisions contained in the
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Budget Act. In addition, some states restrict certain business relationships
between physicians and pharmacies, and many states prohibit business
corporations from providing, or holding themselves out as a provider of,
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs as well as civil and criminal penalties. These laws
vary from state to state.
In certain circumstances, Federal law mandates that conviction for certain
abusive or fraudulent behavior with respect to one nursing center may subject
other facilities under common control or ownership to disqualification for
participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all nursing centers under common control or ownership
within a state are subject to delicensure if any one or more of such
facilities are delicensed.
Certificate of Need and State Licensing. CON regulations control the
development and expansion of healthcare services and facilities in certain
states. CON laws generally provide that approval must be obtained from the
designated state health planning agency prior to the expansion of existing
facilities, construction of new facilities, addition of beds, acquisition of
major items of equipment or introduction of new services. The stated objective
of the CON process is to promote quality healthcare at the lowest possible
cost and avoid unnecessary duplication of services, equipment and facilities.
Certain states also require regulatory approval prior to certain changes in
ownership of a nursing center. Certain states have eliminated their CON
programs and other states are considering alternatives to their CON programs.
Of the 31 states in which the Company's nursing centers are located as of
December 31, 1999, Alabama, Connecticut, Florida, Georgia, Kentucky,
Louisiana, Maine, Massachusetts, Mississippi, Montana, Nebraska, Nevada, New
Hampshire, North Carolina, Ohio, Oregon, Rhode Island, Tennessee, Vermont,
Virginia, Washington and Wisconsin have CON programs. To the extent that CONs
or other similar approvals are required for expansion of the operations of the
health services division, either through facility acquisitions, expansion or
provision of new services or other changes, such expansion could be affected
adversely by the failure or inability to obtain the necessary approvals,
changes in the standards applicable to such approvals or possible delays and
expenses associated with obtaining such approvals.
State licensing is a prerequisite to the operation of each nursing center
and to participation in government programs. Once a nursing center becomes
licensed and operational, it must continue to comply with Federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the nursing centers operated by the health services division
have obtained the necessary licenses to conduct business.
Hospital Division
The hospital division is subject to various Federal and state regulations.
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by HHS relating to the type
of hospital, its equipment, personnel and standard of medical care, as well as
comply with state and local laws and regulations. The Company has developed a
management system to comply with the various standards and requirements. Each
hospital employs a person who is responsible for an on-going quality
assessment and improvement program. Hospitals undergo periodic on-site
Medicare certification surveys, which generally are limited if the hospital is
accredited by JCAHO. As of December 31, 1999, all of the hospitals operated by
the hospital division were certified as Medicare providers and 54 of such
hospitals also were certified by their respective state Medicaid programs. A
loss of certification could affect adversely a hospital's ability to receive
payments from Medicare and Medicaid programs.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS for acute care hospitals as a means of
controlling healthcare costs. Under PPS, Medicare inpatient costs are
reimbursed based upon a fixed payment amount per discharge using diagnosis
related groups ("DRGs"). The DRG payment under PPS is based upon the national
average cost of treating a Medicare patient's condition. Although the average
length of stay varies for each DRG, the average stay for all Medicare patients
subject to PPS is approximately six days. An
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additional outlier payment is made for patients with higher treatment costs.
Outlier payments are only designed to cover marginal costs. Additionally, it
takes 60 days or more for PPS payments to be made. Thus, PPS creates an
economic incentive for general short-term acute care hospitals to discharge
medically complex Medicare patients as soon as clinically possible. Hospitals
that are certified by Medicare as general long-term hospitals are excluded
from PPS. Management believes that the incentive for short-term acute care
hospitals to discharge medically complex patients as soon as clinically
possible creates a substantial referral source for its long-term hospitals.
The Social Security Amendments of 1983 excluded certain hospitals including
general long-term hospitals from PPS. A general long-term hospital is defined
as a hospital which has an average length of stay greater than 25 days.
Inpatient operating costs for general long-term hospitals are reimbursed under
the cost-based reimbursement system, subject to a computed target rate (the
"Target") per discharge for inpatient operating costs established by TEFRA. As
discussed below, the Budget Act made significant changes to the TEFRA
provisions.
Prior to the Budget Act, Medicare operating costs per discharge in excess of
the Target were reimbursed at the rate of 50% of the excess up to 10% of the
Target. Hospitals whose operating costs were lower than the Target were
reimbursed their actual costs plus an incentive. This incentive was equal to
50% of the difference between their actual costs and the Target and may not
exceed 5% of the Target. For cost report periods beginning on or after October
1, 1997, the Budget Act reduced the incentive payments to an amount equal to
15% of the difference between the actual costs and the Target, but not to
exceed 2% of the Target. Costs in excess of the Target are still being
reimbursed at the rate of 50% of the excess up to 10% of the Target but the
threshold to qualify for such payments was raised from 100% to 110% of the
Target. The Budget Act also capped the Targets based on the 75th percentile
for each category of hospitals using 1996 data.
Prior to October 1, 1997, new hospitals could apply for an exemption from
the TEFRA Target provisions. For hospitals certified prior to October 1, 1992,
the exemption was optional and, if granted, lasted for three years. For
certifications since October 1, 1992, the exemption is automatic and is
effective for two years. Under the Budget Act, a new provider will no longer
receive unlimited cost-based reimbursement for its first few years in
operation. Instead, for the first two years, it will be paid the lower of its
costs or 110% of the median TEFRA Target for 1996 adjusted for inflation.
During this two year period, providers remain subject to the TEFRA penalty and
incentive payments discussed in the previous paragraph.
As of December 31, 1999, 54 of the hospitals operated by the Company were
subject to TEFRA Target provisions. During 1999, one additional hospital
became subject to TEFRA Target provisions. The reduction in TEFRA incentive
payments had a material adverse effect on the hospital division's operating
results in 1998 and 1999. These reductions, which began between May 1, 1998
and September 1, 1998 with respect to the Company's hospitals, are expected to
have a material adverse impact on hospital revenues in the future and may
impact adversely the Company's ability to develop additional long-term care
hospitals. The Company's two acute care hospitals are subject to the
prospective payment system.
Medicare and Medicaid reimbursements generally are determined from annual
cost reports filed by the Company which are subject to audit by the respective
agency administering the programs. Management believes that adequate
provisions for loss have been recorded to reflect any adjustments which could
result from audits of these cost reports.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for
services provided to a patient. Such review is subject to administrative and
judicial appeal. Each of the hospitals operated by the hospital division
employs a clinical professional to administer the hospital's integrated
quality assurance and improvement program, including its utilization review
program. PRO denials have not had a material adverse effect on the hospital
division's operating results.
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The Antikickback Amendments prohibit certain business practices and
relationships that might affect the provision and cost of healthcare services
reimbursable under Medicare and Medicaid. Sanctions for violating the
Antikickback Amendments include criminal and civil penalties and exclusion
from the Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid
Patient and Program Protection Act of 1987, HHS and the OIG specified certain
Safe Harbors (as hereinafter defined) which describe conduct and business
relationships permissible under the Antikickback Amendments. These Safe Harbor
regulations have resulted in more aggressive enforcement of the Antikickback
Amendments by HHS and the OIG.
Section 1877 of the Social Security Act (commonly known as "Stark I") states
that a physician who has a financial relationship with a clinical laboratory
generally is prohibited from referring patients to that laboratory. The
Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to expand greatly the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (collectively referred to as the
"Stark Provisions"), a "financial relationship" is defined as an ownership
interest or a compensation arrangement. If such a financial relationship
exists, the entity generally is prohibited from claiming payment for such
services under the Medicare or Medicaid programs. Compensation arrangements
generally are exempted from the Stark Provisions if, among other things, the
compensation to be paid is set in advance, does not exceed fair market value
and is not determined in a manner that takes into account the volume or value
of any referrals or other business generated between the parties. These laws
and regulations, however, are extremely complex and the industry has the
benefit of little judicial or regulatory interpretation. The Company believes
that business practices of providers and financial relationships between
providers have become subject to increased scrutiny as healthcare reform
efforts continue on the Federal and state levels.
The Budget Act provided a number of new antifraud and abuse provisions. The
Budget Act contains new civil monetary penalties for violations of the
Antikickback Amendments and imposes an affirmative duty on providers to ensure
that they do not employ or contract with persons excluded from the Medicare
program. The Budget Act also provides a minimum ten year period for exclusion
from participation in Federal healthcare programs for persons convicted of a
prior healthcare offense.
The pharmacy operations now within the hospital division are subject to
regulation by the various states in which business is conducted as well as by
the Federal government. The pharmacies are regulated under the Food, Drug and
Cosmetic Act and the Prescription Drug Marketing Act, which are administered
by the United States Food and Drug Administration. Under the Comprehensive
Drug Abuse Prevention and Control Act of 1970, which is administered by the
United States Drug Enforcement Administration ("DEA"), dispensers of
controlled substances must register with the DEA, file reports of inventories
and transactions and provide adequate security measures. Failure to comply
with such requirements could result in civil or criminal penalties.
JCAHO Accreditation. Hospitals receive accreditation from JCAHO, a
nationwide commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of medical staffs
of hospitals. Generally, hospitals and certain other healthcare facilities are
required to have been in operation at least six months in order to be eligible
for accreditation by JCAHO. After conducting on-site surveys, JCAHO awards
accreditation for up to three years to hospitals found to be in substantial
compliance with JCAHO standards. Accredited hospitals are periodically
resurveyed, at the option of JCAHO, upon a major change in facilities or
organization and after merger or consolidation. As of December 31, 1999, all
of the hospitals operated by the hospital division were accredited by JCAHO.
The hospital division intends to seek and obtain JCAHO accreditation for any
additional facilities it may purchase or lease and convert into long-term
hospitals. The hospital division does not believe that the failure to obtain
JCAHO accreditation at any hospital would have a material adverse effect on
the hospital division's results of operations.
State Regulatory Environment. The hospital division operates seven hospitals
in Florida, a state which regulates hospital rates. These operations
contribute a significant portion of the hospital division's revenues and
operating income. Accordingly, the hospital division's revenues and operating
income could be materially adversely affected by Florida rate setting laws or
other cost containment efforts. The hospital division also
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operates ten hospitals in Texas, eight hospitals in California, and five
hospitals in Illinois which contribute a significant portion of its revenues
and operating income. Although Texas, California and Illinois do not currently
regulate hospital rates, the adoption of such legislation or other cost
containment measures in these or other states could have a material adverse
effect on the hospital division's revenues and operating income. The Company
is unable to predict whether and in what form such legislation may be adopted.
Moreover, the repeal of the Boren Amendment by the Budget Act eases the
restrictions on the states' ability to reduce their Medicaid reimbursement
levels. Certain other states in which the hospital division operates hospitals
require disclosure of specified financial information. The hospital division
considers the regulatory environment, including but not limited to, any
mandated rate setting, in evaluating its hospital operations.
Certificates of Need and State Licensing. Some states (including Florida,
Massachusetts and Tennessee) have amended their CON regulations to require CON
approval prior to the conversion of a hospital from a general short-term
facility to a general long-term facility. Of the 23 states in which its
hospitals were located as of December 31, 1999, Florida, Georgia, Illinois,
Kentucky, Massachusetts, Michigan, Missouri, North Carolina, Tennessee,
Virginia and Washington have CON programs. With one exception, the hospital
division was not required to obtain a CON in connection with previous
acquisitions due to the relatively low renovation costs and the absence of the
need for additional licensed beds or changes in services. CONs may be required
in connection with the future hospital or services expansion of the hospital
division. There can be no assurance that the hospital division will be able to
obtain the CONs necessary for any or all future projects. If the hospital
division is unable to obtain the requisite CONs, its businesses could be
affected adversely.
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with Federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the hospitals operated by the hospital division have obtained
the necessary licenses to conduct business.
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. Virtually
all spending reductions come from reimbursements to 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 established PPS 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 PPS during the first quarter of 1999, all of
the Company's nursing centers adopted 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 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.
In November 1999, the Balanced Budget Refinement Act ("BBRA") was enacted to
provide a measure of relief for some of the impact of PPS. The BBRA makes
temporary adjustments in payments for the care of higher acuity patients,
adjusts payment categories up by 4% for two years beginning in October 2000
and allows nursing centers to transition more rapidly to the Federal payment
rates. The BBRA also imposes a two-year moritorium on certain therapy
limitations for skilled nursing center patients. All of these measures will
expire at the end of 2002.
Including the effect of the BBRA, revenues recorded under PPS in the
Company's health services division are substantially less than the cost-based
reimbursement it received before the enactment of the Budget Act.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division by reducing incentive payments pursuant to TEFRA,
allowable costs for capital expenditures and bad debts, and payments for
services to patients transferred from a general acute care hospital. The
reductions in allowable costs
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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
hospitals operated by the hospital division. The reductions for payments for
services to patients transferred from a general acute care hospital became
effective October 1, 1998. These reductions have had a material adverse impact
on hospital revenues in 1999 and 1998. In addition, these reductions also may
affect adversely the hospital division's ability to develop additional long-
term care hospitals in the future.
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients has declined dramatically. As previously discussed,
Medicare reimbursements to nursing centers under PPS include substantially all
services provided to patients, including ancillary services. Prior to the
implementation of PPS, the costs of such services were reimbursed under cost-
based reimbursement basis. The decline in the demand for ancillary services is
mostly attributable to efforts by nursing centers to reduce operating costs.
As a result, many nursing centers are electing to provide ancillary services
to their patients though internal staff or are seeking lower acuity patients
who require less ancillary services. In response to PPS and a significant
decline in the demand for ancillary services, the Company realigned its
Vencare division in the fourth quarter of 1999 by integrating the
rehabilitation, speech and occupational therapies into the health services
division and assigning the institutional pharmacy business to the hospital
division. Vencare's respiratory therapy and other ancillary businesses have
been discontinued.
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. Regulatory changes in the Medicare and
Medicaid reimbursement systems applicable to the hospital division also are
being considered. There also are 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.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that payments
under governmental and private third-party payor programs will remain at
levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that facilities operated by the Company,
or the provision of services and supplies by the Company, will meet the
requirements for participation in such programs.
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.
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ADDITIONAL INFORMATION
Employees
As of December 31, 1999, the Company had approximately 39,400 full-time and
13,600 part-time and per diem employees. The Company has approximately 2,500
unionized employees under 25 collective bargaining agreements as of December
31, 1999.
Liability Insurance
The Company's healthcare operations are insured by the Company's wholly
owned captive insurance company, Cornerstone Insurance Company
("Cornerstone"). Cornerstone insures initial losses up to certain coverage
levels. Coverages for losses in excess of those insured by Cornerstone are
maintained through unrelated commercial insurance carriers.
The Company believes that its insurance is adequate in amount and coverage.
There can be no assurance that in the future such insurance will be available
at a reasonable price or that the Company will be able to maintain adequate
levels of professional liability insurance coverage.
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding the Company's expected future financial
position, results of operations, cash flows, liquidity, financing plans,
business strategy, budgets, projected costs and capital expenditures,
competitive position, growth opportunities, plans and objectives of management
for future operations and words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ
materially from the Company's expectations as a result of a variety of
factors, including, without limitation, those discussed below.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this "Cautionary Statements"
section and elsewhere in this Annual Report on Form 10-K. 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. Factors that may
affect the plans or results of the Company include, without limitation, the
ability of the Company to continue as a going concern; the delays or the
inability to complete the Company's Plan of Reorganization; the ability of the
Company to operate pursuant to the terms of the DIP Financing; the ability of
the Company to operate successfully under the Chapter 11 Cases; risks
associated with operating a business in Chapter 11; adverse actions which may
be taken by creditors and the outcome of various bankruptcy proceedings;
adverse developments with respect to the Company's liquidity or results of
operations; the Company's ability to attract patients given its current
financial position; the ability of the Company to attract and retain key
executives and other personnel; the effects of healthcare reform and
legislation on the Company's business strategy and operations; the Company's
ability to control costs, including labor costs, in response to PPS; adverse
developments with respect to the Company's settlement discussions with the DOJ
concerning ongoing investigations; and the dramatic increase in the costs of
defending and insuring against alleged patient care liability claims. The
Company cautions investors that any forward-looking statements made by the
Company are not guarantees of 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 to reflect future
events or developments. Many of these factors are beyond the control of the
Company and its management. See "--Proceedings under Chapter 11 of the
Bankruptcy Code."
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Risks Associated with Potential Defaults under the DIP Financing
If the Company is unable to comply with the covenants contained in the DIP
Financing or is unable to obtain a waiver of any potential covenant violation,
a number of serious financial and operational difficulties may occur,
including the following: (i) the Company's liquidity may be inadequate; (ii)
the Company may be unable to make the required payments under the Master Lease
Agreements as required by the Stipulation; (iii) the Company may be unable to
repay amounts currently owed to third party payors including the Medicare
program; (iv) the Company may be unable to invest adequate capital in its
business to maintain its current facilities; (v) the focus of the Company's
senior management may be diverted from operational matters; (vi) the Company
may be unable to attract and retain key executives and other personnel; (vii)
the Company may experience a reduction in the census at its nursing centers
and hospitals if patients and referral sources become concerned about the
Company's ability to provide quality care, and (viii) suppliers to the Company
may stop providing supplies or services to the Company or provide such
supplies or services only on shortened payment or cash terms. These
difficulties, if they were to occur, would have a material adverse effect on
the Company's liquidity, financial position and results of operations. See "--
Proceedings under Chapter 11 of the Bankruptcy Code" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Substantial Leverage and Ability to Meet Debt Service and Rent Requirements
The Company is highly leveraged and a substantial portion of its cash flow
from operations is dedicated to the payment of principal and interest on
outstanding indebtedness as well as rents related to its leased properties.
During the pendency of the Chapter 11 Cases, the Company is not paying
principal and interest on its Credit Agreement or the 1998 Notes. In
accordance with the Stipulation, the Company is obligated to make monthly
lease payments under the Master Lease Agreements of approximately $15.1
million. Under the HCFA Agreement, the Company is making monthly payments of
approximately $2.0 million to HCFA through March 2004.
The ability of the Company to service its financial obligations, in addition
to its ability to comply with the financial and restrictive covenants
contained in the DIP Financing, is dependent upon, among other things, its
future performance which is subject to financial, economic, competitive,
regulatory and other factors, including obtaining a sustainable capital
structure. Many of these factors are beyond the Company's control. If the
Company is unable to generate sufficient funds to meet its obligations, the
Company may be required to refinance, restructure or otherwise amend some or
all of such obligations, sell assets or raise additional equity. There is no
assurance that such restructuring activities, sales of assets or issuances of
equity can be accomplished or, if accomplished, would raise sufficient funds
to meet these obligations. The Company's high degree of leverage and related
financial covenants also could have a material adverse effect on its ability
to withstand competitive pressures or adverse economic conditions (including
adverse regulatory changes), make material capital expenditures or
acquisitions, obtain future financing or take advantage of business
opportunities that may arise. In addition, a downturn in general economic
conditions or in its businesses could have a material adverse effect on the
Company's ability to meet its obligations or to conduct its businesses in the
ordinary course. See "--Proceedings under Chapter 11 of the Bankruptcy Code"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Potential Consequences of Failing to Pay Rent under Master Lease Agreements
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the Stipulation which provides for the payment by the Company of a reduced
monthly rent of approximately $15.1 million beginning in September 1999. The
Stipulation also continues to toll any statutes of limitations or other time
constraints in a bankruptcy proceeding for claims that might be asserted by
the Company against Ventas. The Stipulation automatically renews for a one-
month period unless either party provides a 14-day notice of termination. The
Stipulation also may be terminated prior to its expiration upon a payment
default by the Company, the consummation of the Plan of Reorganization or the
occurrence of certain defaults under the DIP Financing. The Stipulation also
provides that the Company will continue to fulfill its indemnification
obligations arising from
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the Spin-off. If the parties are unable to resolve their disputes or maintain
an interim resolution, the Company may seek to pursue claims against Ventas
arising out of the Spin-off and seek judicial relief barring Ventas from
exercising any remedies based on the Company's failure to pay some or all of
the rent to Ventas. The Company's failure to pay the rent due or otherwise
comply with the Stipulation, in the absence of judicial relief, would result
in an "Event of Default" under the Master Lease Agreements. Upon an Event of
Default under the Master Lease Agreements, assuming Ventas were to be granted
relief from the automatic stay by the Bankruptcy Court, the remedies available
to Ventas include terminating the Master Lease Agreements, repossessing and
reletting the leased properties and requiring the Company to (i) remain liable
for all obligations under the Master Lease Agreements, including the
difference between the rent under the Master Lease Agreements and the rent
payable as a result of reletting the leased properties or (ii) pay the net
present value of the rent due for the balance of the terms of the Master Lease
Agreements. Such remedies, however, would be subject to the supervision of the
Bankruptcy Court. See "--Proceedings under Chapter 11 of the Bankruptcy Code"
and "--Master Lease Agreements--Events of Default."
Healthcare Industry Risks
Dependence on Reimbursement Process; Medicare and Medicaid as Material
Sources of Revenues
The Company derives a substantial portion of its revenues from third-party
payors, including the Medicare and Medicaid programs. In 1999, the Company
derived approximately two-thirds of its total revenues from the Medicare and
Medicaid programs. Such programs are highly regulated and subject to frequent
and substantial changes. The Budget Act is reducing the projected increase in
Medicare payments over the next five years and made extensive changes in the
Medicare and Medicaid programs. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk.
Efforts to impose greater discounts and more stringent cost controls by
private payors are expected to continue. Net revenue realizable under third-
party payor agreements are subject to change due to examination and
retroactive adjustment by payors during the settlement process. Payors may
disallow in whole or in part requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable or
because additional supporting documentation is necessary. The Company
recognizes revenues from third-party payors and accrues estimated settlement
amounts in the period in which the related services are provided. The Company
estimates these settlement balances by making determinations based on its
prior settlement experience and its interpretation of the applicable
reimbursement rules and regulations. In the hospital division, the Company has
filed numerous collection actions against insurers under Medicare supplement
insurance policies 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 laws governing such policies. Various courts have issued various rulings
on the different issues, some of which have been adverse to the Company and
most of which have been appealed. See "Legal Proceedings." There can be no
assurances that adequate reimbursement levels will continue to be available
for the services provided by the Company which are currently being reimbursed
by Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates could have a material adverse
effect on the Company's liquidity, financial condition and results of
operations.
Extensive Regulation
In the ordinary course of its business, the Company is subject regularly to
inquiries, investigations and audits by Federal and state agencies that
oversee the Healthcare Regulations (as defined). The Company is currently the
subject of ongoing investigations into various Medicare reimbursement issues,
including hospital cost reporting issues, Vencare billing practices and
various quality of care issues in its hospitals and nursing centers. In
addition, the DOJ has filed proofs of claims with respect to certain alleged
claims in the Company's Chapter 11 Cases. See "Legal Proceedings."
The extensive Federal, state and local regulations affecting the healthcare
industry include, but are not limited to, regulations relating to licensure,
conduct of operations, ownership of facilities, addition of facilities,
services and prices for services (collectively, the "Healthcare Regulations").
In particular, the Antikickback Amendments prohibit certain business practices
and relationships that might affect the provisions and cost of
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healthcare services reimbursable under Medicare and Medicaid, including the
payment or receipt of remuneration for the referral of patients whose care
will be paid by Medicare or other governmental programs. Sanctions for
violating the Antikickback Amendments include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs
such as the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, HHS has issued regulations that describe some of the conduct and
business relationships permissible under the Antikickback Amendments ("Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal. Business
arrangements of healthcare service providers that fail to satisfy the
applicable Safe Harbors criteria, however, risk increased scrutiny and
possible sanctions by enforcement authorities.
The Health Insurance Portability and Accountability Act of 1997, which
became effective January 1, 1997, amends, among other things, Title XI (42
U.S.C. (S)1301 et seq.) to broaden the scope of current fraud and abuse laws
to include all health plans, whether or not they are reimbursed under Federal
programs.
In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective
January 1, 1995, to broaden significantly the scope of prohibited physician
referrals under the Medicare and Medicaid programs to providers with which
they have ownership or certain other financial arrangements (the "Self-
Referral Prohibitions"). Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program to
prohibit the payment or receipt of remuneration for the referral of patients
and physician self-referrals regardless of the source of the payment for the
care. These laws and regulations are extremely complex and little judicial or
regulatory interpretation exists. The Company does not believe its
arrangements are in violation of the Self-Referral Prohibitions. There can be
no assurance, however, that governmental officials charged with responsibility
for enforcing the provisions of the Self-Referral Prohibitions will not assert
that one or more of the Company's arrangements are in violation of such
provisions.
The Budget Act also provides a number of new antifraud and abuse provisions.
The Budget Act contains additional civil monetary penalties for violations of
the Antikickback Amendments and imposes an affirmative duty on providers to
insure that they do not employ or contract with persons excluded from the
Medicare program. The Budget Act also provides a minimum ten year period for
exclusion from participation in Federal healthcare programs for persons
convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional
or expanded healthcare facilities or services. CONs, which are issued by
governmental agencies with jurisdiction over healthcare facilities, are at
times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The Company operates nursing centers in 22
states and hospitals in 11 states that require state approval for the
expansion of its facilities and services under CON programs. There can be no
assurance that the Company will be able to obtain a CON for any or all future
projects. If the Company is unable to obtain the requisite CON, its growth and
business could be affected adversely.
The Company believes that the regulatory environment surrounding the long-
term care industry has intensified, particularly on large for-profit, multi-
facility providers. The Federal government has imposed intensive enforcement
policies resulting in a significant increase in the number of inspections,
citations of regulatory deficiencies, and other regulatory sanctions including
terminations from the Medicare and Medicaid programs, bars on Medicare and
Medicaid payments for new admissions and civil monetary penalties. Such
sanctions can have a material adverse effect on the Company's results of
operations, liquidity and financial position. The Company vigorously contests
such sanctions, and in several cases has obtained injunctions against such
sanctions. While the Company generally has been successful to date in
contesting such sanctions, these cases involve significant legal expense and
the time of management.
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The Company is unable to predict the future course of Federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations or the intensity of Federal and state enforcement actions. Changes
in the regulatory framework and sanctions from various enforcement actions
could have a material adverse effect on the Company's liquidity, financial
condition and results of operations. See "--Governmental Regulation."
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. Virtually
all spending reductions come from reimbursements to 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 established PPS 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 PPS during the first quarter of 1999, all of
the Company's nursing centers adopted 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 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.
In November 1999, the BBRA was enacted to provide a measure of relief for
some of the impact of PPS. The BBRA makes temporary adjustments in payments
for the care of higher acuity patients, adjusts payment categories up by 4%
for two years beginning in October 2000 and allows nursing centers to
transition more rapidly to the Federal payment rates. The BBRA also imposes a
two-year moratorium on certain therapy limitations for skilled nursing center
patients. All of these measures will expire at the end of 2002.
Including the effect of the BBRA, revenues recorded under PPS in the
Company's health services division are substantially less than the cost-based
reimbursement it received before the enactment of the Budget Act.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division by reducing incentive payments pursuant to TEFRA,
allowable costs for capital expenditures and bad debts, and payments for
services to patients transferred from a general acute care hospital. The
reductions in allowable costs for capital expenditures became effective
October 1, 1997. The reductions in the TEFRA incentive payments and allowable
costs for bad debts became effective between May 1, 1998 and September 1, 1998
with respect to the hospitals operated by the hospital division. The
reductions for payments for services to patients transferred from a general
acute care hospital became effective October 1, 1998. These reductions have
had a material adverse impact on hospital revenues in 1999 and 1998. In
addition, these reductions also may affect adversely the hospital division's
ability to develop additional long-term care hospitals in the future.
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients has declined dramatically. As previously discussed,
Medicare reimbursements to nursing centers under PPS include substantially all
services provided to patients, including ancillary services. Prior to the
implementation of PPS, the costs of such services were reimbursed under cost-
based reimbursement basis. The decline in the demand for ancillary services is
mostly attributable to efforts by nursing centers to reduce operating costs.
As a result, many nursing centers are electing to provide ancillary services
to their patients though internal staff or are seeking lower acuity patients
who require less ancillary services. In response to PPS and a significant
decline in the demand for ancillary services, the Company realigned its
Vencare division in the fourth quarter of 1999 by integrating the
rehabilitation, speech and occupational therapies into the health services
division and assigning the institutional pharmacy business to the hospital
division. Vencare's respiratory therapy and other ancillary businesses have
been discontinued.
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
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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. Regulatory changes in
the Medicare and Medicaid reimbursement systems applicable to the hospital
division also are being considered. There also are 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.
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that payments
under governmental and private third-party payor programs will remain at
levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that facilities operated by the Company,
or the provision of services and supplies by the Company, will meet the
requirements for participation in such programs.
There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have a material adverse effect on the Company's results of
operations, liquidity and financial position.
Risks Relating to State Regulation
The Company operates seven hospitals in Florida, a state which regulates
hospital rates. These operations contribute a significant portion of the
Company's revenues and operating income from its hospital division.
Accordingly, the Company's hospital revenues and operating income could be
materially adversely affected by Florida's rate setting laws or other cost
containment efforts. The Company also operates ten hospitals in Texas, eight
hospitals in California, and five hospitals in Illinois which contribute a
significant portion of the Company's revenues and operating income from its
hospitals. Although Texas, California and Illinois do not currently regulate
hospital rates, the adoption of such legislation or other cost containment
measures in these or other states could have a material adverse effect on the
hospital division's revenues and operating income. Moreover, the repeal of the
Boren Amendment by the Budget Act provides the states' with greater
flexibility to reduce their Medicaid reimbursement levels. The Company is
unable to predict whether and in what form such legislation will be adopted.
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.
Highly Competitive Industry
The long-term healthcare services industry is highly competitive. The
Company's nursing centers compete on a local and regional basis with other
nursing centers. Some facilities operated by the Company's competitors are
located in newer facilities and offer services not provided by the Company or
are operated by entities having greater financial and other resources than the
Company. The Company's hospitals face competition from general acute care
hospitals and long-term care hospitals which provide services comparable to
those offered by the Company's hospitals. Many general acute care hospitals
are larger and more established than the Company's hospitals. The Company may
experience increased competition from existing hospitals as well as hospitals
converted, in whole or in part, to specialized care facilities. The long-term
care industry is divided into a variety of competitive areas which market
similar services. These competitors include nursing centers, hospitals,
extended care centers, assisted living facilities, home health agencies and
similar institutions. The Company's facilities generally operate in
communities that also are served by similar facilities operated by its
competitors. Certain of the Company's competitors are operated by not-for-
profit, nontaxpaying or governmental agencies, which can finance capital
expenditures on a tax-exempt basis, and which receive funds and charitable
contributions unavailable to the Company. The Company's facilities compete
based on factors such as its reputation for quality care; the commitment and
expertise of its staff and physicians; the quality and
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comprehensiveness of its treatment programs; charges for services; and the
physical appearance, location and condition of its facilities. The Company
also competes with other companies in providing rehabilitation therapy
services and institutional pharmacy services. Many of these competing
companies have greater financial and other resources than the Company. There
can be no assurance that increased competition in the future will not
adversely affect the Company's financial condition and results of operations.
Year 2000 Issue
Management's analysis of and conclusions with respect to Year 2000 ("Y2K")
issues affecting the Company are based on information currently available and
its experience to date. 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 additional costs to remediate the Y2K
issues will not be needed. While the Company believes it has substantially
completed its Y2K program, there is no certainty that additional issues and
costs related thereto may not arise in the future. Although the Company is
continuing to monitor the Medicare and Medicaid programs and other third-party
payors for Y2K compliance, there can be no guarantee that the unforeseen
failure of these third parties to remediate their systems to be Y2K compliant
will not have a material adverse effect on the Company's results of
operations, liquidity and financial position. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
Item 2. Properties
For information concerning the nursing centers and hospitals operated by the
Company, see "Business--Health Services Division--Nursing Center Facilities,"
"Business--Hospital Division--Hospital Facilities," and "Business--Master
Lease Agreements." The Company believes that its facilities are adequate for
the Company's future needs in such locations.
In December 1998, the Company purchased an approximately 287,000 square foot
building located in Louisville, Kentucky as its corporate headquarters to
consolidate corporate employees from several locations. The Company relocated
all of its corporate employees to its corporate headquarters during 1999.
Item 3. Legal Proceedings
Summary descriptions of various significant legal and regulatory activities
follow:
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 Cases have been styled In re: Vencor, Inc., et al.,
Debtors and Debtors in Possession, Case Nos. 99-3199 (MFW) through 99-3327
(MFW), Chapter 11, Jointly Administered. See "Business--Proceedings under
Chapter 11 of the Bankruptcy Code" for further discussion of the Chapter 11
Cases.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Spin-off Agreement. The Company was seeking a reduction in
rent and other concessions under its Master Lease Agreements with Ventas. 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. On April 12, 1999, the Company and
Ventas entered into the Second Standstill which provided that neither party
would pursue any claims against the other or any other third party related to
the Spin-off as long as the Company complied with certain rent payment terms.
The Second Standstill was scheduled to terminate on May 5, 1999. Pursuant to
the Tolling Agreement, the Company and Ventas also agreed that any statutes of
limitations or other time-related constraints in a bankruptcy or other
proceeding that might be asserted by one party against the other would be
extended and tolled from April 12, 1999 until May 5, 1999 or until the
termination of the Second Standstill. As a result of the Company's failure to
pay rent, Ventas served the Company with notices of nonpayment under the
Master Lease Agreements. Subsequently, the Company and Ventas entered into
further amendments to the Second Standstill and the Tolling Agreement to
extend the time during which no remedies may be pursued by either party and to
extend the date by which the Company may cure its failure to pay rent.
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In connection with the Chapter 11 Cases, the Company and Ventas entered into
the Stipulation which provides for the payment by the Company of a reduced
monthly rent of approximately $15.1 million beginning in September 1999. The
Stipulation was approved by the Bankruptcy Court. The Stipulation also
continues to toll any statutes of limitations or other time constraints in a
bankruptcy proceeding for claims that might be asserted by the Company against
Ventas. The Stipulation automatically renews for one-month periods unless
either party provides a 14-day notice of termination. The Stipulation also may
be terminated prior to its expiration upon a payment default by the Company,
the consummation of the Plan of Reorganization or the occurrence of certain
defaults under the DIP Financing. The Stipulation also provides that the
Company will continue to fulfill its indemnification obligations arising from
the Spin-off.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may seek to pursue claims against Ventas
arising out of the Spin-off and seek judicial relief barring Ventas from
exercising any remedies based on the Company's failure to pay some or all of
the rent to Ventas. The Company's failure to pay rent or comply with the
Stipulation, in the absence of judicial relief, would result in an "Event of
Default" under the Master Lease Agreements. Upon an Event of Default under the
Master Lease Agreements, assuming Ventas were to be granted relief from the
automatic stay by the Bankruptcy Court, the remedies available to Ventas
include terminating the Master Lease Agreements, repossessing and reletting
the leased properties and requiring the Company to (i) remain liable for all
obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (ii) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements. Such
remedies, however, would be subject to the supervision of the Bankruptcy
Court.
The Company's subsidiary, TheraTx, is a plaintiff in a declaratory judgment
action entitled TheraTx, Incorporated v. James W. Duncan, Jr., et al., No.
1:95-CV-3193, filed in the United States District Court for the Northern
District of Georgia and currently pending in the United States Court of
Appeals for the Eleventh Circuit, No. 99-11451-FF. 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 "Commission"). The court granted summary judgment for
the defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both have appealed the court's rulings. The
Company is defending the action vigorously.
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 Federal and state laws governing such policies. Various courts
have issued various rulings on the different issues, some of which have been
adverse to the Company and 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 and liquidity would be
materially adversely affected.
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
36
<PAGE>
action claims were brought by an alleged stockholder of the Company against
the Company and certain current and former 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 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. In December 1998, the
Company filed a motion to dismiss the case. The court converted the Company's
motion to dismiss into a motion for summary judgment and granted summary
judgment as to all defendants. The plaintiff has appealed the ruling to the
United States Court of Appeals for the Sixth Circuit. The Company is defending
this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of the Company and
Ventas. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the Company and Ventas have an effective remedy. The
Company believes that the allegations in the complaint are without merit and
intends to defend this action vigorously.
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. In June 1998, the court granted the Company's
motion to dismiss with leave to amend the Section 10(b) claim and the state
law claims for misrepresentation. The court denied the Company's motion to
dismiss the Section 14(e) and Section 20(a) claims, after which the Company
filed a motion for reconsideration. On March 23, 1999, the court granted the
Company's motion to dismiss all remaining claims and the case was dismissed.
The plaintiff has appealed this ruling. The Company is defending this action
vigorously.
37
<PAGE>
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of
Los Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various
causes of action arising out of the Company's sale and lease of several
nursing centers to Lenox in 1997. Lenox subsequently removed certain of its
causes of action and refiled these claims before the United States District
Court for the Western District of Kentucky in a case entitled Lenox
Healthcare, Inc. v. Vencor, Inc., et al., Case No. 3:99 CV-348-H. The Company
has asserted counterclaims, including RICO claims, against Lenox in the
Kentucky action. The Company believes that the allegations made by Lenox in
both complaints are without merit and intends to defend these actions
vigorously. Lenox and its subsidiaries filed for protection under Chapter 11
of the Bankruptcy Code on November 3, 1999. The Company has not determined the
effect, if any, such filing will have on the Company's financial condition,
results of operations or liquidity. By virtue of both the Company's and
Lenox's separate filings for Chapter 11 protection, the two Lenox actions and
the Company's counterclaims are stayed.
The Company has been informed by the DOJ that the Company and Ventas are the
subjects of ongoing investigations into various Medicare reimbursement issues,
including hospital cost reporting issues, Vencare billing practices and
various quality of care issues in the hospitals and nursing centers formerly
operated by Ventas and currently operated by the Company. These investigations
include some matters for which the Company indemnified Ventas in the Spin-off.
In cases where neither the Company nor any of its subsidiaries are defendants
but Ventas is the defendant, the Company had agreed to defend and indemnify
Ventas for such claims as part of the Spin-off. The Stipulation entered into
with Ventas provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off. The Company has
cooperated fully in the investigations.
The DOJ has informed the Company that it has intervened in several pending
qui tam actions asserted against the Company and/or Ventas in connection with
these investigations. The Company and Ventas are engaged in active settlement
discussions with the DOJ that may result in a resolution of some or all of the
DOJ investigations including the pending qui tam actions. In addition, the DOJ
has filed proofs of claims with respect to certain alleged claims in the
Chapter 11 Cases. Such a resolution with the DOJ could include a payment to
the Federal government which could have a material adverse effect on the
Company's liquidity and financial position. However, there can be no assurance
that a settlement or other resolution will be consummated with the DOJ.
The following is a summary of the qui tam actions pending against the
Company and/or Ventas in which the DOJ has intervened. In connection with the
DOJ's intervention, the courts have ordered these previously non-public
actions to be unsealed. Certain of the actions described below name other
defendants in addition to the Company and Ventas.
(a) The Company, Ventas and the Company's subsidiary, American X-Rays,
Inc. ("AXR"), are defendants in a civil qui tam action styled United States
ex rel. Doe v. American X-Rays Inc., et al., No. LR-C-95-332, pending in
the United States District Court for the Eastern District of Arkansas and
served on AXR on July 7, 1997. The DOJ intervened in the suit which was
brought under the Federal Civil False Claims Act and added the Company and
Ventas as defendants. 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. AXR provided portable X-ray
services to nursing centers (including some of those operated by Ventas or
the Company) and other healthcare providers. 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. The Company has defended this action vigorously. The court
has dismissed the action based upon the possible pending settlement between
the DOJ and Vencor and Ventas. 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. However, the Company has received several grand jury
subpoenas for documents and witnesses which it has moved to quash.
38
<PAGE>
(b) The Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"),
Ventas and Hillhaven (former parent company to Medisave), are the
defendants in a civil qui tam action styled United States ex rel. Danley v.
Medisave Pharmacies, Inc., et al., No. CV-N-96-00170-HDM, filed in the
United States District Court for the District of Nevada on March 15, 1996.
The plaintiff alleges that Medisave, an institutional pharmacy provider,
formerly owned by Ventas and owned by the Company since the Spin-off: (1)
charged the Medicare program for unit dose drugs when bulk drugs were
administered and charged skilled nursing facilities more for the same drugs
for Medicare patients than for non-Medicare patients; (2) improperly
claimed special dispensing fees that it was not entitled to under Medicaid;
and (3) recouped unused drugs from skilled nursing facilities and returned
these drugs to its stock without crediting Medicare or Medicaid, all in
violation of the Federal Civil False Claims Act. The complaint also alleges
that Medisave had a policy of offering kickbacks, such as free equipment,
to skilled nursing centers to secure and maintain their business. The
complaint seeks treble damages, other unspecified damages, civil penalties,
attorneys' fees and other costs. The Company disputes the allegations in
the complaint. The defendants intend to defend this action vigorously.
(c) Ventas and the Company's subsidiary, Vencare, Inc. ("Vencare"), among
others, are defendants in the action styled United States ex rel. Roberts
v. Vencor, Inc., et al., No. 3:97CV-349-J, filed in the United States
District Court for the Western District of Kansas on June 25, 1996 and
consolidated with the action styled United States of America ex rel.
Meharg, et al. v. Vencor, Inc., et al., No. 3:98SC-737-H, filed in the
United States District Court for the Middle District of Florida on June 4,
1998. The complaint alleges that the defendants knowingly submitted and
conspired to submit false claims and statements to the Medicare program in
connection with their purported provision of respiratory therapy services
to skilled nursing center residents. The defendants allegedly billed
Medicare for respiratory therapy services and supplies when those services
were not medically necessary, billed for services not provided, exaggerated
the time required to provide services or exaggerated the productivity of
their therapists. It is further alleged that the defendants presented false
claims and statements to the Medicare program in violation of the Federal
Civil False Claims Act, by, among other things, allegedly causing skilled
nursing centers with which they had respiratory therapy contracts, to
present false claims to Medicare for respiratory therapy services and
supplies. The complaint seeks treble damages, other unspecified damages,
civil penalties, attorneys' fees and other costs. The Company disputes the
allegations in the complaint. The defendants intend to defend this action
vigorously.
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et
al., No. 97-10400-GAO, filed in the United States District Court for the
District of Massachusetts on October 15, 1998, the Company's subsidiary,
Transitional, and two unrelated entities, Gambro Healthcare, Inc. and
Dialysis Holdings, Inc., are defendants in this suit alleging that they
violated the Federal Civil False Claims Act and the Antikickback Amendments
and committed common law fraud, unjust enrichment and payment by mistake of
fact. Specifically, the complaint alleges that a predecessor to
Transitional formed a joint venture with Damon Clinical Laboratories to
create and operate a clinical testing laboratory in Georgia that was then
used to provide lab testing for dialysis patients, and that the joint
venture billed at below cost in return for referral of substantially all
non-routine testing in violation of the Antikickback Amendments. It is
further alleged that a predecessor to Transitional and Damon Clinical
Laboratories used multiple panel testing of end stage renal disease rather
than single panel testing that allegedly resulted in the generation of
additional revenues from Medicare and that the entities allegedly added
non-routine tests to tests otherwise ordered by physicians that were not
requested or medically necessary but resulted in additional revenue from
Medicare in violation of the Antikickback Amendments. Transitional has
moved to dismiss the case. Transitional disputes the allegations in the
complaint and is defending the action vigorously.
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM
(Mcx), filed in the United States District Court for the Central District
of California on June 13, 1997. The plaintiff alleges that the defendant
violated the Federal Civil False Claims Act by submitting false claims to
the Medicare, Medicaid and CHAMPUS programs by allegedly: (1) falsifying
patient bills and submitting the bills to the Medicare, Medicaid and
CHAMPUS
39
<PAGE>
programs, (2) submitting bills for intensive and critical care not actually
administered to patients, (3) falsifying patient charts in relation to the
billing, (4) charging for physical therapy services allegedly not provided
and pharmacy services allegedly provided by non-pharmacists, and (5)
billing for sales calls made by nurses to prospective patients. The
complaint seeks treble damages, other unspecified damages, civil penalties,
attorneys' fees and other costs. Defendants dispute the allegations in the
complaint. The Company, on behalf of itself and Ventas, intends to defend
this action vigorously.
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997.
Ventas is alleged to have knowingly violated the Federal Civil False Claims
Act by submitting and conspiring to submit false claims to the Medicare
program. The complaint alleges that Ventas: (1) fabricated diagnosis codes
by ordering medically unnecessary services, such as respiratory therapy;
(2) changed referring physicians' diagnoses in order to qualify for
Medicare reimbursement; and (3) billed Medicare for oxygen use by patients
regardless of whether the oxygen was actually administered to particular
patients. The complaint further alleges that Ventas paid illegal kickbacks
to referring health care professionals in the form of medical consulting
service agreements as an alleged inducement to refer patients, in violation
of the Federal Civil False Claims Act, the Antikickback Amendments and the
Stark Provisions. It is additionally alleged that Ventas consistently
submitted Medicare claims for clinical services that were not performed or
were performed at lower actual costs. The complaint seeks unspecified
damages, civil penalties, attorneys' fees and costs. Ventas disputes the
allegations in the complaint. The Company, on behalf of Ventas, intends to
defend the action vigorously.
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States of America intervened in this civil qui tam lawsuit on May 17, 1999.
On July 23, 1999, the United States filed its amended complaint in the
lawsuit and added the Company as a defendant. The lawsuit alleges that the
Company and Ventas knowingly submitted false claims and false statements to
the Medicare and Medicaid programs including, but not limited to, claims
for reimbursement of costs for certain ancillary services performed in
defendants' nursing centers and for third party nursing center operators
that the United States alleges are not properly reimbursable costs through
the hospitals' cost reports. The lawsuit involves the Company's hospitals
which were owned by Ventas prior to the Spin-off. The complaint does not
specify the amount of damages sought. The Company and Ventas dispute the
allegations in the amended complaint and intend to defend this action
vigorously.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al.,
filed in the Eastern District of Missouri on May 25, 1999, the defendants
include the Company, Vencare, and Ventas. The defendants allegedly
submitted and conspired to submit false claims for payment to the Medicare
and CHAMPUS programs, in violation of the Federal Civil False Claims Act.
According to the complaint, the Company, through its subsidiary, Vencare,
allegedly (1) over billed for respiratory therapy services, (2) rendered
medically unnecessary treatment, and (3) falsified supply, clinical and
equipment records. The defendants also allegedly encouraged or instructed
therapist to falsify clinical records and over prescribe therapy services.
The complaint seeks treble damages, other unspecified damages, civil
penalties, attorneys' fees and other costs. The Company disputes the
allegations in the complaint and intends to defend this action vigorously.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its
two subsidiaries, Vencare and Vencor Hospice, Inc., are alleged to have
violated the Federal Civil False Claims Act by obtaining improper
reimbursement from Medicare concerning the treatment of hospice patients.
Defendants are alleged to have obtained inflated Medicare reimbursement for
admitting, treating and/or failing to discharge in a timely manner hospice
patients who were not "hospice appropriate." The complaint further alleges
that the defendants obtained inflated reimbursement for providing
medications for these hospice patients. The complaint alleges damages in
excess of $1,000,000. The Company disputes the allegations in the complaint
and intends to defend vigorously the action.
40
<PAGE>
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, Vencor Operating, Inc., Ventas,
Hillhaven and Medisave, are alleged to have presented or caused to be
presented false or fraudulent claims for payment to the Medicare program in
violation of, among other things, the Federal Civil False Claims Act. The
complaint alleges that Medisave, a subsidiary of the Company which was
transferred from Ventas to the Company in the Spin-off, systematically up-
charged for drugs and supplies dispensed to Medicare patients. The
complaint seeks unspecified damages, civil penalties, interest, attorneys'
fees and other costs. The Company disputes the allegations in the complaint
and intends to defend this action vigorously.
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to
submit false claims and statements to Medicare, Medicaid, and other Federal
and state funded programs during a period commencing in 1993. The conduct
complained of allegedly violates the Federal Civil False Claims Act, the
California False Claims Act, the Florida False Claims Act, the Tennessee
Health Care False Claims Act, and the Illinois Whistleblower Reward and
Protection Act. Defendant allegedly submitted improper and erroneous claims
to Medicare, Medicaid and other programs, for improper or unnecessary
services and services not performed, inadequate collections efforts
associated with billing and collecting bad debts, inflated and nonexistent
laboratory charges, false and inadequate documentation of claims, splitting
charges, shifting revenues and expenses, transferring patients to hospitals
that are reimbursed by Medicare at a higher level, failing to return
duplicate reimbursement payments, and improperly allocating hospital
insurance expenses. In addition, the complaint alleges that the defendants
were inconsistent in their reporting of cost report data, paid kickbacks to
increase patient referrals to hospitals, and incorrectly reported employee
compensation resulting in inflated employee 401(k) contributions. The
complaint seeks unspecified damages. The Company disputes the allegations
in the complaint and intends to defend this action vigorously.
In connection with the Spin-off, 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 Stipulation entered into with Ventas provides that the Company
will continue to fulfill its indemnification obligations arising from the
Spin-off.
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 the DOJ, HCFA or
other regulatory agencies will not initiate additional investigations related
to the Company's businesses 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 the
Company's management and may have a disruptive effect upon the Company's
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
41
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
MARKET PRICE FOR COMMON STOCK
AND DIVIDEND HISTORY
The Common Stock of the Company began trading on the OTC Bulletin Board
under the symbol "VCRI" on June 10, 1999. The Common Stock traded on the New
York Stock Exchange (NYSE) under the ticker symbol of "VC" immediately
following the Spin-off through June 7, 1999. The Company believes that it has
approximately 50,000 stockholders based on the number of record holders of
Common Stock and an estimate of the number of individual participants
represented by security position listings. The prices in the table below, for
the calendar quarters indicated, represent the high and low sales prices for
the Common Stock as reported by the OTC Bulletin Board and the NYSE Composite
Tape, as the case may be, since the Spin-off. No cash dividends have been paid
on the Common Stock during such period.
Dividends cannot be declared on the Company's stock under the terms of the
DIP Financing.
<TABLE>
<CAPTION>
Sales Price of
Common Stock
--------------
High Low
------- ------
1998
- ----
<S> <C> <C>
May 1, 1998 through June 30, 1998............................... $ 12.88 $ 6.56
Third Quarter................................................... 7.25 2.94
Fourth Quarter.................................................. 5.75 3.50
<CAPTION>
1999
- ----
<S> <C> <C>
First Quarter................................................... $ 5.00 $ 0.81
Second Quarter.................................................. 1.13 0.13
Third Quarter................................................... 0.26 0.06
Fourth Quarter.................................................. 0.27 0.07
</TABLE>
42
<PAGE>
Item 6. Selected Financial Data
VENCOR, INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(In thousands, except for per share amounts and statistics)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $2,665,641 $2,999,739 $3,116,004 $2,577,783 $2,323,956
---------- ---------- ---------- ---------- ----------
Salaries, wages and
benefits............... 1,566,227 1,753,023 1,788,053 1,490,938 1,360,018
Supplies................ 347,789 340,053 347,127 303,463 270,702
Rent.................... 305,120 234,144 89,474 77,795 79,476
Other operating
expenses............... 942,198 942,391 446,340 489,155 444,444
Depreciation and
amortization........... 93,196 124,617 123,865 99,533 89,478
Interest expense........ 80,442 107,008 102,736 45,922 60,918
Investment income....... (5,188) (4,688) (6,057) (12,203) (13,444)
---------- ---------- ---------- ---------- ----------
3,329,784 3,496,548 2,891,538 2,494,603 2,291,592
---------- ---------- ---------- ---------- ----------
Income (loss) before
reorganization costs
and income taxes....... (664,143) (496,809) 224,466 83,180 32,364
Reorganization costs.... 18,606 - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (682,749) (496,809) 224,466 83,180 32,364
Provision for income
taxes.................. 500 76,099 89,338 35,175 24,001
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (683,249) (572,908) 135,128 48,005 8,363
Cumulative effect of
change in accounting
for start-up costs..... (8,923) - - - -
Extraordinary loss on
extinguishment of debt,
net of income taxes.... - (77,937) (4,195) - (23,252)
---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (692,172) $ (650,845) $ 130,933 $ 48,005 $ (14,889)
========== ========== ========== ========== ==========
Earnings (loss) per
common share:
Basic:
Income (loss) from
operations............ $ (9.72) $ (8.39) $ 1.96 $ 0.69 $ 0.22
Cumulative effect of
change in accounting
for start-up costs.... (0.13) - - - -
Extraordinary loss on
extinguishment of
debt.................. - (1.14) (0.06) - (0.38)
---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (9.85) $ (9.53) $ 1.90 $ 0.69 $ (0.16)
========== ========== ========== ========== ==========
Diluted:
Income (loss) from
operations............ $ (9.72) $ (8.39) $ 1.92 $ 0.68 $ 0.29
Cumulative effect of
change in accounting
for start-up costs.... (0.13) - - - -
Extraordinary loss on
extinguishment of
debt.................. - (1.14) (0.06) - (0.32)
---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (9.85) $ (9.53) $ 1.86 $ 0.68 $ (0.03)
========== ========== ========== ========== ==========
Shares used in computing
earnings (loss) per
common share:
Basic.................. 70,406 68,343 68,938 69,704 61,196
Diluted................ 70,406 68,343 70,359 70,702 71,967
Financial Position:
Working capital
(deficit).............. $ 195,011 $ (682,569) $ 431,113 $ 316,615 $ 229,536
Assets.................. 1,235,974 1,774,372 3,334,739 1,968,856 1,912,454
Long-term debt.......... - 6,600 1,919,624 710,507 778,100
Long-term debt in
default classified as
current................ - 760,885 - - -
Liabilities subject to
compromise............. 1,159,417 - - - -
Stockholders' equity
(deficit).............. (378,309) 313,245 905,350 797,091 772,064
Operating Data:
Number of nursing
centers................ 295 291 309 313 311
Number of nursing center
licensed beds.......... 38,573 38,362 40,383 39,619 39,480
Number of nursing center
patient days........... 11,656,439 11,939,266 12,622,238 12,566,763 12,569,600
Nursing center occupancy
%...................... 86.8 87.3 90.5 91.9 92.2
Number of hospitals..... 56 57 60 38 36
Number of hospital
licensed beds.......... 4,931 4,979 5,273 3,325 3,263
Number of hospital
patient days........... 982,301 947,488 767,810 586,144 489,612
Hospital occupancy %.... 56.9 54.0 52.9 53.7 47.6
</TABLE>
43
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Selected Financial Data in Item 6 and the consolidated financial
statements included herein set forth certain data with respect to the
financial position, results of operations and cash flows of the Company which
should be read in conjunction with the following discussion and analysis.
As discussed in the Notes to the Consolidated Financial Statements, the
Company realigned its Vencare ancillary services business in the fourth
quarter of 1999. Vencare's rehabilitation, speech and occupational therapies
were integrated into the Company's health services division, and its
institutional pharmacy business was assigned to the hospital division.
Vencare's respiratory therapy and certain other ancillary businesses were
discontinued. Financial and operating data presented in Item 6 and the
following discussion and analysis reflect the realignment of the former
Vencare businesses for all periods presented.
The consolidated financial statements have been prepared on the basis of
accounting principles applicable to going concerns and contemplate the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The consolidated financial statements do not
include any adjustments that might result from the resolution of the Chapter
11 Cases or other matters discussed herein.
General
The Company provides long-term healthcare services primarily through the
operation of nursing centers and hospitals. At December 31, 1999, the
Company's health services division operated 295 nursing centers (38,573
licensed beds) in 31 states and a rehabilitation therapy business. The
Company's hospital division operated 56 hospitals (4,931 licensed beds) in 23
states and an institutional pharmacy business.
Reorganization. On September 13, 1999, the Company and substantially all of
its subsidiaries filed voluntary petitions for protection under Chapter 11 of
the Bankruptcy Code. The Company currently is operating its businesses as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. The
Company's recent operating losses, liquidity issues and the Chapter 11 Cases
raise substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern and the
appropriateness of using the going concern basis of accounting are dependent
upon, among other things, (i) the Company's ability to comply with the terms
of the DIP Financing, (ii) confirmation of the Plan of Reorganization under
the Bankruptcy Code, (iii) the Company's ability to achieve profitable
operations after such confirmation, and (iv) the Company's ability to generate
sufficient cash from operations to meet its obligations. The Plan of
Reorganization and other actions during the Chapter 11 Cases could change
materially the amounts currently recorded in the consolidated financial
statements. See Note 2 of the Notes to Consolidated Financial Statements.
Spin-off. On May 1, 1998, Ventas completed the Spin-off through the
distribution of Vencor Common Stock to its stockholders. Ventas retained
ownership of substantially all of its real property and leases such real
property to Vencor pursuant to the Master Lease Agreements. In anticipation of
the Spin-off, the Company was incorporated on March 27, 1998. For accounting
purposes, the consolidated historical financial statements of Ventas became
the historical financial statements of the Company upon consummation of the
Spin-off. Any discussion concerning events prior to May 1, 1998 refers to the
Company's business as it was conducted by Ventas prior to the Spin-off.
TheraTx Merger. On March 21, 1997, the TheraTx Merger was completed
following a cash tender offer. At the time of the TheraTx Merger, TheraTx
primarily provided rehabilitation and respiratory therapy management services
and operated 26 nursing centers. Annualized revenues approximated $425
million. The TheraTx Merger has been accounted for by the purchase method. See
Note 4 of the Notes to Consolidated Financial Statements for a description of
the TheraTx Merger.
44
<PAGE>
Transitional Merger. On June 24, 1997, the Company acquired approximately
95% of the outstanding common stock of Transitional through a cash tender
offer, after which time the operations of Transitional were consolidated with
those of the Company in accordance with the purchase method of accounting. On
August 26, 1997, the Transitional Merger was completed. At the time of the
Transitional Merger, Transitional operated 19 long-term acute care hospitals
and provided respiratory therapy management services. Annualized revenues
approximated $350 million. In addition, Transitional owned a 44% voting equity
interest (61% equity interest) in Behavioral Healthcare Corporation ("BHC"),
an operator of psychiatric and behavioral clinics. See Note 5 of the Notes to
Consolidated Financial Statements for a description of the Transitional
Merger.
45
<PAGE>
Results of Operations
A summary of key operating data follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Health services division:
Nursing centers........................ $ 1,594,244 $ 1,667,343 $ 1,766,403
Rehabilitation services................ 195,731 264,574 230,525
Other ancillary services............... 43,527 168,165 244,303
Elimination............................ (128,267) (124,500) (65,911)
----------- ----------- -----------
1,705,235 1,975,582 2,175,320
Hospital division:
Hospitals.............................. 850,548 919,847 785,829
Pharmacy............................... 171,493 149,991 167,643
----------- ----------- -----------
1,022,041 1,069,838 953,472
Atria................................... - - 31,199
----------- ----------- -----------
2,727,276 3,045,420 3,159,991
Elimination of pharmacy charges to
Company nursing centers................ (61,635) (45,681) (43,987)
----------- ----------- -----------
$ 2,665,641 $ 2,999,739 $ 3,116,004
=========== =========== ===========
Income (loss) from operations:
Operating income (loss):
Health services division:
Nursing centers........................ $ 185,764 $ 216,575 $ 242,889
Rehabilitation services................ 3,233 18,594 47,683
Other ancillary services............... 4,166 30,183 39,653
----------- ----------- -----------
193,163 265,352 330,225
Hospital division:
Hospitals.............................. 136,903 248,983 237,445
Pharmacy............................... 719 15,327 27,209
----------- ----------- -----------
137,622 264,310 264,654
Atria.................................. - - 9,945
Corporate overhead..................... (108,940) (126,265) (84,173)
Unusual transactions................... (412,418) (439,125) 13,833
Reorganization costs................... (18,606) - -
----------- ----------- -----------
Operating income (loss)............... (209,179) (35,728) 534,484
Rent.................................... (305,120) (234,144) (89,474)
Depreciation and amortization........... (93,196) (124,617) (123,865)
Interest, net........................... (75,254) (102,320) (96,679)
----------- ----------- -----------
Income (loss) before income taxes....... (682,749) (496,809) 224,466
Provision for income taxes.............. 500 76,099 89,338
----------- ----------- -----------
$ (683,249) $ (572,908) $ 135,128
=========== =========== ===========
Nursing center data:
Revenue mix %:
Medicare............................... 26.1 29.3 32.1
Medicaid............................... 48.7 44.7 42.9
Private and other...................... 25.2 26.0 25.0
Patient days:
Medicare............................... 1,436,288 1,498,968 1,610,470
Medicaid............................... 7,718,963 7,746,401 8,152,503
Private and other...................... 2,501,188 2,693,897 2,859,265
----------- ----------- -----------
11,656,439 11,939,266 12,622,238
=========== =========== ===========
Average daily census.................... 31,935 32,710 34,581
Occupancy %............................. 86.8 87.3 90.5
Hospital data:
Revenue mix %:
Medicare............................... 58.3 58.5 63.0
Medicaid............................... 10.5 9.7 8.1
Private and other...................... 31.2 31.8 28.9
Patient days:
Medicare............................... 669,976 647,283 520,144
Medicaid............................... 119,849 121,538 96,490
Private and other...................... 192,476 178,667 151,176
----------- ----------- -----------
982,301 947,488 767,810
=========== =========== ===========
Average daily census.................... 2,691 2,596 2,104
Occupancy %............................. 56.9 54.0 52.9
</TABLE>
46
<PAGE>
Regulatory Changes
Legislative and regulatory activities in the long-term healthcare industry
have had a significant negative impact on the Company's operating results for
1999 and 1998.
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. Virtually
all spending reductions come from reimbursements to 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 established PPS 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 PPS during the first quarter of 1999, all of
the Company's nursing centers adopted 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 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.
In November 1999, the BBRA was enacted to provide a measure of relief for
some of the impact of PPS. The BBRA makes temporary adjustments in payments
for the care of higher acuity patients, adjusts payment categories up by 4%
for two years beginning in October 2000 and allows nursing centers to
transition more rapidly to the Federal payment rates. The BBRA also imposes a
two-year moritorium on certain therapy limitations for skilled nursing center
patients. All of these measure will expire at the end of 2002.
Including the effect of the BBRA, revenues recorded under PPS in the
Company's health services division are substantially less than the cost-based
reimbursement it received before the enactment of the Budget Act.
The Budget Act also reduced payments made to the hospitals operated by the
Company's hospital division by reducing incentive payments pursuant to TEFRA,
allowable costs for capital expenditures and bad debts, and payments for
services to patients transferred from a general acute care hospital. These
reductions, most of which became effective in 1998, have had a material
adverse impact on hospital revenues. In addition, these reductions also may
affect adversely the hospital division's ability to develop additional long-
term care hospitals in the future.
Under PPS, the volume of ancillary services provided per patient day to
nursing center patients has declined dramatically. As previously discussed,
Medicare reimbursements to nursing centers under PPS include substantially all
services provided to patients, including ancillary services. Prior to the
implementation of PPS, the costs of such services were reimbursed under cost-
based reimbursement rules. The decline in the demand for ancillary services is
mostly attributable to efforts by nursing centers to reduce operating costs.
As a result, many nursing centers have elected to provide ancillary services
to their patients though internal staff or are seeking lower acuity patients
who require less ancillary services. In response to PPS and a significant
decline in the demand for ancillary services, the Company realigned its
Vencare division in the fourth quarter of 1999 by integrating the
rehabilitation, speech and occupational therapies into the health services
division and assigning the institutional pharmacy business to the hospital
division. Vencare's respiratory therapy and other ancillary businesses have
been discontinued.
There also continues to be state legislative proposals that would impose
increased 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. Regulatory changes in
the Medicare and Medicaid reimbursement systems applicable to the hospital
division also are being considered. There also are 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.
47
<PAGE>
The Company could be affected adversely by the continuing efforts of
governmental and private third-party payors to contain the amount of
reimbursement for healthcare services. There can be no assurance that payments
under governmental and private third-party payor programs will remain at
levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that facilities operated by the Company,
or the provision of services and supplies by the Company, will meet the
requirements for participation in such programs.
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.
Health Services Division--Nursing Centers
Revenues declined 4% in 1999 to $1.59 billion and 6% in 1998 to $1.67
billion. The declines in both periods were primarily attributable to lower
Medicare reimbursement under PPS, the disposition of certain nursing centers
and, in 1998, reductions in same-store patient days.
As previously discussed, all of the Company's nursing centers adopted PPS on
July 1, 1998, resulting in substantially less reimbursement to the Company's
nursing centers. Medicare revenues per patient day were $290 in 1999, $326 in
1998 and $352 in 1997. Lower average reimbursement rates in 1999 resulted from
a full-year effect of PPS and a slight decline in the average acuity level of
the Company's nursing center Medicare patients.
The number of facilities operated by the health services division has
declined from 309 at December 31, 1997 to 295 at the end of 1999. Revenues in
1999 and 1998 were reduced by approximately $35 million and $70 million,
respectively, as a result of lower capacity.
Same-store patient days were relatively unchanged for 1999 compared to 1998.
Management believes that the Chapter 11 Cases have had little, if any, impact
on nursing center patient days in the fourth quarter of 1999. During 1998,
same-store patient days declined 3% compared to the prior year. Management
believes that the decline in 1998 was primarily attributable to the Company's
former strategy of lowering Medicaid utilization to improve patient mix. This
strategy adversely impacted the nursing centers' relationship with many of its
primary patient referral sources. In addition, this strategy also resulted in
significant regulatory compliance actions against the Company and general
negative publicity. The Company discontinued this practice in April 1998.
Nursing center operating income in 1999 totaled $186 million, compared to
$217 million in 1998 and $243 million in 1997. The declines in both periods
were primarily attributable to reductions in Medicare reimbursement under PPS
and, in 1998, a decline in same-store census. While the Company achieved some
operational efficiencies in 1999 in response to PPS, expenses related to
professional liability risks and doubtful accounts increased substantially
(including the adjustments recorded in the fourth quarter of 1999).
Professional liability costs aggregated $28 million in 1999 compared to $14
million in 1998 and $10 million in 1997. Costs for doubtful accounts rose in
1999 to $51 million compared to $17 million in 1998 and $12 million in 1997.
Operating results for 1997 include a fourth quarter charge of $7.3 million of
additional provisions for doubtful accounts related to the former TheraTx
nursing centers to adjust the initial purchase price allocation.
In response to reductions in reimbursement under PPS, the Company has
initiated programs to provide quality patient care more efficiently. However,
management believes that PPS rates do not adequately cover the costs of
providing care to higher acuity patients. To the extent that average patient
acuity increases or is higher than other nursing centers, the Company's
operating results may be impacted adversely under PPS in the future.
Health Services Division--Rehabilitation Services
Revenues declined 26% in 1999 to $196 million and increased 15% in 1998 to
$265 million. Revenue declines in 1999 (and the second half of 1998) were
primarily attributable to reduced customer demand for these
48
<PAGE>
services in response to fixed reimbursement rates under PPS. Under PPS, the
reimbursement for ancillary services provided to nursing center patients is a
component of the total reimbursement allowed per nursing center patient. As a
result, many nursing center customers (including the Company's nursing
centers) have elected to provide ancillary services to their patients through
internal staff and no longer contract with outside parties for ancillary
services.
Rehabilitation services reported operating income of $3 million in 1999
compared to $19 million in 1998 and $48 million in 1997. Reductions in
operating income in both 1999 and 1998 reflect the significant decline in
customer demand resulting from PPS. Operating results in 1999 also were
negatively impacted as a result of a $26 million increase in the provision for
doubtful accounts. Operating results in 1998 include the effect of
approximately $12 million of charges recorded in the fourth quarter related to
third-party reimbursements. While the health services division will continue
to provide rehabilitation services to nursing center customers, revenues and
operating income related to these services may continue to decline in 2000.
Health Services Division--Other Ancillary Services
Other ancillary services refers to certain ancillary businesses (primarily
respiratory therapy) that were discontinued as part of the Vencare realignment
in the fourth quarter of 1999. See Note 3 of the Notes to Consolidated
Financial Statements for a description of the Vencare realignment.
Hospital Division--Hospitals
Revenues declined 8% in 1999 to $851 million and increased 17% in 1998 to
$920 million. The previously discussed provisions of the Budget Act reduced
1998 revenues by approximately $25 million and 1999 revenues by an additional
$15 million. In addition, revenues in 1999 were reduced by certain
adjustments, including approximately $60 million recorded in the fourth
quarter related to changes in estimates of amounts due from third parties. The
Company also recorded a provision for loss in the fourth quarter of 1999 of
approximately $19 million related to disputed amounts due to the Company's
hospitals by various issuers of Medicare supplement insurance policies. The
full-year effect of the Transitional Merger increased 1998 revenues by
approximately $119 million.
Medicare revenues recorded by the Company's hospitals include reimbursement
for expenses related to certain costs associated with hospital-based ancillary
services previously provided by the Vencare division to its nursing center
customers. As part of its ongoing investigations, the DOJ has objected to
including such costs on the Medicare costs reported filed by the Company's
hospitals. Medicare revenues related to the reimbursement of such costs
aggregated $18 million in 1999 and $47 million in both 1998 and 1997. In
connection with the continuing settlement discussions with the DOJ, the
Company has agreed to discontinue recording such revenues and will exclude
such costs from its Medicare cost reports beginning September 1, 1999.
Same-store patient days grew 4% in 1999 compared to 1998. Management
believes that the Chapter 11 Cases have had little, if any, impact on hospital
patient days in the fourth quarter of 1999. During 1998, same-store patient
days rose 5% compared to 1997.
Hospital operating income declined 45% in 1999 to $137 million and increased
5% in 1998 to $249 million. The decline in 1999 operating income was primarily
attributable to reductions in Medicare reimbursement and the impact of the
previously discussed adjustments recorded in the fourth quarter of 1999.
Operating income in 1998 rose $22 million as a result of the full-year effect
of the Transitional Merger.
Hospital Division--Pharmacy
Revenues increased 14% in 1999 to $171 million and declined 11% in 1998 to
$150 million. The increase in 1999 resulted primarily from price increases to
Company-operated nursing centers and growth in the number of nursing center
customers.
The Company's pharmacies reported operating income of $719,000 in 1999
compared to $15 million in 1998 and $27 million in 1997. Operating income in
1999 includes an increase in the provision for doubtful accounts totaling $11
million compared to the prior year. Operating results in 1998 include the
effect of
49
<PAGE>
approximately $8 million of charges recorded in the fourth quarter related to
accounts receivable. Management believes that the decline in operating income
in 1999 also was attributable to pricing pressures associated with PPS for
external customers.
Corporate Overhead
Operating income for the Company's operating divisions excludes allocations
of corporate overhead. These costs aggregated $109 million, $126 million and
$84 million during each of the last three years, respectively. The substantial
increase in corporate overhead during 1998 was primarily attributable to the
increased information systems spending necessary to strategically support each
of the Company's businesses, to increase future operating efficiencies and to
address Y2K issues. See "--Year 2000." Assimilation and support services
related to the TheraTx Merger and the Transitional Merger also contributed to
the increase in overhead in 1998. As a percentage of revenues (before
eliminations), corporate overhead totaled 4.0% in 1999, 4.1% in 1998 and 2.7%
in 1997.
Unusual Transactions
Operating results for each of the last three years include certain unusual
transactions. These transactions are included in other operating expenses in
the consolidated statement of operations (unless otherwise indicated) for the
respective periods in which they were recorded. See Note 8 of the Notes to
Consolidated Financial Statements.
1999
The following table summarizes the pretax impact of unusual transactions
recorded during 1999 (in millions):
<TABLE>
<CAPTION>
Quarters
-------------------------
First Second Third Fourth Year
----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment........... $330.4 $330.4
Investment in BHC..................... $15.2 15.2
Cancellation of software development
project................................ 5.6 5.6
Realignment of Vencare division......... 56.3 56.3
Retirement plan curtailment............. 7.3 7.3
Corporate properties.................... (2.4) (2.4)
--- ----- --- ------ ------
$ - $20.8 $ - $391.6 $412.4
=== ===== === ====== ======
</TABLE>
Long-lived asset impairment--SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
requires impairment losses to be recognized for long-lived assets used in
operations when indications of impairment are present and the estimate of
undiscounted future cash flows is not sufficient to recover asset carrying
amounts. SFAS 121 also requires that long-lived assets held for disposal be
carried at the lower of carrying value or fair value less costs of disposal,
once management has committed to a plan of disposal.
Operating results and related cash flows for 1999 did not meet management's
expectations. These expectations were the basis upon which the Company valued
its long-lived assets at December 31, 1998, in accordance with SFAS 121. In
addition, certain events occurred in 1999 which had a negative impact on the
Company's operating results and are expected to impact negatively its
operations in the future. In connection with continuing discussions with the
DOJ, the Company has agreed to exclude certain expenses from its hospital
Medicare cost reports beginning September 1, 1999 for which the Company had
been reimbursed in prior years. Medicare revenues related to the reimbursement
of such costs aggregated $18 million in 1999 and $47 million in both 1998 and
1997. In addition, as more fully described in Note 9 of the Notes to
Consolidated Financial
50
<PAGE>
Statements, hospital revenues in 1999 were reduced by approximately $19
million as a result of disputes with certain insurers who issued Medicare
supplement insurance policies to individuals who became patients of the
Company's hospitals. The Company also reviewed the expected impact of the BBRA
enacted in November 1999 (which provided a measure of relief for some impact
of the Budget Act) and the realignment of the Vencare ancillary services
business completed in the fourth quarter of 1999. The actual and expected
future impact of these issues served as an indication to management that the
carrying values of the Company's long-lived assets may be impaired.
In accordance with SFAS 121, management estimated the future undiscounted
cash flows for each of its facilities and compared these estimates to the
carrying values of the underlying assets. As a result of these estimates, the
Company reduced the carrying amounts of the assets associated with 71 nursing
centers and 21 hospitals to their respective estimated fair values. The
determination of the fair values of the impaired facilities was based upon the
net present value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property
Goodwill and Equipment Total
-------- ------------- ------
<S> <C> <C> <C>
Health services division...................... $ 18.3 $ 37.7 $ 56.0
Hospital division............................. 198.9 75.5 274.4
------ ------ ------
$217.2 $113.2 $330.4
====== ====== ======
</TABLE>
Effective January 1, 2000, the Company will adopt an amortization period of
20 years from the date of acquisition for goodwill. This change will increase
amortization expense by approximately $5 million in 2000. The write-off of
goodwill discussed above (assuming no change in amortization period) will
reduce amortization expense by approximately $6 million in 2000.
Investment in BHC--In connection with the Transitional Merger, the Company
acquired a 44% voting equity interest (61% equity interest) in BHC. In the
second quarter of 1999, the Company wrote off its remaining investment in BHC
aggregating $15.2 million as a result of deteriorating financial performance.
See the discussion of unusual transactions recorded in 1998 for further
information related to the Company's investment in BHC.
Cancellation of software development project--In the second quarter of 1999,
the Company canceled a nursing center software development project and charged
previously capitalized costs to operations.
Realignment of Vencare division--As discussed in Note 3 of the Notes to
Consolidated Financial Statements, the Company realigned the Vencare ancillary
services division in the fourth quarter of 1999. As a result, the Company
recorded a charge aggregating $56.3 million, including the write-off of
goodwill totaling $42.3 million. The remainder of the charge related to the
write-down of certain equipment to net realizable value and the recording of
employee severance costs.
Retirement plan curtailment--In December 1999, the Board of Directors
approved the curtailment of benefits under the Company's supplemental
executive retirement plan, resulting in an actuarially determined charge of
$7.3 million. Under the terms of the curtailment, plan benefits were vested
for each eligible participant through December 31, 1999 and the accrual of
future benefits under the plan was substantially eliminated. The Board of
Directors also deferred the time at which certain benefits would be paid by
the Company. See "Executive Compensation--Supplemental Executive Retirement
Plan."
Corporate properties--During 1999, the Company adjusted estimated property
loss provisions recorded in the fourth quarter of 1998, resulting in a pretax
credit of $2.4 million.
51
<PAGE>
1998
The following table summarizes the pretax impact of unusual transactions
recorded during 1998 (in millions):
<TABLE>
<CAPTION>
Quarters
---------------------------
First Second Third Fourth Year
----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment........ $307.8 $ 307.8
Investment in BHC.................. $ 8.5 43.1 51.6
Wisconsin nursing center........... 27.5 27.5
Corporate properties............... $ 8.8 2.9 15.1 26.8
Acquired entities.................. 13.5 13.5
Gain on sale of investments.......... (98.5) (13.0) (111.5)
Losses from termination of
construction projects............... 71.3 71.3
Spin-off transaction costs........... $7.7 9.6 17.3
Write-off of clinical information
systems............................. 10.1 10.1
Doubtful accounts related to sold
operations.......................... 9.6 9.6
Settlement of litigation............. 7.8 7.8
Loss on sale and closure of home
health and hospice businesses....... 7.3 7.3
---- ----- ------ ------ -------
$7.7 $25.7 $ (6.2) $411.9 $ 439.1
==== ===== ====== ====== =======
</TABLE>
Long-lived asset impairment--As previously discussed, all of the Company's
nursing centers became subject to PPS effective July 1, 1998. The revenues
recorded under PPS in the Company's health services division are substantially
less than the cost-based reimbursement it received before the enactment of the
Budget Act.
The Budget Act also reduced payments to the Company's hospitals by reducing
incentive payments pursuant to TEFRA, allowable costs for capital expenditures
and bad debts, and payments for services to patients transferred from a
general acute care hospital. These reductions, most of which became effective
in 1998, had a material adverse impact on hospital revenues in 1998 and may
impact adversely the Company's ability to develop additional long-term care
hospitals in the future.
The Company provided ancillary services to both Company-operated and non-
affiliated nursing centers. While most of the nursing center industry became
subject to PPS on or after January 1, 1999, management believed that its
ability to maintain services and revenues was impacted adversely during 1998,
particularly in the third and fourth quarters, since nursing centers were
reluctant to enter into ancillary service contracts while transitioning to the
new fixed payment system under PPS. Medicare reimbursements to nursing centers
under PPS include substantially all services provided to patients, including
ancillary services. Management believed that the decline in demand for its
Vencare services in 1998, particularly respiratory therapy and rehabilitation
therapy, was mostly attributable to efforts by nursing center customers to
reduce operating costs. In addition, as a result of these regulatory changes,
many nursing centers have elected to provide ancillary services to their
patients through internal staff and no longer contract with outside parties
for ancillary services.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under these rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The new limits became effective for services
provided on or after April 10, 1998 and negatively impacted operating results
of the Company's ancillary services businesses in 1998.
52
<PAGE>
These significant regulatory changes and the impact of such changes on the
Company's operating results in the third and fourth quarters of 1998 served as
an indication to management that the carrying values of the assets of its
nursing center and hospital facilities, as well as certain portions of its
ancillary services business, may be impaired.
In accordance with SFAS 121, management estimated the future undiscounted
cash flows for each of its facilities and ancillary services lines of business
and compared these estimates to the carrying values of the underlying assets.
As a result of these estimates, the Company reduced the carrying amounts of
the assets associated with 110 nursing centers, 12 hospitals and a portion of
the goodwill associated with its rehabilitation therapy business to their
respective estimated fair values. The determination of the fair values of the
impaired facilities and rehabilitation therapy business was based upon the net
present value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property and
Goodwill Equipment Total
-------- ------------ ------
<S> <C> <C> <C>
Health services division:
Nursing centers.............................. $ 27.7 $ 71.6 $ 99.3
Ancillary services........................... 99.2 0.2 99.4
Hospital division.............................. 74.4 34.7 109.1
------ ------ ------
$201.3 $106.5 $307.8
====== ====== ======
</TABLE>
In addition to the above impairment charges, the amortization period for the
remaining goodwill associated with the rehabilitation therapy business
acquired as part of the TheraTx Merger was reduced from forty years to seven
years, effective October 1, 1998. Management believed that the provisions of
the Budget Act altered the expected long-term cash flows and business
prospects associated with this business to such an extent that a shorter
amortization period was deemed appropriate. The change in the amortization
period resulted in an additional pretax charge to operations of $6.4 million
in the fourth quarter of 1998. In the fourth quarter of 1999, in connection
with the realignment of Vencare, the Company wrote off all of the goodwill
associated with the rehabilitation therapy business. See Note 8 of the Notes
to Consolidated Financial Statements.
Investment in BHC--Subsequent to the Transitional Merger, the Company had
been unsuccessful in its attempts to sell its investment in BHC. In July 1998,
the Company entered into an agreement to sell its interest in BHC for an
amount less than its carrying value and accordingly, a provision for loss of
$8.5 million was recorded during the third quarter. In November 1998, the
agreement to sell the Company's interest in BHC was terminated by the
prospective buyer, indicating to the Company that the carrying amount of its
investment may be impaired. Following an independent appraisal, the Company
recorded a $43.1 million write-down of the investment in the fourth quarter of
1998. The net carrying amount of the investment aggregated $20.0 million at
December 31, 1998.
Wisconsin nursing center--The Company recorded an asset impairment charge of
$27.5 million in the fourth quarter of 1998 related to a nursing center in
Wisconsin that is leased from Ventas. The impairment resulted primarily from
certain fourth quarter regulatory actions by state and Federal agencies with
respect to the operation of the facility. In the fourth quarter of 1998, the
facility reported a pretax loss of $4.2 million and is not expected to
generate positive cash flows in the future.
Corporate properties and acquired entities--During 1998, the Company
recorded $26.8 million of charges related to the valuation of certain
corporate assets, the most significant of which relates to previously
capitalized amounts and expected property disposal losses associated with the
cancellation of a corporate headquarters construction project. The Company
also recorded $13.5 million of asset write-downs associated with the Hillhaven
Merger, the TheraTx Merger and the Transitional Merger, including provisions
for obsolete or abandoned computer equipment and miscellaneous receivables.
53
<PAGE>
Gain on sale of investments--In September 1998, the Company sold its
investment in Atria Communities, Inc. ("Atria") for $177.5 million in cash and
an equity interest in the surviving corporation, resulting in a gain of $98.5
million. In November 1998, the Company's investment in Colorado MEDtech, Inc.
was sold at a gain of $13.0 million. Proceeds from the sale were $22.0
million.
Losses from termination of construction projects--In the third quarter of
1998, as a result of substantial reductions in Medicare reimbursement to the
Company's nursing centers and hospitals in connection with the Budget Act,
management determined to suspend all acquisition and development activities,
terminate the construction of substantially all of its development properties,
and close two recently acquired hospitals. Accordingly, the Company recorded
pretax charges aggregating $71.3 million, of which $53.9 million related to
the cancellation of construction projects and the remainder related to the
planned closure of the hospitals. In connection with the construction
termination charge, the Company decided that it would not replace certain
facilities that previously were accounted for as assets intended for disposal.
Accordingly, the $53.9 million charge discussed above included a $10.0 million
reversal of a previously recorded valuation allowance (the amount necessary to
reduce the carrying value to fair value less costs of disposal) related to
such facilities.
Spin-off transaction costs--The Spin-off was completed on May 1, 1998.
Direct costs related to the transaction totaled $17.3 million and primarily
included costs for professional services.
Write-off of clinical information systems--During 1997, the Company began
the installation of its proprietary clinical information system, VenTouch(TM),
in several of its nursing centers. During the pilot process, the Company
determined that VenTouch(TM) did not support effectively the nursing center
processes, especially in facilities with lower acuity patients. Accordingly,
management determined in the fourth quarter of 1998 to remove VenTouch(TM)
from these facilities during 1999. A loss of $10.1 million was recorded to
reflect the write-off of the equipment and estimated costs of removal from the
facilities.
Doubtful accounts related to sold operations--In the third quarter of 1998,
the Company recorded $9.6 million of additional provisions for doubtful
accounts for accounts receivable associated with previously sold facilities.
Settlement of litigation--The Company settled a legal action entitled
Highland Pines Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al.
(assumed in connection with the TheraTx Merger) which resulted in a payment of
$16.2 million. Approximately $7.8 million of the settlement was charged to
earnings in the fourth quarter of 1998, and the remainder of such costs had
been previously accrued in connection with the purchase price allocation.
Loss on sale and closure of home health and hospice businesses--The Company
began operating its home health and hospice businesses in 1996. These
operations generally were unprofitable. In the second quarter of 1998,
management decided to cease operations and either close or sell these
businesses, resulting in a loss of $7.3 million.
1997
During 1997, the Company completed the reorganization of the institutional
pharmacy business and, in the fourth quarter, adjusted the accrued costs of
these activities originally recorded in 1996. The adjustment increased pretax
income by $8.7 million. In addition, changes in estimates and gains related to
the disposition of assets increased pretax income by $5.1 million during 1997.
Capital Costs
Upon completion of the Spin-off, 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 $474 million in 1999, $461 million in 1998 and $310
million in 1997. Rent expense in 1999 and 1998 included $225 million and $148
million, respectively, incurred by the Company in connection with the Master
Lease Agreements.
54
<PAGE>
As a result of the Spin-off, the overall leverage of the Company was
increased substantially. Capital costs in 1998, including the impact of
reduced depreciation and interest costs, were increased by approximately $75
million as a result of the Spin-off.
During the pendency of the Chapter 11 Cases, the Company is continuing to
record the contractual amount of interest expense related to the Credit
Agreement and the rents due to Ventas under the Master Lease Agreements. No
interest costs have been recorded related to the 1998 Notes since the filing
of the Chapter 11 Cases. Contractual interest expense for the 1998 Notes for
this period was $8.9 million.
The TheraTx Merger and the Transitional Merger in 1997 resulted in net cash
payments of $359 million and $616 million, respectively, and were financed
through the issuance of long-term debt. In connection with the Spin-off in
1998, approximately $992 million of long-term debt was retained by Ventas.
Fourth Quarter Adjustments
Preparation of the financial statements requires a number of estimates and
judgments that are based upon the best available evidence at the time. In
addition, management regularly reviews the methods used to recognize revenues
and allocate costs to ensure that the financial statements reflect properly
the results of interim periods.
In addition to the unusual transactions previously discussed, during the
fourth quarter of 1999 and 1998, the Company recorded certain adjustments
which significantly impacted operating results. A summary of such adjustments
follows (in millions):
<TABLE>
<CAPTION>
Health Services
Division Hospital Division
----------------- ------------------
Nursing Ancillary
Centers Services Hospitals Pharmacy Corporate Total
------- --------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
1999
(Income)/expense
Provision for doubtful
accounts............. $40.2 $26.8 $ 6.5 $8.9 $ 82.4
Medicare supplement
insurance disputes... 18.8 18.8
Third-party
reimbursements and
contractual
allowances, including
amounts due from
government agencies
and other payors that
are subject to
dispute.............. 2.0 59.6 61.6
Professional liability
risks................ 10.5 0.3 0.6 11.4
Employee benefits..... (6.3) (1.5) (1.8) (9.6)
Incentive
compensation......... 2.2 (1.9) (1.1) (0.8)
Inventories........... 0.9 6.3 7.2
Other................. 1.7 (0.4) 2.0 (4.4) $(2.8) (3.9)
----- ----- ----- ---- ----- ------
$51.2 $25.2 $83.8 $9.7 $(2.8) $167.1
===== ===== ===== ==== ===== ======
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Health Services
Division Hospital Division
----------------- ------------------
Nursing Ancillary
Centers Services Hospitals Pharmacy Corporate Total
------- --------- --------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
1998
(Income)/expense
Provision for doubtful
accounts.............. $14.0 $ 6.8 $ 5.7 $ 2.5 $29.0
Third-party
reimbursements and
contractual
allowances, including
amounts due from
government agencies
and other payors that
are subject to
dispute............... 4.8 11.5 11.4 27.7
Change in goodwill
amortization period
related to
rehabilitation therapy
business.............. 6.4 6.4
Taxes other than
income................ $ 6.4 6.4
Compensated absences... 2.1 1.3 (0.8) 0.7 3.3
Incentive
compensation.......... (1.0) (0.4) (0.8) (0.1) (2.9) (5.2)
Litigation and
regulatory actions.... 3.5 3.5
Miscellaneous
receivables........... 5.2 5.2
Gain on sale of
assets................ (2.0) (2.0)
Other.................. 1.2 0.4 (1.0) 0.3 3.7 4.6
----- ----- ----- ----- ----- -----
$21.1 $24.0 $14.5 $ 7.9 $11.4 $78.9
===== ===== ===== ===== ===== =====
</TABLE>
The Company regularly reviews its accounts receivable and records provisions
for loss based upon the best available evidence. Factors such as changes in
collection patterns, the composition of patient accounts by payor type, the
status of ongoing disputes with third-party payors (including both government
and non-government sources), the effect of increased regulatory activities,
general industry conditions and the financial condition of the Company and its
ancillary service customers, among other things, are considered by management
in determining the expected collectibility of accounts receivable.
During the past two years, the Company has recorded significant adjustments
in the fourth quarter related to contractual allowances and doubtful accounts
in each of its divisions. These adjustments represented changes in estimates
resulting from management's assessment of its collection processes, the
general financial deterioration of the long-term healthcare industry and, in
1999, the realignment of the Vencare businesses (including the cancellation of
unprofitable contracts and the discontinuance of certain services) and the
filing of the Chapter 11 Cases in September 1999.
In addition, the Company recorded a significant adjustment in the fourth
quarter of 1999 related to professional liability risks. This adjustment was
recorded based upon actuarially determined estimates completed in the fourth
quarter and reflects substantial increases in claims and litigation activity
in the Company's nursing center business during 1999. Management believes that
cost increases for professional liability risks are negatively impacting other
providers in the long-term healthcare industry and expects that the Company's
operating results in 2000 may be impacted negatively by additional
professional liability costs.
Income Taxes
Prior to 1998, management believed that recorded deferred tax assets
ultimately would be realized. Management's conclusions at that time primarily
were based on the existence of sufficient taxable income within the allowable
carryback periods to realize the tax benefits of deductible temporary
differences recorded at December 31, 1997. For the fourth quarter of 1998, the
Company reported a pretax loss of $506 million. Additionally, the Company
revised its operating budgets as a result of the Budget Act and the less than
expected operating results in 1998. Based upon these revised forecasts,
management did not believe that the Company could generate sufficient taxable
income to realize the net deferred tax assets recorded at December 31, 1998.
As a result of those estimates, the Company recorded a deferred tax valuation
allowance aggregating $203 million in 1998 and $146 million in 1999. The
deferred tax valuation allowance included in the consolidated balance sheet at
December 31, 1999 totaled $349 million. See Note 12 of the Notes to
Consolidated Financial Statements.
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<PAGE>
Consolidated Results
The Company reported a pretax loss from operations before reorganization
costs of $664 million in 1999 compared to a loss of $497 million in 1998 and
income of $224 million in 1997. Reorganization costs in 1999 aggregating $19
million principally comprised professional fees and certain management
incentive payments incurred in connection with the Company's restructuring
activities.
The net loss from operations in 1999 totaled $683 million compared to $573
million in 1998 (including charges to record the deferred tax valuation
allowance). Net income from operations in 1997 totaled $135 million.
Effective January 1, 1999, the Company adopted the provisions of the
American Institute of Certified Public Accounts 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 provision 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, 1997, was not significant.
In conjunction with the Spin-off, the Company incurred an extraordinary loss
on extinguishment of debt aggregating $78 million. Extraordinary losses
related to the refinancing of long-term debt in 1997 reduced net income by $4
million.
Liquidity
As previously discussed, on September 13, 1999, the Company and
substantially all of its subsidiaries filed voluntary petitions for protection
under Chapter 11 of the Bankruptcy Code. See "Business--Proceedings Under
Chapter 11 of the Bankruptcy Code."
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the Company's consolidated balance sheet as
liabilities subject to compromise. The Company currently is paying the post-
petition claims of all vendors and providers in the ordinary course of
business.
The Company currently is operating its businesses as a debtor-in-possession
subject to jurisdiction of the Bankruptcy Court. In connection with the
Chapter 11 Cases, the Company entered into the DIP Financing aggregating $100
million. The Bankruptcy Court granted final approval of the DIP Financing on
October 1, 1999. The DIP Financing, which was initially scheduled to mature on
March 13, 2000, is comprised of a $75 million Tranche A Loan and a $25 million
Tranche B Loan. Interest is payable at prime rate plus 2 1/2% on the Tranche A
Loan and prime rate plus 4 1/2% on the Tranche B Loan.
Available aggregate borrowings under the Tranche A Loan were initially
limited to $45 million in September 1999 and increased to $65 million in
October, $70 million in November and $75 million thereafter. Pursuant to a
recent amendment to the DIP Financing, the aggregate borrowing limitations
under the Tranche A Loans are limited to approximately $68 million until
maturity. Borrowings under the Tranche B Loan require the approval of lenders
holding at least 75% of the credit exposure under the DIP Financing. The DIP
Financing is secured by substantially all of the assets of the Company and its
subsidiaries, including certain owned real property. The DIP Financing
contains standard representations and warranties and other affirmative and
restrictive covenants. As of March 29, 2000, there were no outstanding
borrowings under the DIP Financing.
Since the consummation of the DIP Financing, the Company and the DIP Lenders
have agreed to five amendments to the DIP Financing. These amendments approved
various changes to the DIP Financing including (i) extending the period of
time for the Company to file its plan of reorganization, (ii) approving
certain transactions and (iii) revising the Company's cash plan originally
submitted with the DIP Financing. In December 1999, the Company informed the
DIP Lenders that it planned to record a significant charge to earnings in the
fourth quarter of 1999 related to the valuation of accounts receivable that
could have resulted in noncompliance with certain covenants in the DIP
Financing requiring minimum Consolidated EBITDAR and a
57
<PAGE>
minimum Net Amount of Eligible Accounts (both as defined in the DIP
Financing). In connection with the third amendment to the DIP Financing, the
Company received a waiver from compliance with these covenants of the DIP
Financing through February 14, 2000. The Company received subsequent waivers
from compliance with these covenants in later amendments. In connection with
the most recent amendment to the DIP Financing dated February 23, 2000, the
parties agreed, among other things, to (i) extend the maturity date of the DIP
Financing until June 30, 2000, (ii) extend the period of time for the Company
to file its plan of reorganization to May 1, 2000, and (iii) revise certain
financial covenants. The Bankruptcy Court granted approval of this amendment
to the DIP Financing on March 10, 2000.
At December 31, 1999, the Company was not in compliance with the DIP
Financing covenant related to the minimum Net Amount of Eligible Accounts
(accounts receivable). The Company intends to seek an amendment or waiver to
the DIP Financing to remedy this event of default. Since there were no
outstanding borrowings under the DIP Financing at December 31, 1999, the event
of default had no effect on the Company's consolidated financial statements.
However, if the Company is not successful in obtaining an amendment or waiver
to remedy the event of default, its ability to borrow under the DIP Financing
to finance its operations during the pendency of the Chapter 11 Cases may be
limited. See"--Cautionary Statements."
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. The automatic stay does
not necessarily apply to certain actions against Ventas for which the Company
has agreed to indemnify Ventas in connection with the Spin-off. In addition,
the Company may assume or reject executory contracts, including lease
obligations, under the Bankruptcy Code. Parties affected by these rejections
may file claims with the Bankruptcy Court in accordance with the
reorganization process.
As previously disclosed, the Company is developing a Plan of Reorganization
through negotiations with key parties including its Senior Lenders, the
holders of the 1998 Notes, Ventas and the DOJ, acting on behalf of HCFA and
HHS. A substantial portion of pre-petition liabilities are subject to
settlement under the Plan of Reorganization to be submitted by the Company.
The Plan of Reorganization must be voted upon by the impaired creditors of
the Company and approved by the Bankruptcy Court. There can be no assurance
that the Plan of Reorganization to be proposed by the Company will be approved
by the requisite holders of claims, confirmed by the Bankruptcy Court or that
it will be consummated. If the Plan of Reorganization is not accepted by the
required number of impaired creditors and the Company's exclusive right to
file and solicit acceptance of a plan of reorganization ends, any party in
interest may subsequently file it own plan of reorganization for the Company.
The Bankruptcy Court currently has extended the Company's exclusive right to
submit a plan of reorganization until May 16, 2000. A plan of reorganization
must be confirmed by the Bankruptcy Court after certain findings required by
the Bankruptcy Court are made by the Bankruptcy Court. The Bankruptcy Court
may confirm a plan of reorganization notwithstanding the non-acceptance of the
plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are satisfied. As previously announced,
the Company has indicated that any Plan of Reorganization will result in the
Company's Common Stock having little, if any, value.
As a result of the uncertainty related to the Chapter 11 Cases, the report
of the Company's independent accountants, PricewaterhouseCoopers LLP, refers
to the Company's ability to continue as a going concern at December 31, 1999.
As a result of the Company's net loss in 1998, its working capital deficiency
and its covenant defaults under the Credit Agreement at December 31, 1998, the
report of the Company's former independent accountants, Ernst & Young LLP,
refers to the Company's ability to continue as a going concern at
December 31, 1998.
Cash provided by operations before reorganization costs totaled $247 million
for 1999 compared to $323 million for 1998 and $266 million for 1997. Cash
flows in 1998 were unusually high due to growth in amounts due to third
parties. Overpayments from third party payors resulted from the Medicare
program continuing to reimburse the Company's nursing centers under the prior
cost-based reimbursement system after the Company's nursing centers had
converted to PPS.
On April 9, 1999, the Company was informed by HCFA that the Medicare program
had made a demand for repayment of approximately $90 million of reimbursement
overpayments by April 23, 1999. On April 21, 1999,
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<PAGE>
the Company reached an agreement with HCFA to extend the repayment of such
amounts over 60 monthly installments. Under the HCFA Agreement, monthly
payments of approximately $1.5 million commenced in May 1999. Beginning in
December 1999, the balance of the overpayments bears interest at a statutory
rate approximating 13.4%, resulting in a monthly payment of approximately $2.0
million through March 2004. If the Company is delinquent with two consecutive
payments, the HCFA Agreement will be defaulted and all subsequent Medicare
reimbursement payments to the Company may be withheld. Amounts due under the
HCFA Agreement aggregate $80.3 million and have been classified as liabilities
subject to compromise in the Company's consolidated balance sheet at December
31, 1999. The Company has received Bankruptcy Court approval to continue to
make the monthly payments under the HCFA Agreement during the pendency of the
Chapter 11 Cases.
Capital Resources
Excluding acquisitions, capital expenditures totaled $111 million for 1999
compared to $267 million for 1998 and to $282 million for 1997. Planned
capital expenditures in 2000 (excluding acquisitions) are expected to
approximate $100 million. Management believes that its capital expenditure
program is adequate to expand, improve and equip existing facilities.
Capital expenditures during the last three years were financed primarily
through internally generated funds. At December 31, 1999, the estimated cost
to complete and equip construction in progress approximated $6 million. There
can be no assurance that the Company will have sufficient resources to finance
its capital expenditure program in 2000.
During 1997, the Company expended approximately $359 million and $616
million in connection with the TheraTx Merger and the Transitional Merger,
respectively. These acquisitions were financed primarily through the issuance
of long-term debt. See Notes 4 and 5 of the Notes to Consolidated Financial
Statements for a discussion of these acquisitions. The Company also expended
$24 million in 1998 and $37 million in 1997 for acquisitions of new facilities
(and related healthcare businesses) and previously leased nursing centers. See
Note 6 of the Notes to Consolidated Financial Statements. The Company does not
intend to acquire additional nursing centers and hospitals in 2000.
In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
the Company's Common Stock at an aggregate cost of $82 million. These
transactions were financed primarily through bank borrowings.
At December 31, 1999, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $100
million of floating rate debt outstanding. The agreement provides for fixed
rates at 6.4% plus 3/8% to 1 1/8% and expires in May 2000. The fair value of
the swap agreements or the estimated amount the Company would pay to terminate
the agreements based on current interest rates, is not recognized in the
consolidated financial statements.
Other Information
Effects of Inflation and Changing Prices
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. In recent years, significant cost containment measures
enacted by Congress and certain state legislators have limited the Company's
ability to recover its cost increases through increased pricing of its
healthcare services. Medicare revenues in the Company's nursing centers are
subject to fixed payments under PPS. Medicaid reimbursement rates in many
states in which the Company operates nursing centers also are based on fixed
payment systems. In addition, by repealing the Boren Amendment, the Budget Act
eases existing impediments on the states' ability to reduce Medicaid
reimbursement levels to the Company's nursing centers. Medicare revenues in
the Company's hospitals also have been reduced by the Budget Act.
The Company's ability to control its labor costs is subject to a number of
factors, including (i) the availability of nursing, therapy and other
personnel, (ii) competitive local labor market conditions, (iii) the Company's
ability to attract, develop and retain it employees and (iv) the average
acuity level of its patients.
Management believes that its operating margins have been, and may continue
to be, under significant pressure because of increased regulatory scrutiny and
growth in operating expenses in excess of the increase in
59
<PAGE>
payments by third-party payors. In addition, as a result of competitive
pressures, the Company's ability to maintain operating margins through price
increases to private patients is limited.
Subsequent Event
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. These documents are filed annually in settlement of
amounts due to or from the various agencies administering the reimbursement
programs. These cost reports indicated amounts due from the Company
aggregating $58 million. This liability arose during 1999 as part of the
Company's routine settlement of Medicare reimbursement overpayments. Such
amounts are classified as liabilities subject to compromise in the
consolidated balance sheet at December 31, 1999 and, accordingly, no funds
were disbursed by the Company in settlement of such pre-petition liabilities.
Other
In September 1998, the Company received $178 million from the sale of
approximately 88% of its ownership of Atria and retained approximately 12% of
the outstanding capital stock of the surviving entity. The Company is
accounting for its investment in the surviving entity under the cost method.
From July 1, 1997 until the sale, the Company accounted for Atria under the
equity method. Prior to July 1, 1997, such accounts were consolidated with
those of the Company and provisions related to minority interests in the
earnings and equity of Atria had been recorded since the consummation of the
initial public offering of Atria in August 1996.
At the time of the Spin-off, the Company recorded both a deferred tax asset
and a valuation allowance for identical amounts in connection with the
difference in book and tax basis of the Company's investment in Atria which
resulted from the Spin-off. The valuation allowance was recorded due to the
litigation and other uncertainties associated with the realization of the
deferred tax asset, based upon the available evidence at the time of the Spin-
off. During the third quarter of 1998, upon favorable resolution of such
litigation and completion of the Atria sale, the Company adjusted the
valuation allowance that had been recorded in the second quarter of 1998.
The Company is a party to certain material litigation and regulatory actions
as well as various lawsuits and claims arising in the ordinary course of
business. See Note 24 of the Notes to Consolidated Financial Statements for a
description of material litigation and regulatory actions.
Year 2000
The Y2K issue is a result of computer programs and embedded computer chips
using two digits rather than four digits to define the applicable year.
Without corrective action, computer programs and embedded chips could
potentially recognize the date ending in "00" as the year 1900 rather than
2000, causing 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 potentially were affected by the Y2K issue.
In response to the Y2K issue, the Company established teams to address
specific areas affected by Y2K issues and developed a Y2K compliance program
consisting of five phases: (i) business assessment; (ii) inventory and
assessment; (iii) remediation and testing; (iv) implementation and rollout;
and (v) post-implementation. All phases were successfully completed by 2000
except for the post-implementation phase. The post-implementation phase
involves finalizing the documentation of the Y2K compliance program and any
corrective efforts surrounding date issues associated with the year 2000 being
a leap year (for which the Company did not experience any significant
difficulties).
In the course of its Y2K compliance program, the Company identified three
critical risks caused by the Y2K issue: (i) unanticipated delays in the
implementation and rollout of the new financial information system 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.
60
<PAGE>
In an effort to consolidate the Company's systems and to respond to the
changes created by the Budget Act, the Company instituted a plan to replace
substantially all of the Company's financial information and patient
accounting systems. During 1999, the Company replaced its financial
information system and its patient accounting system in the hospital division.
During the second quarter of 1999, management determined to remediate rather
than replace its existing patient accounting system in the health services
division. The Company installed the remediated patient accounting system for
the health services division prior to year-end. To date, the Company has not
experienced any problems in connection with the replacement or remediation of
these systems.
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 contacted all of its significant reimbursement sources
to determine their Y2K compliance status in order to make a determination of
this potential risk. In the fourth quarter of 1999, the Company was notified
by HCFA that its mission-critical internal systems had been certified as Y2K
compliant. The Company did not receive assurance that systems used by Medicaid
would be Y2K compliant. The Company has not experienced any delays in payments
from third-party payors at this time.
As part of its Y2K compliance program, the Company also contacted its
critical suppliers and vendors and evaluated information provided by third-
party vendors. Generally, the Company relied on information provided to it by
such third parties. To date, the Company has not experienced and is unaware of
any significant Y2K problems involving its critical suppliers and vendors.
The Company developed contingency plans to address the most critical risks
raised by the Y2K issue. These contingency plans covered all IT and non-IT
systems. If the Medicare and Medicaid systems experience problems in the
future, the Company will arrange for interim payments from Medicare and submit
written requests for payment from state Medicaid agencies. The Company's
contingency plans also cover failures by suppliers and vendors. 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. At
this time, the Company has not been required to implement its contingency
plans at any facility or its corporate office.
The cost to replace or remediate of the Company's financial information and
patient accounting systems approximated $45 million. A substantial portion of
these costs were capitalized and will be amortized over seven years. Including
the costs of the new financial information and patient accounting systems, the
total Y2K program costs expended through December 31, 1999 approximated $68
million. A majority of the costs related solely to Y2K compliance were
expensed as incurred. As previously discussed, management determined during
the second quarter to remediate rather than replace its existing patient
accounting system in the health services division. Accordingly, the Company
recorded a loss of approximately $5.6 million in the second quarter of 1999
associated with the costs incurred in implementing the new system prior to
determining to remediate the existing system. The costs of the new financial
information systems and patient accounting systems and the additional Y2K
costs were funded through operating cash flows. The Company does not expect to
incur any material costs associated with post-implementation phase of its Y2K
compliance program.
Management's analysis of and conclusions with respect to the Y2K issues
affecting the Company are based on information currently available and its
experience to date. 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 additional costs to remediate the
Y2K issues will not be needed. While the Company believes it has substantially
completed its Y2K compliance program, there is no certainty that additional
issues and costs related thereto may not arise in the future.
Although the Company is continuing to monitor the Medicare and Medicaid
programs and other third-party payors for Y2K compliance, there can be no
guarantee that unforeseen failure of these third parties to remediate their
systems to be Y2K compliant will not have a material adverse effect on the
Company's results of operations, liquidity and financial position.
61
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's only significant exposure to market risk is changes in the
levels of various interest rates. In this regard, changes in LIBOR interest
rates affect the interest paid on its borrowings. In addition, the interest
rates on the DIP Financing are affected by changes in the Federal Funds rate
and the prime rate of Morgan Guaranty Trust Company of New York. 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.
As previously discussed, the Company filed the Chapter 11 Cases on September
13, 1999. Accordingly, all amounts disclosed in the table below are subject to
compromise in connection with the Chapter 11 Cases. While the fair values of
the Company's debt obligations have declined significantly in 1999 as a result
of the Chapter 11 Cases, such amounts do not reflect any adjustments that
might result from resolutions of the Chapter 11 Cases or other matters
discussed herein.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. In addition, the Company
may assume or reject executory contracts under the Bankruptcy Code.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table
constitutes a forward-looking statement. For long-term debt, the table
presents principal cash flows and related weighted average interest rates by
expected maturity 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
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
-------- ------- -------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt,
including amounts due
within one year:
Fixed rate............. $ 17,408 $17,802 $ 19,454 $21,145 $ 7,573 $303,897 $387,279 $151,279
Average interest rate.. 11.00% 11.00% 11.00% 11.00% 9.00% 9.00%
Variable rate.......... $ 19,474 $61,974 $128,640 $79,535 $177,344 $ 39,147 $506,114 $334,035
(a) Average interest
rate
Interest rate derivative
financial instruments
related to debt:
Interest rate swaps:
Pay fixed/receive
variable.............. $100,000 $100,000 $ 157
Average pay rate....... 6.1%
(b) Average receive
rate
</TABLE>
- --------
(a) Interest is payable, depending on the debt instrument, certain leverage
ratios and other factors, at a rate of LIBOR plus 3/4% to 3 1/2% or the
prime rate plus 2% to 3 1/2%.
(b) The variable rate portion of the interest rate swap is 3-month LIBOR.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in appendix pages F-2
through F-47 of this Annual Report on Form 10-K.
62
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
The Company, upon approval of its Board of Directors, appointed
PricewaterhouseCoopers LLP ("PwC") as its independent auditors for the fiscal
year ending December 31, 1999 to replace Ernst & Young LLP ("Ernst & Young")
effective November 2, 1999. The Board of Directors was advised by counsel that
the participation of Ernst & Young in the Company's Spin-off presented a
potential conflict of interest that would significantly jeopardize the ability
of Ernst & Young to be approved as independent auditors for the Company by the
Bankruptcy Court. The audit reports of Ernst & Young on the consolidated
financial statements of the Company and its subsidiaries as of and for the
years ended December 31, 1998 and 1997, did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to audit scope
or accounting principles. The opinion of Ernst & Young for the year ended
December 31, 1998 was modified as to uncertainty by the inclusion of an
explanatory "going concern" paragraph resulting from the Company's net loss in
1998, working capital deficiency and covenant defaults under its Credit
Agreement.
In connection with the audits for the two years ended December 31, 1998 and
1997, and the subsequent interim period through November 2, 1999, there were
no disagreements with Ernst & Young on any accounting principles or practices,
financial statement disclosures, or auditing scope or procedures, which if not
resolved to the satisfaction of Ernst & Young, would have caused it to make a
reference to the subject matter of the disagreement in their report.
In connection with the audit of the Company's consolidated financial
statements for the year ended December 31, 1998, Ernst & Young informed the
Company and its Audit and Compliance Committee of a condition that it believed
constituted a material weakness in the Company's internal controls. Ernst &
Young communicated that certain of the Company's account reconciliations had
not been completed on a timely basis. Additionally, Ernst & Young stated that
there was a lack of appropriate follow up and resolution of reconciling items,
including adjustments of the accounting records on a timely basis, and there
was a lack of evidence of review of the reconciliations by an independent
person. The Company did reconcile all accounts and recorded the appropriate
adjustments prior to the filing of its Annual Report on Form 10-K for the year
ended December 31, 1998. Ernst & Young advised the Company that, in completing
its audit, it considered the aforementioned material weakness in determining
the nature, timing and extent of procedures performed to enable it to issue
its opinion on the consolidated financial statements.
The Company requested that Ernst & Young furnish it with a letter addressed
to the Commission stating whether or not it agrees with the statements set
forth above. A copy of such letter dated November 5, 1999 was filed with the
Commission on a Current Report on Form 8-K filed by the Company.
63
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages (as of January 1, 2000) and present and
past positions of the persons who are the current directors and executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Edward L. Kuntz................ 54 Chairman of the Board, Chief Executive
Officer and President
Ulysses L. Bridgeman, Jr. ..... 46 Director
Elaine L. Chao................. 46 Director
Donna R. Ecton................. 52 Director
Stanley C. Gault............... 73 Director
William H. Lomicka............. 62 Director
Richard A. Schweinhart......... 50 Senior Vice President and Chief Financial
Officer
Donald D. Finney............... 52 President, Health Services Division
Frank J. Battafarano........... 49 President, Hospital Division
Richard E. Chapman............. 51 Senior Vice President and Chief Information
Officer
Owen E. Dorsey................. 49 Chief Administrative Officer
James H. Gillenwater, Jr. ..... 42 Senior Vice President, Planning and
Development
Richard A. Lechleiter.......... 41 Vice President, Finance, Corporate
Controller and Treasurer
M. Suzanne Riedman............. 48 Senior Vice President and General Counsel
</TABLE>
Edward L. Kuntz, an attorney, has served as Chairman of the Board, Chief
Executive Officer and President of the Company since January 1999. He served
as President, Chief Operating Officer and director of the Company from
November 1998 to January 1999. Mr. Kuntz was Chairman and Chief Executive
Officer of Living Centers of America, Inc. ("Living Centers"), a leading
provider of long-term healthcare, from 1992 to 1997. After leaving Living
Centers, he served as an advisor and consultant to a number of healthcare
services and investment companies and was affiliated with Austin Ventures, a
venture capital firm. In addition, Mr. Kuntz served as Associate General
Counsel and later as Executive Vice President of ARA Living Centers until the
formation of Living Centers in 1992.
Ulysses L. Bridgeman, Jr., has served as a director of the Company since
April 1998. He served as a director of the Company's predecessor from May 1997
to April 1998. Since 1988, Mr. Bridgeman has been President of Bridgeman
Foods, Inc., a franchisee of 120 Wendy's Old Fashioned Hamburger Restaurants.
Elaine L. Chao has served as a director of the Company since April 1998. She
served as a director of the Company's predecessor from May 1997 to April 1998.
Ms. Chao is a Distinguished Fellow of The Heritage Foundation in Washington,
D.C. From 1992 to 1996, Ms. Chao was President and Chief Executive Officer of
the United Way of America. From 1991 to 1992, she served as the Director of
the Peace Corps. Ms. Chao is a director of Dole Food Company, Inc., Protective
Life Corporation and Millipore Corporation, a manufacturer and seller of
products used to identify and purify fluids.
Donna R. Ecton has served as a director of the Company since April 1998. She
served as a director of the Company's predecessor from 1992 to April 1998. Ms.
Ecton is Chairman, President and Chief Executive Officer of EEI Inc.,
consultants to management and investors. Ms. Ecton served as Chief Operating
Officer and a director of PETsMART, Inc., a pet supplies retailer, from 1996
to 1998. From 1995 to 1996, she was Chairman, President and Chief Executive
Officer of Business Mail Express, Inc., an expedited print and mail services
company. From 1991 to 1994, she was President and Chief Executive Officer of
Van Houten North America, Inc. and Andes Candies Inc., confectionery products
businesses. Ms. Ecton is a director of H&R Block, Inc.
64
<PAGE>
Stanley C. Gault has served as a director of the Company since July 1998. In
July 1996, Mr. Gault retired as Chairman of the Board of The Goodyear Tire &
Rubber Company ("Goodyear"). Mr. Gault was Chairman and Chief Executive
Officer of Goodyear from June 1991 to January 1996. Previously, he served as
Chairman of the Board and Chief Executive Officer of Rubbermaid Incorporated
from May 1980 to May 1991. Mr. Gault currently serves on the boards of
directors of Wal-Mart Stores, Inc., Avon Products, Inc., and The Timken
Company, a manufacturer of anti-friction bearings and steel alloy products. He
is a past director of the New York Stock Exchange, Inc., PPG Industries, Inc.,
International Paper Company, The Goodyear Tire & Rubber Company, and
Rubbermaid Incorporated.
William H. Lomicka has served as a director of the Company since April 1998.
Mr. Lomicka was a director of the Company's predecessor from 1987 to April
1998. From 1989 to April 1999, he served as President of Mayfair Capital,
Inc., a private investment firm. Since April 1999, he has served as Chairman
of Coulter Ridge Capital, Inc., a private investment firm. Mr. Lomicka serves
as a director of Pomeroy Computer Resources, Inc., a computer network
integrator.
Richard A. Schweinhart, a certified public accountant, has served as Senior
Vice President and Chief Financial Officer of the Company since September
1998. Mr. Schweinhart was Senior Vice President--Columbia Sponsored Networks
for Columbia/HCA Healthcare Corp. ("Columbia") from March 1996 through
September 1998. From April 1995 until March 1996, he served as Senior Vice
President--Nonhospital Operations and from September 1993 until April 1995 as
Senior Vice President--Finance of Columbia. Mr. Schweinhart served as Senior
Vice President--Finance for both Galen Health Care, Inc. ("Galen") and Humana
Inc. ("Humana") from November 1991 to September 1993.
Donald D. Finney has served as President, Health Services Division of the
Company since January 1999. During 1998, Mr. Finney was Chief Executive
Officer of HCMF Corporation, a privately held post-acute and assisted living
provider. From January 1997 to December 1997, he served as Chief Operating
Officer of Summerville Healthcare Group, Inc., an operator of assisted living
facilities. He served as President of the Facilities Division of GranCare,
Inc. from July 1995 to January 1997. From October 1990 to July 1995,
Mr. Finney served as Chief Operating Officer of Evergreen Healthcare, Inc., an
operator of long-term care and assisted living facilities.
Frank J. Battafarano has served as President, Hospital Division of the
Company since November 1998. He served as Vice President of Operations from
April 1998 to November 1998. He held the same position with the Company's
predecessor from February 1998 to April 1998. From May 1996 to January 1998,
Mr. Battafarano served as Senior Vice President of the central regional office
of the Company's predecessor. From January 1992 to April 1996, he served as an
executive director and hospital administrator for the Company's predecessor.
Richard E. Chapman has served as Senior Vice President and Chief Information
Officer of the Company since April 1998. Mr. Chapman served as Senior Vice
President and Chief Information Officer of the Company's predecessor from
October 1997 to April 1998. From March 1993 to October 1997, he was Senior
Vice President of Information Systems of Columbia, Vice President of Galen
from March 1993 to August 1993, and of Humana from September 1988 to February
1993.
Owen E. Dorsey has served as Chief Administrative Officer of the Company
since April 1999. Mr. Dorsey served as Senior Vice President of Service
Merchandise, Inc. from July 1998 to February 1999. From 1993 to 1998, he
served as Executive Vice President of Saks Holding, Inc., the parent company
of Saks Fifth Avenue. Mr. Dorsey also held executive positions with Ritz-
Carlton Hotel Company from 1987 to 1993.
James H. Gillenwater, Jr. has served as Senior Vice President, Planning and
Development of the Company since April 1998. Mr. Gillenwater served as Senior
Vice President, Planning and Development of the Company's predecessor from
December 1996 to April 1998. From November 1995 through December 1996, he
served as Vice President, Planning and Development of the Company's
predecessor and was Director of Planning and Development from 1989 to November
1995.
65
<PAGE>
Richard A. Lechleiter, a certified public accountant, has served as Vice
President, Finance and Corporate Controller of the Company since April 1998
and also has served as Treasurer since July 1998. Mr. Lechleiter served as
Vice President, Finance and Corporate Controller of the Company's predecessor
from November 1995 to April 1998. From June 1995 to November 1995, he was
Director of Finance for the Company's predecessor. Mr. Lechleiter was Vice
President and Controller of Columbia from September 1993 to May 1995, of Galen
from March 1993 to August 1993, and of Humana from September 1990 to February
1993.
M. Suzanne Riedman, an attorney, has served as Senior Vice President and
General Counsel of the Company since August 1999. She served as Vice President
and Associate General Counsel of the Company from April 1998 to August 1999.
Ms. Riedman held the same position with the Company's predecessor from January
1997 to April 1998. She joined the Company's predecessor as counsel in
September 1995 and became Associate General Counsel in January 1996. Ms.
Riedman was counsel to Beverly Enterprises, Inc. ("Beverly") in various
capacities from 1990 to 1995 and most recently served as Senior Vice President
and Corporate Compliance Officer of Beverly. Prior to joining Beverly, Ms.
Riedman was in the private practice of law for 11 years.
The Company's Board of Directors is divided into the following three
classes: Class I Directors--Mr. Bridgeman and Mr. Lomicka; Class II
Directors--Ms. Ecton and Mr. Gault; and Class III Directors--Ms. Chao and Mr.
Kuntz. Each class of directors holds office for a term of three years expiring
at the annual meeting of stockholders or thereafter until their successors are
duly elected and qualified. Terms of the Class I, Class II and Class III
directors expire in 2002, 2000 and 2001, respectively. Each of the executive
officers serves at the pleasure of the Board of Directors.
As noted above, Mr. Dorsey served as Senior Vice President of Service
Merchandise, Inc. ("SMI") until February 1999. On March 15, 1999, five of
SMI's vendors filed an involuntary petition for reorganization under Chapter
11 in the United States Bankruptcy Court for the Middle District of Tennessee.
On March 27, 1999, SMI and 31 of its subsidiaries filed voluntary petitions
with that court for reorganization under Chapter 11.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of the
Common Stock to file initial stock ownership reports and reports of changes in
ownership with the Commission and, as appropriate, the New York Stock
Exchange. Based on a review of these reports and on written representations
from the reporting persons that no other reports were required, the Company
believes that the applicable Section 16(a) reporting requirements were
complied with for all transactions which occurred in 1999.
66
<PAGE>
Item 11. Executive Compensation
The following Summary Compensation Table sets forth compensation earned
during the three fiscal years ended December 31, 1999 by (i) the Chief
Executive Officer of the Company, (ii) the other four most highly compensated
executive officers of the Company and (iii) the Company's former chief
executive officer, former president, ancillary services division and former
senior vice president, general counsel and secretary (collectively, the "Named
Executive Officers").
The executive compensation and other information presented below for periods
prior to the Spin-off include amounts received from Ventas by the Named
Executive Officers. Any discussion concerning events prior to May 1, 1998
refers to the Company's business as it was conducted by Ventas prior to the
Spin-off.
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------- Long-Term
Bonus Compensation
--------------------- -------------------------
Restricted Securities
Performance Stock Underlying All Other
Name and Principal Position Year Salary Cash(2) Shares(3) Awards Options Compensation(4)
- --------------------------- ---- -------- --------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward L. Kuntz(5)...... 1999 $735,385 $ 337,500 - $450,000(6) 200,000 $ 433,211(7)
Chairman of the Board, 1998 73,077 22,917 - - - -
Chief Executive Officer
and President
Richard A. 1999 $272,115 $ 123,750 - - - $ 122,376
Schweinhart(8)......... 1998 50,000 16,667 - $107,813(9) 75,000 -
Senior Vice President
and Chief Financial
Officer
Donald D. Finney(8)..... 1999 $279,711 $ 123,750 - - 80,000 $ 120,625(10)
President, Health
Services Division
Frank J. 1999 $213,654 $ 96,750 - - - $ 253,637
Battafarano(8)......... 1998 184,539 45,000 - $ 30,000(11) 221,240(12) 5,852
President, Hospital
Division
Richard E. Chapman(8)... 1999 $274,421 $ 123,750 - - - $ 139,758(13)
Senior Vice President 1998 270,000 65,000 - $ 30,000(11) 274,879(12) 24,036(13)
and Chief Information 1997 45,000 21,668 - - 50,000 44,022(13)
Officer
Frank W. Anastasio(14).. 1999 $183,483 $ 32,250 - - - $ 874,650(14)
Former President, 1998 185,923 45,000 - $ 30,000(11) 263,526(12) 5,227
Ancillary Services
Division
Jill L. Force(15)....... 1999 $127,740 $ 27,750 - - - $ 762,091(15)
Former Senior Vice 1998 172,885 41,750 - $ 30,000(11) 408,981(12) 7,213(15)
President, General 1997 160,000 53,336 $ 81,758 - 25,000 6,036
Counsel and Secretary
W. Bruce Lunsford(16)... 1999 $ 97,308 - - - - $3,630,280(16)
Former Chairman of the 1998 569,469 $ 137,500 - - 2,965,100(12) 24,084
Board and Chief 1997 700,000 233,345 $523,298 - 160,000 26,735
Executive Officer
</TABLE>
- --------
(1) The amounts for 1998 represent the total compensation paid by the Company
from May 1, 1998 to December 31, 1998 and by the Company's predecessor
from January 1, 1998 to April 30, 1998. The amounts for 1997 represent the
total compensation paid by the Company's predecessor.
(2) The amounts shown represent cash bonuses awarded under incentive
compensation plans.
(3) Amounts in this column represent the fair market value, on the date of
allocation, of performance shares awarded to Mr. Lunsford and Ms. Force
upon satisfaction of certain performance goals for the periods presented.
The number of performance shares allocated to Mr. Lunsford and Ms. Force
for 1997 were 21,333 and 3,333 shares, respectively. See "--Long-Term
Incentive Awards."
67
<PAGE>
(4) In addition to certain amounts noted below, the amounts in this column
include contributions for the benefit of the Named Executive Officers to
the Company's Retirement Savings Plan ("VRSP"), Deferred Compensation Plan
("DCP"), and for 1999, amounts funded and distributed from the Company's
Supplemental Executive Retirement Plan ("SERP") as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------- ---------------------- --------------------------
VRSP DCP SERP Total VRSP DCP Total VRSP DCP Total
------ -------- ---------- ---------- ------ ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Kuntz............... $4,800 - - $ 4,800 - - - - - -
Mr. Schweinhart......... 4,800 - - 4,800 - - - - - -
Mr. Finney.............. - - - - - - - - - -
Mr. Battafarano......... 4,800 $ 5,902 $ 149,057 159,759 $4,800 $ 1,052 $ 5,852 - - -
Mr. Chapman............. 4,800 - - 4,800 1,500 - 1,500 - - -
Mr. Anastasio........... 4,800 2,702 271,448 278,950 4,800 427 5,227 - - -
Ms. Force............... 4,800 12,886 249,188 266,874 4,800 679 5,479 $4,800 $ 1,236 $ 6,036
Mr. Lunsford............ 4,800 127,471 2,569,518 2,701,789 4,800 19,284 24,084 4,800 21,935 26,735
</TABLE>
For 1999, the amounts also include retention bonuses paid to the following
Named Executive Officers: Mr. Kuntz--$312,500; Mr. Schweinhart--$114,583;
Mr. Finney--$114,583; Mr. Battafarano--$89,583; and Mr. Chapman--$114,583.
See "--Management Retention Plan." In addition, the 1999 amounts include
amounts relating to personal use of the Company's airplane by the following
Named Executive Officers: Mr. Kuntz--$34,908; Mr. Schweinhart--$2,993; Mr.
Battafarano--$4,295; and Mr. Lunsford--$3,147.
(5) Mr. Kuntz became an executive officer upon his employment with the Company
in November 1998. Mr. Kuntz was elected Chairman of the Board, Chief
Executive Officer and President by the Board of Directors on January 22,
1999.
(6) The amount for Mr. Kuntz represents the fair market value on the date of
grant of 200,000 shares of restricted stock granted on February 12, 1999.
These shares were scheduled to vest on January 1, 2000 but Mr. Kuntz
voluntarily forfeited the restricted shares in December 1999. This award
would have been valued at $18,000 based on the closing price of $0.09 for
the Common Stock on December 31, 1999. The Company does not pay dividends
on its Common Stock, but the holder of restricted stock is entitled to
dividends if paid.
(7) In addition to the amounts noted above, this amount includes travel and
living expenses (including a gross-up for applicable taxes) paid to Mr.
Kuntz of $81,003.
(8) Mr. Schweinhart, Mr. Finney and Mr. Chapman became executive officers upon
their employment with the Company in September 1998, January 1999 and
October 1997, respectively. Mr. Battafarano first became an executive
officer of the Company in November 1998.
(9) This amount represents the fair market value on the date of grant of
25,000 shares of restricted stock granted on September 28, 1998. These
shares vest in four equal annual installments, beginning on the first
anniversary of the date of grant. This award was valued at $2,250 based on
the closing price of $0.09 for the Common Stock on December 31, 1999. The
Company does not pay dividends on its Common Stock, but the holder of
restricted stock is entitled to dividends if paid.
(10) In addition to the amounts noted above, this amount includes relocation
benefits paid to Mr. Finney of $6,042.
(11) The amounts for Mr. Battafarano, Mr. Chapman, Mr. Anastasio and Ms. Force
represent the fair market value on the date of grant of 10,000 shares of
restricted stock granted on September 18, 1998. Except for the shares
awarded to Mr. Anastasio and Ms. Force, these shares vest on March 18,
2000. Each award was valued at $900 based on the closing price of $0.09
for the Common Stock on December 31, 1999. The Company does not pay
dividends on its Common Stock, but the holder of restricted stock is
entitled to dividends if paid. The restricted stock awarded to Mr.
Anastasio and Ms. Force vested in connection with their severance. See
"--Severance Agreements."
(12) The amounts shown for options awarded in 1998 include options issued in
connection with the assumption of outstanding options in the Spin-off. At
the time of the Spin-off, all outstanding options of the Company's
predecessor ("Existing Options") were split into options to purchase the
same number of both the Company's Common Stock and Ventas common stock.
The Existing Options remained options to purchase Ventas common stock and
new options were granted by the Company to evidence the options to
purchase
68
<PAGE>
the Common Stock (the "Company Options.") The Company assumed the
obligation to issue the Company Options in the Spin-off. The exercise price
of each Existing Option was modified, and the exercise price of each
Company Option was set, so that the combined exercise price of these
options equaled the original exercise price of the Existing Option prior to
the Spin-off. The exercise prices were split based on the relative fair
market value of the Company's Common Stock and Ventas common stock
immediately following the Spin-off. All other terms of the Company Options
were the same as the Existing Options. The numbers shown also include
options that were repriced in 1998. In connection with the repricing of
options, the Company issued a reduced number of new options with an
exercise price of $5.50 in exchange for the cancellation of outstanding
options.
(13) In addition to the amounts noted above, these amounts include relocation
benefits paid to Mr. Chapman of $20,375, $22,080 and $44,022 for 1999,
1998 and 1997, respectively. The amount for 1998 also includes $456 of
interest forgiveness on a loan to Mr. Chapman.
(14) Mr. Anastasio resigned from the Company effective October 30, 1999. In
addition to the amounts noted above, all other compensation for 1999
includes $594,900 in cash and other personal property valued at $800
received by Mr. Anastasio in connection with his severance agreement with
the Company. Mr. Anastasio also received other benefits as part of his
severance. See "--Severance Agreements."
(15) Ms. Force resigned from the Company effective August 25, 1999. In
addition to the amounts noted above, all other compensation for 1999
includes $488,325 in cash and Common Stock valued at $5,158 received by
Ms. Force in connection with her severance agreement with the Company.
Ms. Force also received other benefits as part of her severance. See "--
Severance Agreements." These amounts also include $1,734 of interest
forgiveness for each of 1999 and 1998 on Ms. Force's Tax Loan (as
defined). See "Certain Relationships and Related Transactions."
(16) Mr. Lunsford resigned from the Company effective January 22, 1999. In
addition to the amounts noted above, all other compensation for 1999
includes $825,000 in cash and personal property and other benefits
(including office space and the services of an administrative assistant)
valued at $100,344 received by Mr. Lunsford in connection with his
severance agreement with the Company. Mr. Lunsford also received other
benefits as part of his severance. See "--Severance Agreements."
Option Grants In Last Fiscal Year
The following table sets forth information concerning options to purchase
shares of Common Stock granted in 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(3)
Options Employees Price Expiration ---------------------------
Name Granted(1) In 1999 Per Share(2) Date 5% 10%
- ---- ---------- ---------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Kuntz......... 200,000(4) 49.4% $ 2.25 2/12/09 $ 283,003 $ 717,184
Richard A. Schweinhart.. - - - - - -
Donald D. Finney........ 80,000 19.8% $4.375 1/4/09 $ 220,113 $ 557,810
Frank J. Battafarano.... - - - - - -
Richard E. Chapman...... - - - - - -
Frank W. Anastasio...... - - - - - -
Jill L. Force........... - - - - - -
W. Bruce Lunsford....... - - - - - -
</TABLE>
- --------
(1) Except as otherwise noted, all options shown in the above table will
become exercisable in four equal annual installments, beginning on the
first anniversary of the date of grant, were granted at fair market value
and have a ten-year term. All options become fully exercisable upon a
Change in Control of the Company (as defined in the Company's 1998
Incentive Compensation Plan) ("Change in Control").
69
<PAGE>
(2) The exercise price and any tax withholding obligations related to exercise
may be paid, at the discretion of the Executive Compensation Committee of
the Board of Directors, in cash, in shares of Common Stock or in any other
reasonable consideration deemed appropriate.
(3) The dollar amounts in this table represent the potential realizable value
of the stock options granted, assuming that the market price of the Common
Stock appreciates in value from the date of grant to the end of the option
term at annualized rates of 5% and 10%. Therefore, these amounts are not
the actual value of the options granted and are not intended to forecast
possible future appreciation, if any, of the price of the Common Stock. No
assurance can be given that the stock price will appreciate at these rates
or experience any appreciation at all.
(4) This option is exercisable in four equal annual installments beginning on
the date of grant.
Option Exercises and Holdings
The following table sets forth information concerning the exercise of
options during 1999 and unexercised options held as of December 31, 1999 by
the Named Executive Officers.
Aggregate Option Exercises in 1999
and Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at 12/31/99 at 12/31/99(1)
On Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Kuntz......... - - 450,000 550,000 - -
Richard A. Schweinhart.. - - 18,750 56,250 - -
Donald D. Finney........ - - - 80,000 - -
Frank J. Battafarano.... - - 58,279 46,311 - -
Richard E. Chapman...... - - 66,456 74,441 - -
Frank W. Anastasio(2)... 1,406 $837 107,563 - - -
Jill L. Force(2)........ - - 168,510 - - -
W. Bruce Lunsford(2).... - - 1,336,398 - - -
</TABLE>
- --------
(1) The value of unexercised options was calculated by subtracting the
exercise price from the market value of the underlying Common Stock as of
December 31, 1999. The market value of the Common Stock was $0.09 per
share as of December 31, 1999, based on the closing price per share on the
OTC Bulletin Board.
(2) In connection with their severance agreements, certain options held by Mr.
Anastasio, Ms. Force and Mr. Lunsford were accelerated and the remaining
portions of such options were cancelled. See "--Severance Agreements."
Management Retention Plan
In November 1999, the Company received approval (subject to certain
conditions) to implement the Management Retention Plan to enhance the ability
of the Company to retain key management employees during the reorganization
period. Under the Management Retention Plan, bonuses aggregating $7.3 million
were awarded to certain key management employees based on various percentages
of their annual salary. The Management Retention Plan provides that the
retention bonuses will be paid in three equal amounts upon: (i) the Bankruptcy
Court's approval of the Management Retention Plan, (ii) the effective date of
the Plan of Reorganization and (iii) three months following the effective date
of the Plan of Reorganization. For 1999, the following Named Executive
Officers received the indicated amounts under the Management Retention Plan:
Mr. Kuntz--$312,500; Mr. Schweinhart--$114,583; Mr. Finney--$114,583; Mr.
Battafarano--$89,583; and Mr. Chapman--$114,583.
70
<PAGE>
Long-Term Incentive Awards
In 1995, the Company's predecessor entered into performance share agreements
whereby it could issue shares to certain officers for each year of a five-year
period beginning in 1995. In the Spin-off, outstanding performance share
awards were assumed by the Company and converted into awards to receive shares
of Common Stock adjusted to reflect the relative value of the Company's Common
Stock and Ventas common stock immediately following the Spin-off. The receipt
of shares was contingent upon the satisfaction of performance goals
established by the Executive Compensation Committee. No performance shares
were awarded by the Executive Compensation Committee to the Named Executive
Officers during 1999. There are no performance share agreements currently
outstanding.
Supplemental Executive Retirement Plan
Effective January 1, 1998, the Executive Compensation Committee adopted the
Supplemental Executive Retirement Plan ("SERP") which provides certain of the
Named Executive Officers and certain other officers of the Company with
supplemental deferred benefits in the form of retirement payments. Effective
December 31, 1999, the Board of Directors amended the SERP to freeze existing
benefits under the SERP.
Under the SERP, a monthly benefit will be paid at retirement to vested
participants that is a product of three factors: (i) the participant's
Compensation, (ii) the participant's Vesting Percentage and (iii) a Maximum
Normal Retirement Benefit percentage. For purposes of the SERP, "Compensation"
is defined as the sum of (i) the highest base salary of the participant
regardless of whether such salary is the participant's final salary upon
termination and (ii) the greater of (y) the participant's target cash bonus in
the year of termination or (x) the average cash bonus earned by the
participant in the three years immediately preceding the year of termination.
The participant's "Vesting Percentage" is equal to 5% multiplied by the number
of completed years of service. If the participant has less than five completed
years of service, however, the participant's Vesting Percentage will be zero.
Under the SERP, participants were given credit for their actual years of
service with the Company prior to the adoption of the SERP. The "Maximum
Normal Retirement Benefit" percentage for the chief executive officer is 100%,
for an executive officer is 70% and for a vice president is 50%. If a
participant is eligible for more than one category, the larger Maximum Normal
Retirement Benefit percentage is used. The benefits payable under the SERP are
not subject to any reduction for social security payments or other offset
amounts.
Effective December 31, 1999, the SERP was amended to freeze the further
accrual or vesting of benefits. Accordingly, the Vesting Percentages for all
participants were frozen at December 31, 1999. Participant's with less than
five years of service will not receive any benefits under the SERP except in
the event of a change in control, as discussed below. The SERP also was
amended to change the definition of retirement age from 62 to 65 and
eliminated the early retirement pay out benefit available to both active and
terminated participants. As amended, payments under the SERP will be made on
the earlier of the month immediately following the month the participant turns
65 or in which the participant dies.
In the event of a change in control of the Company (as defined under the
SERP), participants who are actively employed at the time will be deemed to
have a Vesting Percentage equal to 100% without regard to actual years of
service and are deemed to have reached normal retirement age notwithstanding
that the participant has not attained age 65 at the time of the change in
control. The Company will pay each participant an amount equal to the lump sum
value of such participant's benefit within 20 days of a change in control.
With respect to participants with Vesting Percentages of 25% or greater, the
Executive Compensation Committee approved in January 1999 a partial funding
and distribution of individual annuity contracts to settle approximately one-
third of the obligations under the SERP relating to such participants. In
addition, the eligible participants received a tax payment to cover their
estimated taxes associated with this distribution. The following Named
Executive Officers received annuity contracts and a tax payment totaling the
following amounts: Mr. Battafarano--$149,057; Mr. Anastasio--$271,448; Ms.
Force--$249,188; and Mr. Lunsford--$2,569,518.
71
<PAGE>
The following table illustrates the estimated maximum annual benefit which
would be payable on a straight-life annuity basis at age 65 to a participant,
at various compensation levels for specified years of credited service, under
the SERP, had the SERP not been frozen as described above. The table assumes a
Maximum Normal Retirement Benefit of 70%.
Estimated Maximum Annual Benefit for
Years of Service Indicated (1)(2)
<TABLE>
<CAPTION>
20 Years
Compensation 10 Years 15 Years or More
- ------------ -------- -------- --------
<S> <C> <C> <C>
$ 150,000.......................................... $ 52,500 $ 78,750 $105,000
200,000.......................................... 70,000 105,000 140,000
250,000.......................................... 87,500 131,250 175,000
300,000.......................................... 105,000 157,500 210,000
400,000.......................................... 140,000 210,000 280,000
500,000.......................................... 175,000 262,500 350,000
600,000.......................................... 210,000 315,000 420,000
700,000.......................................... 245,000 367,500 490,000
800,000.......................................... 280,000 420,000 560,000
900,000.......................................... 315,000 472,500 630,000
1,000,000.......................................... 350,000 525,000 700,000
1,100,000.......................................... 385,000 577,500 770,000
1,200,000.......................................... 420,000 630,000 840,000
1,300,000.......................................... 455,000 682,500 910,000
1,400,000.......................................... 490,000 735,000 980,000
</TABLE>
- --------
(1) These estimates are based on the assumption that (a) the SERP will
continue under its present terms; (b) participants in the SERP could
continue to increase their Vesting Percentages; (c) the participant will
continue with the Company until, and retire at, age 65; and (d) the
participant elected to receive an annual distribution instead of a lump
sum payment.
(2) The amounts shown reflect the Maximum Normal Retirement Benefit of 70%.
The Maximum Normal Retirement Benefit of the Company's chief executive
officer is 100% and would result in higher amounts than those shown in the
table.
The maximum number of years to reach a 100% Vesting Percentage under the
SERP is 20 years. The completed years of service for each of the Named
Executive Officers at December 31, 1999 were as follows: Mr. Kuntz--1 year;
Mr. Battafarano--7 years; Mr. Chapman--2 years; Mr. Anastasio--11 years; Ms.
Force--10 years; and Mr. Lunsford--14 years. As noted above, the SERP was
amended effective December 31, 1999 to freeze additional vesting. Mr.
Schweinhart and Mr. Finney do not participate in the SERP.
In connection with the amendments to the SERP effective December 31, 1999,
the Company recorded a charge of approximately $7.3 million to reflect an
actuarial determination of the vested benefits owed under the SERP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Unusual Transactions."
Employment and Other Agreements--Current Executive Officers
In July 1998, the Company entered into employment agreements with its
officers, including certain of the Named Executive Officers. In February 1999,
the Company entered into a new employment agreement with Mr. Kuntz in
connection with his appointment as Chairman of the Board, Chief Executive
Officer and President. The Company also entered into an employment agreement
with Mr. Finney in connection with his employment in January 1999 as
President, Health Services Division. In November 1999, the Company also
amended existing employment agreements with Mr. Battafarano and Mr. Finney to
provide consistent benefits among the Company's executive officers.
72
<PAGE>
The agreements for Mr. Kuntz, Mr. Schweinhart, Mr. Battafarano, Mr. Finney
and Mr. Chapman (collectively, the "Current Executive Officers") generally
contain standard terms except as noted below. These agreements have a one year
term but are extended automatically unless the Company notifies the Current
Executive Officer. Upon such notification, the employment agreements will
terminate in one year. The employment agreements provide a base salary and the
ability of the Current Executive Officer to be eligible for bonuses and to
participate in the Company's incentive and other employee benefit plans. Mr.
Kuntz's agreement also provides that the Company will pay $3,500 per month,
grossed-up for applicable taxes, to cover travel and living expenses incurred
by Mr. Kuntz. The base salaries for 1999 for the Current Executive Officers
under the employment agreements were as follows: Mr. Kuntz--$750,000; Mr.
Schweinhart--$275,000; Mr. Finney--$275,000; Mr. Battafarano--$215,000; and
Mr. Chapman--$275,000. The Current Executive Officers may receive increases in
their base salaries as approved by the Board of Directors.
Under certain circumstances, the employment agreements also provide for
severance payments if the Current Executive Officer is terminated. If
employment is terminated by reason of death or disability, the Current
Executive Officer is entitled to a prorated portion of his target bonus. If
the Current Executive Officer is terminated for cause, no additional payments
are made under the employment agreements. If the Current Executive Officer's
employment is terminated for good reason (as defined in the employment
agreements) or for other than cause (collectively, an "Involuntary
Termination"), certain levels of severance payments are provided under the
employment agreements.
Upon an Involuntary Termination, Mr. Kuntz's agreement provides for a cash
payment equal to the prorated portion of his target bonus and any performance
share award in the year of termination and three times his base salary, target
bonus and target performance share award in the year of termination. In
addition, Mr. Kuntz would be entitled to coverage under the Company's employee
benefit plans for three years and three years of additional vesting of
restricted stock awards and stock options and an additional three years in
which to exercise the options. Mr. Kuntz's agreement also requires the Company
to provide substantially similar office space and the services of an
administrative assistant for three years.
Upon the Involuntary Termination of Mr. Schweinhart, Mr. Finney, Mr.
Battafarano and Mr. Chapman, their agreements provide for a cash payment equal
to the prorated portion of their target bonus and performance share award in
the year of termination and one and one-half times their base salary, target
bonus and target performance share award in the year of termination. In
addition, they would be entitled to coverage under the Company's employee
benefit plans for 18 months and 18 months of additional vesting of restricted
stock awards and stock options and an additional 18 months in which to
exercise such options.
The employment agreements for Mr. Battafarano and Mr. Chapman also provide
for a restructuring of their Preferred Stock Loans (as defined) if they are
subject to an Involuntary Termination. See "Certain Relationships and Related
Transactions" for a description of the Preferred Stock Loans. The Preferred
Stock Loans would be amended to provide that (i) payments on the loans would
be deferred until ten years from the date of issuance, (ii) interest payments
would be forgiven if the average closing price of the Common Stock for the 90
days prior to any interest payment date is less than $8.00 and (iii) during
the five-day period following the expiration of the fifth anniversary of the
date of termination, the executive would have the right to put the 6% Series A
Non-Voting Convertible Preferred Stock (the "Preferred Stock") underlying the
Preferred Stock Loan to the Company at par.
The Company also has entered into Change in Control Severance Agreements
with certain of its key employees, including the Current Executive Officers.
These agreements provide for the payment of severance benefits under certain
circumstances. These benefits become payable at any time within two years of a
Change in Control of the Company if: (i) the Company terminates the executive
without cause; (ii) the executive terminates employment with the Company for
good reason (as defined in the agreement), or within either of two 30-day
periods commencing 30 days after the Change in Control and one year after the
Change in Control, respectively. The benefits to be afforded the Company's
Current Executive Officers include: (i) a cash payment
73
<PAGE>
equal to three times base salary, target bonus and performance share award
target as of the termination of employment; (ii) continuation of health, life
and disability insurance coverage for three years; (iii) full vesting under
the Company's retirement savings plan; and (iv) an additional payment for any
excise taxes the Current Executive Officer may incur as a result of the Change
in Control.
Employment and Other Agreements--Former Executive Officers
In July 1998, the Company entered into employment agreements with its
officers, including Mr. Anastasio, Ms. Force and Mr. Lunsford (collectively,
the "Former Executive Officers"). These agreements had a one year term but
were extended automatically unless the Company notified the Former Executive
Officer. Upon such notification, the employment agreements would terminate in
one year. The employment agreements provided for a base salary and the ability
of the Former Executive Officer to be eligible for bonuses and to participate
in the Company's incentive and other employee benefit plans. The base salaries
for 1999 under the employment agreements were as follows: Mr. Anastasio--
$215,000; Ms. Force--$185,000; and Mr. Lunsford--$550,000.
The employment agreements provided that if employment is terminated by
reason of death or disability, the Former Executive Officer would be entitled
to a prorated portion of his or her target bonus. If the Former Executive
Officer is terminated for cause, no additional payments would be made under
the employment agreements. Upon the Involuntary Termination of a Former
Executive Officer's employment, certain levels of severance payments were
provided under the employment agreements.
Upon an Involuntary Termination, Mr. Lunsford's agreement provided for a
cash payment equal to the prorated portion of his target bonus and performance
share award in the year of termination and three times his base salary, target
bonus and target performance share award in the year of termination. In
addition, Mr. Lunsford would be entitled to coverage under the Company's
employee benefit plans for three years and three years of additional vesting
of restricted stock awards and stock options and an additional three years in
which to exercise the options. Mr. Lunsford's agreement also required the
Company to provide substantially similar office space and the services of an
administrative assistant for three years.
Upon the Involuntary Termination of Mr. Anastasio and Ms. Force, their
agreements provided for a cash payment equal to the prorated portion of their
target bonus and performance share award in the year of termination and one
and one-half times their base salary, target bonus and target performance
share award in the year of termination. In addition, they would be entitled to
coverage under the Company's employee benefit plans for 18 months and 18
months of additional vesting of restricted stock awards and stock options and
an additional 18 months in which to exercise such options.
The employment agreements for the Former Executive Officers also provided
for a restructuring of their Preferred Stock Loans if such executive was
subject to an Involuntary Termination. The Preferred Stock Loans would be
amended to provide that (i) payments on the loans would be deferred until ten
years from the date of issuance, (ii) interest payments would be forgiven if
the average closing price of the Common Stock for the 90 days prior to any
interest payment date is less than $8.00 and (iii) during the five-day period
following the expiration of the fifth anniversary of the date of termination,
the executive would have the right to put the Preferred Stock underlying the
loan to the Company at par. The employment agreement for Ms. Force also
provided for the restructuring of her Tax Loan (as defined). Payment of the
principal and interest on Ms. Force's Tax Loan would be deferred until the
fifth anniversary of the date of her termination. See "Certain Relationships
and Related Transactions" for a description of the Tax Loan.
The Company also entered into Change in Control Severance Agreements with
Mr. Anastasio, Ms. Force and Mr. Lunsford with substantially similar terms to
the Current Executive Officers. The Change in Control Severance Agreements for
Mr. Anastasio, Ms. Force and Mr. Lunsford expired upon termination of their
employment.
74
<PAGE>
Severance Agreements
The Company entered into a Severance Agreement and Release of Claims with
Frank W. Anastasio, former President, Ancillary Services Division of the
Company, effective October 30, 1999. Pursuant to the severance agreement, the
Company paid Mr. Anastasio a one-time lump sum payment of $594,900 and
transferred to him certain personal property valued at $800. In addition, the
Company agreed to continue his coverage under the Company's employee benefit
plans for 18 months and agreed to 18 months of additional vesting of stock
options and an additional 18 months in which to exercise such options. The
severance agreement also amended his Preferred Stock Loan to provide that (i)
the Preferred Stock Loan will not be due and payable until October 30, 2004,
(ii) payments on the Preferred Stock Loan will be deferred until the fifth
anniversary of his date of termination, (iii) interest payments will be
forgiven if the average closing price of the Common Stock for the 90 days
prior to any interest payment date is less than $8.00 and (iv) during the
five-day period following the expiration of the fifth anniversary of his date
of termination, Mr. Anastasio will have the right to put the Preferred Stock
underlying the Preferred Stock Loan to the Company at par. Under his severance
agreement, Mr. Anastasio provided the Company with a full release of any
claims against the Company.
The Company entered into a Severance Agreement and Release of Claims with
Jill L. Force, former Senior Vice President, General Counsel and Secretary of
the Company, effective August 25, 1999. Pursuant to the severance agreement,
the Company paid Ms. Force a one-time lump sum payment of $488,325 and issued
to her 85,972 shares of Common Stock. In addition, the Company agreed to
continue her coverage under the Company's employee benefit plans for 18 months
and agreed to 18 months of additional vesting of stock options and an
additional 18 months in which to exercise such options. Ms. Force's Tax Loan
was restructured to provide that the payment of the principal and interest on
the Tax Loan will be deferred until the fifth anniversary of her date of
termination. The severance agreement also amended her Preferred Stock Loan to
provide that (i) the Preferred Stock Loan will not be due and payable until
April 30, 2008, (ii) payments on the Preferred Stock Loan will be deferred
until the fifth anniversary of her date of termination, (iii) interest
payments will be forgiven if the average closing price of the Common Stock for
the 90 days prior to any interest payment date is less than $8.00 and (iv)
during the five-day period following the expiration of the fifth anniversary
of her date of termination, Ms. Force will have the right to put the Preferred
Stock underlying the Preferred Stock Loan to the Company at par. Under her
severance agreement, Ms. Force provided the Company with a full release of any
claims against the Company.
The Company entered into a Severance Agreement and Release of Claims with W.
Bruce Lunsford, former Chairman of the Board and Chief Executive Officer of
the Company effective January 22, 1999. Pursuant to the severance agreement,
the Company paid Mr. Lunsford a lump sum payment of $825,000 and provided
personal property and other benefits (including office space and the services
of an administrative assistant) valued at $100,344. In addition, the Company
agreed to continue his coverage under the Company's employee benefit plans for
36 months and agreed to 36 months of additional vesting of stock options and
an additional 36 months, beginning on November 9, 1999, in which to exercise
such options. Mr. Lunsford's Preferred Stock Loan was amended to provide that
(i) the Preferred Stock Loan will not be due and payable until April 30, 2008,
(ii) payments on the Preferred Stock Loan will be deferred until the fifth
anniversary of his date of termination, (iii) interest payments will be
forgiven if the average closing price of the Common Stock for the 90 days
prior to any interest payment date is less than $8.00 and (iv) during the
five-day period following the expiration of the fifth anniversary of his date
of termination, Mr. Lunsford will have the right to put the Preferred Stock
underlying the Preferred Stock Loan to the Company at par. In addition, the
Company agreed to provide Mr. Lunsford with comparable office space and the
services of an administrative assistant for a three year period and to cover
his taxes with respect to those benefits. The Company also agreed to provide
Mr. Lunsford with certain legal and tax advice. In the event of a Change in
Control of the Company before February 1, 2001, Mr. Lunsford also would be
entitled to an additional payment of $500,000. Under his severance agreement,
Mr. Lunsford provided the Company with a full release of any claims against
the Company.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
Between January 1999 to March 1999, the following persons served on the
Executive Compensation Committee of the Board of Directors: Mr. R. Gene Smith
(Chairman), Mr. Ulysses L. Bridgeman, Jr. and Ms. Elaine L. Chao. Mr. Smith
resigned from the Company's Board of Directors effective March 8, 1999. On
March 22, 1999, the following directors were appointed to the Executive
Compensation Committee: Mr. Stanley C. Gault (Chairman), Mr. Ulysses L.
Bridgeman, Jr., Ms. Elaine L. Chao, Ms. Donna R. Ecton and Mr. William H.
Lomicka. None of the persons who served on the Executive Compensation
Committee were employees of the Company.
Compensation of Directors
During 1999, non-employee directors of the Company received $2,000 for each
board meeting attended and $1,000 for each committee meeting attended. In
addition, non-employee directors received a $2,500 retainer for each calendar
quarter that they served as a director. During 1999, director fees incurred
during the third quarter of 1999 were not paid since they constituted pre-
petition obligations of the Company under the Chapter 11 Cases.
Prior to 1999, the Company's Non-Employee Directors Deferred Compensation
Plan permitted a non-employee director to defer in stock or cash the receipt
of fees which would otherwise be paid to the director for services on the
Board and its committees. The Company discontinued this plan in 1999.
During 1999, directors not employed by the Company receive options pursuant
to the Company's Stock Option Plan for Non-Employee Directors (the "Directors
Plan"). Under the Directors Plan, the Company issues on each January 1, to
each of the Company's non-employee directors an option to purchase 3,000
shares of Common Stock with an exercise price equal to the fair market value
of the Common Stock on the date the option was granted. Accordingly, the
Company issued options with respect to an aggregate of 18,000 shares to the
six persons who were non-employee directors on January 1, 1999. All options
become exercisable in four equal annual installments, beginning on the first
anniversary of the date of grant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and its Preferred Stock, as
of January 1, 2000, by (a) each person known to the Company to be the
beneficial owner of more than five percent of the outstanding Common Stock,
(b) each person who is a director, (c) each of the Company's Named Executive
Officers, and (d) all of the persons who are directors and executive officers
of the Company, as a group.
<TABLE>
<CAPTION>
Common Preferred
Stock Percent Stock Percent
Name of Individual or Number in Beneficially Of Beneficially Of
Group Owned(1)(2) Class Owned(1)(2) Class
- ------------------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Frank J. Battafarano.............. 78,982 * 330 1.9%
Ulysses L. Bridgeman, Jr.......... 10,500(3) * - -
Elaine L. Chao.................... 10,857(4) * - -
Richard E. Chapman................ 172,454 * 360 2.1%
Donna R. Ecton.................... 28,152(5) * - -
Donald D. Finney.................. 70,000 * - -
Stanley C. Gault.................. 175,678 * - -
Edward L. Kuntz................... 600,000 * - -
William H. Lomicka................ 107,678 * - -
Richard A. Schweinhart............ 144,055 * - -
Frank W. Anastasio................ 108,969(6) * 400 2.3%
Jill L. Force..................... 168,510(6) * 540 3.1%
W. Bruce Lunsford................. 1,336,398(6) 1.9% 4,543 26.1%
All executive officers and
directors as a group
(14 persons)..................... 1,785,127(7) 2.5% 1,865(7) 10.7%
</TABLE>
- --------
(*) Less than 1%.
76
<PAGE>
(1) Beneficial ownership of shares for purposes of this table, as determined
in accordance with applicable Commission rules, includes shares as to
which a person has or shares voting power and/or investment power.
Beneficial ownership is given as of January 1, 2000.
(2) Except as set forth in the accompanying footnotes, the named persons have
sole voting power and sole investment power over the shares beneficially
owned by them. The number of shares of Common Stock shown does not include
interests of certain persons in shares held by family members in their own
right or in shares held for their benefit in the Company's 401(k) plan.
The numbers shown include the shares of Common Stock which may be acquired
by them through the exercise of options, which are exercisable as of, or
within 60 days after, January 1, 2000, under the Company's stock option
plans as follows: Mr. Battafarano--66,516 shares; Mr. Bridgeman--7,500
shares; Ms. Chao--7,500 shares; Mr. Chapman--71,954 shares; Ms. Ecton--
21,002 shares; Mr. Finney--20,000 shares; Mr. Gault--25,750 shares;
Mr. Kuntz--500,000 shares; Mr. Lomicka--22,315 shares; Mr. Schweinhart--
18,750 shares; Mr. Anastasio--107,563 shares; Ms. Force--168,510 shares;
and Mr. Lunsford--1,336,398 shares.
(3) Excludes 4,849 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(4) Excludes 4,896 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(5) Excludes 3,755 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(6) These amounts are based on information available to the Company. See
"Executive Compensation--Severance Agreements."
(7) These amounts do not include the shares beneficially owned by Mr.
Anastasio, Ms. Force and Mr. Lunsford.
Item 13. Certain Relationships and Related Transactions
In connection with the Spin-off, the Company agreed to loan certain
executive officers an amount sufficient to cover estimated personal income
taxes payable by them as a result of the Spin-off (the "Tax Loans"). Each Tax
Loan is evidenced by a promissory note which has a term of ten years and bears
interest at 5.77% per annum. Principal on the Tax Loans is scheduled to be
repaid in ten equal annual installments which began on June 15, 1999. Interest
is payable quarterly, however, any interest payment on the Tax Loans is
forgiven if the executive officer remains employed in his or her position with
the Company on the date on which such interest payment is due. Moreover, in
the event of a Change in Control of the Company, the entire balance of the Tax
Loan will be forgiven. Ms. Jill L. Force, former Senior Vice President,
General Counsel and Secretary received a Tax Loan in the amount of $60,100. As
of March 1, 2000, the Tax Loan to Ms. Force had an outstanding principal
balance of $55,651. The terms of the Tax Loan with Ms. Force was amended in
connection with her severance agreement. See "Executive Compensation--
Severance Agreements."
In connection with the Spin-off, the Company issued 17,700 shares of its
Preferred Stock to Ventas as part of the consideration for the assets
transferred from Ventas to the Company. On April 30, 1998, Ventas offered and
sold the Preferred Stock at $1,000 per share to certain officers of the
Company for an aggregate consideration of $17.7 million. The following
executive officers and former executive officers purchased the number of
shares of Preferred Stock indicated: Mr. Battafarano, President, Hospital
Division--330 shares; Mr. Chapman, Senior Vice President and Chief Information
Officer--360 shares; Mr. James H. Gillenwater, Jr., Senior Vice President,
Planning and Development--510 shares; Mr. Richard A. Lechleiter, Vice
President, Finance, Corporate Controller and Treasurer--350 shares; Ms. M.
Suzanne Riedman, Senior Vice President and General Counsel--315 shares; Mr.
Anastasio, former President, Ancillary Services Division--400 shares; Ms.
Force, former Senior Vice President, General Counsel and Secretary--540
shares; and Mr. Lunsford, former Chairman of the Board and Chief Executive
Officer--4,543 shares. On or after April 30, 2002, each share of the Preferred
Stock will be convertible, at the option of the holder, in whole or in part,
into such number of shares of the Common Stock as is equal to the aggregate
principal amount of the shares of Preferred Stock being converted divided by
the conversion price. The conversion price is $12.50, which is equal to 118%
of the average of the high and low sales price of the Common Stock immediately
following the Spin-off.
77
<PAGE>
In connection with the purchases of the Preferred Stock, the Company loaned
certain officers, including certain Named Executive Officers, 90% of the
purchase price of the Preferred Stock (the "Preferred Stock Loans"). Each
Preferred Stock Loan is evidenced by a promissory note which has a ten year
term and bears interest at 5.74%, payable annually. No principal payments are
due under the promissory notes until their maturity. The promissory notes are
secured by a first priority security interest in the Preferred Stock purchased
by each such officer. The following current and former executive officers were
loaned the indicated amounts: Mr. Battafarano--$297,000; Mr. Chapman--
$324,000; Mr. Gillenwater--$459,000; Mr. Lechleiter--$315,000; Ms. Riedman--
$283,500; Mr. Anastasio--$360,000; Ms. Force--$486,000; and Mr. Lunsford--
$4,088,700. As of March 1, 2000, these loans remain outstanding. The terms of
the Preferred Stock Loans with Mr. Anastasio, Ms. Force and Mr. Lunsford were
amended in connection with their severance. See "Executive Compensation--
Severance Agreements."
In August 1999, the Company entered into agreements with certain officers,
including certain Named Executive Officers, which permit such officer to put
the Preferred Stock to the Company for an amount equal to the outstanding
principal and interest on the officer's Preferred Stock Loan ("Preferred Stock
Agreements"). The officer can put the Preferred Stock to the Company between
January 1, 2000 and December 31, 2000. As of March 29, 2000, no officer had
exercised the put option. The Preferred Stock Agreements were entered into
with each officer employed by the Company in August 1999 who owned the
Preferred Stock including, Mr. Battafarano, Mr. Chapman, Mr. Gillenwater, Mr.
Lechleiter, Ms. Riedman, Mr. Anastasio, and Ms. Force.
During 1999, the Company paid approximately $238,000 for legal services
rendered by the law firm of Wyatt, Tarrant & Combs. The spouse of Jill L.
Force, former Senior Vice President, General Counsel and Secretary of the
Company, is a partner of that firm. These fees represented less than three
percent of the legal fees paid by the Company in 1999. It is expected that
Wyatt, Tarrant & Combs will provide legal services to the Company in 2000.
78
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Index to Consolidated Financial Statements and Financial Statement
Schedules:
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Page
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<S> <C>
Report of PricewaterhouseCoopers LLP...................................... F-2
Report of Ernst & Young LLP............................................... F-3
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Balance Sheet, December 31, 1999 and 1998.................. F-5
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31,
1999, 1998 and 1997.................................................... F-6
Consolidated Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Quarterly Consolidated Financial Information (Unaudited)................ F-46
Financial Statement Schedule (a):
Schedule II-Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998
and 1997............................................................... F-47
</TABLE>
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(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
(a)(2) Index to Exhibits:
EXHIBIT INDEX
<TABLE>
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Exhibit
Number Description of Document
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<C> <S>
3.1 Restated Certificate of Incorporation of the Company. Exhibit 3.1 to
the Company's Form 10, as amended, dated April 27, 1998 (Comm. File
No. 001-14057) is hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10, as amended, dated April 27, 1998 (Comm. File No.
001-14057) is hereby incorporated by reference.
4.1 Articles IV and X of the Restated Certificate of Incorporation of the
Company is included in Exhibit 3.1.
4.2 Indenture dated April 30, 1998, among Vencor, Inc., Vencor Operating,
Inc. and PNC Bank, National Association, as Trustee. Exhibit 4.1 to
the Company's Registration Statement on Form S-4 (Reg. No. 333-57953)
is hereby incorporated by reference.
4.3 Instrument of Resignation, Appointment and Acceptance, dated as of
September 16, 1999 among Vencor Operating, Inc., Vencor, Inc., The
Chase Manhattan Bank (successor to PNC Bank, National Association) and
HSBC Bank USA, as Successor Trustee.
4.4 Form of 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (included
in Exhibit 4.2).
4.5 Form of the Company's 8 5/8% Senior Subordinated Notes due 2007.
Exhibit 4.1 to the Ventas, Inc. Current Report on Form 8-K dated July
21, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference.
4.6 Indenture dated as of July 21, 1997, between the Company and the Bank
of New York, as Trustee. Exhibit 4.2 to the Ventas, Inc. Current
Report of Form 8-K dated July 21, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.1 Credit Agreement dated as of April 29, 1998 (the "Credit Agreement"),
among Vencor, Inc., Vencor Operating, Inc., the Lenders party thereto,
the Swingline Bank party thereto, the LC Issuing Banks party thereto,
the Senior Managing Agents, Managing Agents and Co-Agents party
thereto, Morgan Guaranty Trust Company of New York and NationsBank,
N.A. Exhibit 10.1 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.2 Amendment No. 1 dated as of September 30, 1998 to the Credit Agreement
dated as of April 29, 1998 among Vencor Operating, Inc., Vencor, Inc.,
the Lenders, Swingline Bank, LC Issuing Banks, Senior Managing Agents,
Managing Agents and Co-Agents party thereto, Morgan Guaranty Trust
Company of New York, as Documentation Agent and Collateral Agent, and
NationsBank, N.A., as Administrative Agent. Exhibit 10.2 to the
Company's Form 10-K for the year ended December 31, 1998 (Comm. File
No. 001-14057) is hereby incorporated by reference.
10.3 Waiver No. 2 to the Credit Agreement dated as of March 31, 1999 among
Vencor Operating, Inc., Vencor, Inc., the Lenders, Swingline Bank and
LC Issuing Banks party thereto, the Senior Managing Agents, Managing
Agents and Co-Agents party thereto and Morgan Guaranty Trust Company
of New York, as Documentation Agent and Collateral Agent, and
NationsBank, N.A., as Administrative Agent. Exhibit 99.2 to the
Current Report on Form 8-K of the Company dated March 31, 1999 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.4 Waiver No. 3 dated as of May 28, 1999, under the $1,000,000,000 Credit
Agreement dated as of April 29, 1998 among Vencor Operating, Inc.,
Vencor, Inc., the Lenders, Swingline Bank and LC Issuing Banks party
thereto, the Senior Managing Agents, Managing Agents and Co-Agents
party thereto and Morgan Guaranty Trust Company of New York, as
Documentation Agent and Collateral Agent, and NationsBank, N.A., as
Administrative Agent. Exhibit 99.2 to the Current Report on Form 8-K
of the Company dated May 28, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.5 Waiver No. 4 dated as of July 30, 1999, under the $1,000,000,000
Credit Agreement dated as of April 29, 1998 among Vencor Operating,
Inc., Vencor, Inc., the Lenders, Swingline Bank and LC Issuing Banks
party thereto, the Senior Managing Agents, Managing Agents and Co-
Agents party thereto and Morgan Guaranty Trust Company of New York, as
Documentation Agent and Collateral Agent, and NationsBank, N.A., as
Administrative Agent. Exhibit 10.2 to the Company's Form 10-Q for the
quarterly period ended June 30, 1999 (Comm. File No. 001-14057) is
hereby incorporated by reference.
10.6 Waiver No. 5 dated as of August 27, 1999, under the $1,000,000,000
Credit Agreement dated as of April 29, 1998 among Vencor Operating,
Inc., Vencor, Inc., the Lenders, Swingline Bank and LC Issuing Banks
party thereto, the Senior Managing Agents, Managing Agents and Co-
Agents party thereto and Morgan Guaranty Trust Company of New York, as
Documentation Agent and Collateral Agent, and NationsBank, N.A., as
Administrative Agent. Exhibit 10.2 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.7 Debtor-in-Possession Credit Agreement dated as of September 13, 1999,
among Vencor, Inc., Vencor Operating, Inc. and each of the
subsidiaries of Vencor, Inc. party thereto, the Lenders party thereto,
the LC Issuing Banks party thereto and Morgan Guaranty Trust Company
of New York as Arranger, Collateral Agent and Administrative Agent.
Exhibit 10.3 to the Company's Form 10-Q for the quarterly period ended
September 30, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.8 First Amendment to Debtor-in-Possession Credit Agreement and First
Amendment to Security Agreement dated October 21, 1999 among Vencor,
Inc., Vencor Operating, Inc. and each of Vencor's subsidiaries listed
on the signature pages thereof, the Lenders listed on the signature
page thereof and Morgan Guaranty Trust Company of New York as
Arranger, Collateral Agent and Administrative Agent.
10.9 Second Amendment to Debtor-in-Possession Credit Agreement dated
November 19, 1999 among Vencor, Inc., Vencor Operating, Inc. and each
of Vencor's subsidiaries listed on the signature pages thereof, the
Lenders listed on the signature pages thereof and Morgan Guaranty
Trust Company of New York as Arranger, Collateral Agent and
Administrative Agent.
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.10 Third Amendment to Debtor-in-Possession Credit Agreement dated
December 23, 1999 among Vencor, Inc., Vencor Operating, Inc. and each
of Vencor's subsidiaries listed on the signature pages thereof, the
Lenders listed on the signature pages thereof and Morgan Guaranty
Trust Company of New York as Arranger, Collateral Agent and
Administrative Agent.
10.11 Fourth Amendment to Debtor-in-Possession Credit Agreement dated
February 9, 2000 among Vencor, Inc., Vencor Operating, Inc. and each
of Vencor's subsidiaries listed on the signature pages thereof, the
Lenders listed on the signature pages thereof and Morgan Guaranty
Trust Company of New York as Arranger, Collateral Agent and
Administrative Agent.
10.12 Fifth Amendment to Debtor-in-Possession Credit Agreement dated
February 23, 2000 among Vencor, Inc., Vencor Operating, Inc. and each
of Vencor's subsidiaries listed on the signature pages thereof, the
Lenders listed on the signature pages thereof and Morgan Guaranty
Trust Company of New York as Arranger, Collateral Agent and
Administrative Agent.
10.13* Vencor Retirement Savings Plan Amended and Restated as of January 1,
1997. Exhibit 10.2 to the Ventas, Inc. Form 10-K for the year ended
December 31, 1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.14* Amendment No. 1 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997. Exhibit 10.3 to the Ventas, Inc. Form
10-K for the year ended December 31, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.15* Amendment No. 2 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997. Exhibit 10.4 to the Ventas, Inc. Form
10-K for the year ended December 31, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.16* Amendment No. 3 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997. Exhibit 10.5 to the Ventas, Inc. Form
10-K for the year ended December 31, 1997 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.17* Amendment No. 4 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.18* Amendment No. 5 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.19* Amendment No. 6 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.20* Amendment No. 7 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.21* Amendment No. 8 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.22* Amendment No. 9 to the Vencor Retirement Savings Plan Amended and
Restated dated January 1, 1997.
10.23* Vencor, Inc. 401(k) Master Trust Agreement dated January 1, 1997 by
and between the Company and Wachovia Bank of North Carolina, N.A.
Exhibit 10.6 to the Ventas, Inc. Form 10-K for the year ended December
31, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.24* Amendment No. 1 to Vencor, Inc. 401(k) Master Trust Agreement dated
January 1, 1997 by and between the Company and Wachovia Bank of North
Carolina, N.A. Exhibit 10.7 to the Ventas, Inc. Form 10-K for the year
ended December 31, 1997 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.25* Amendment No. 2 to Vencor, Inc. 401(k) Master Trust Agreement by and
between the Company and Wachovia Bank of North Carolina, N.A. Exhibit
10.3 to the Company's Form 10-Q for the quarterly period ended
September 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
</TABLE>
81
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.26* Retirement Savings Plan for Certain Employees of Vencor and its
Affiliates Amended and Restated as of January 1, 1997. Exhibit 10.8 to
the Ventas, Inc. Form 10-K for the year ended December 31, 1997 (Comm.
File No. 1-19089) is hereby incorporated by reference.
10.27* Amendment No. 1 to the Retirement Savings Plan for Certain Employees
of Vencor and its Affiliates Amended and Restated as of January 1,
1997.
10.28* Amendment No. 2 to the Retirement Savings Plan for Certain Employees
of Vencor and its Affiliates Amended and Restated as of January 1,
1997.
10.29* Amendment No. 3 to the Retirement Savings Plan for Certain Employees
of Vencor and its Affiliates Amended and Restated as of January 1,
1997.
10.30* Amendment No. 4 to the Retirement Savings Plan for Certain Employees
of Vencor and its Affiliates Amended and Restated as of January 1,
1997.
10.31 Tax Allocation Agreement dated as of April 30, 1998 by and between the
Company and Ventas, Inc. Exhibit 10.9 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 001-14057) is
hereby incorporated by reference.
10.32 Transition Services Agreement dated as of April 30, 1998 by and
between the Company and Ventas, Inc. Exhibit 10.10 to the Company's
Form 10-Q for the quarterly period ended June 30, 1998 (Comm. File No.
001-14057) is hereby incorporated by reference.
10.33 Agreement of Indemnity-Third Party Leases dated as of April 30, 1998
by and between the Company and its subsidiaries and Ventas, Inc.
Exhibit 10.11 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.34 Agreement of Indemnity-Third Party Contracts dated as of April 30,
1998 by and between the Company and its subsidiaries and Ventas, Inc.
Exhibit 10.12 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.35* Form of Indemnification Agreement between Vencor, Inc. and certain of
its officers and employees. Exhibit 10.31 to the Ventas, Inc. Form 10-
K for the year ended December 31, 1995 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.36 Amended and Restated Agreement and Plan of Merger. Appendix A to
Amendment No. 2 to the Ventas, Inc. Registration Statement on Form S-4
(Reg. No. 33-59345) is hereby incorporated by reference.
10.37 Agreement and Plan of Merger dated as of February 9, 1997 among
TheraTx, Incorporated, Vencor, Inc. and Peach Acquisition Corp.
("Peach"). Exhibit (c)(1) to the Statement on Schedule 14D-1 of
Ventas, Inc. and Peach, dated February 14, 1997 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.38 Amendment No. 1 to Agreement and Plan of Merger dated as of February
28, 1997 among TheraTx, Incorporated, Vencor, Inc. and Peach. Exhibit
(c)(3) of Amendment No. 2 to the Statement on Schedule 14D-1 of
Ventas, Inc. and Peach, dated March 3, 1997 (Comm. File No. 1-10989)
is hereby incorporated by reference.
10.39 Asset Purchase Agreement between Transitional Hospitals Corporation
and Behavioral Healthcare Corporation, dated October 22, 1996. Exhibit
99.1 to the Current Report on Form 8-K of Transitional dated October
22, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference.
10.40 Agreement and Plan of Merger between Transitional Hospitals
Corporation and Behavioral Healthcare Corporation, dated October 22,
1996. Exhibit 99.2 to the Current Report on Form 8-K of Transitional
dated October 22, 1996 (Comm. File No. 1-7008) is hereby incorporated
by reference.
</TABLE>
82
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
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<C> <S>
10.41 First Amendment to Asset Purchase Agreement between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation, dated
November 30, 1996. Exhibit 99.1 to the Current Report on Form 8-K of
Transitional dated December 16, 1996 (Comm. File No. 1-7008) is hereby
incorporated by reference.
10.42 Amendment to Agreement and Plan of Merger between Transitional
Hospitals Corporation and Behavioral Healthcare Corporation, dated
November 30, 1996. Exhibit 99.2 to the Current Report on Form 8-K of
Transitional dated December 16, 1996 (Comm. File No. 1-7008) is hereby
incorporated by reference.
10.43* Vencor, Inc. 1998 Incentive Compensation Plan. Exhibit 10.23 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-57953) is
hereby incorporated by reference.
10.44* Vencor, Inc. 1998 Stock Option Plan for Non-Employee Directors.
Exhibit 10.24 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.45* Vencor, Inc. Deferred Compensation Plan dated April 30, 1998. Exhibit
10.25 to the Company's Registration Statement on Form S-4 (Reg. No.
333-57953) is hereby incorporated by reference.
10.46* Vencor, Inc. Non-Employee Directors Deferred Compensation Plan.
Exhibit 10.26 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.47* Vencor, Inc. Supplemental Executive Retirement Plan dated January 1,
1998, as amended. Exhibit 10.27 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-57953) is hereby incorporated by
reference.
10.48* Amendment No. Two to Supplemental Executive Retirement Plan dated as
of January 15, 1999.
10.49* Amendment No. Three to Supplemental Executive Retirement Plan dated as
of December 31, 1999.
10.50* Form of Vencor Operating, Inc. Change-in-Control Severance Agreement.
Exhibit 10.28 to the Company's Registration Statement on Form S-4
(Reg. No. 333-57953) is hereby incorporated by reference.
10.51 Form of Vencor, Inc. Promissory Note. Exhibit 10.29 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-57953) is hereby
incorporated by reference.
10.52* Form of Non-Transferable Full Recourse Secured Promissory Note dated
as of September 28, 1998 made by certain executive officers in favor
of Vencor Operating, Inc. Exhibit 10.6 to the Company's Form 10-Q for
the quarterly period ended September 30, 1998 (Comm. File No. 001-
14057) is hereby incorporated by reference.
10.53* Separation Agreement and Release of Claims entered into by W. Bruce
Lunsford and Vencor, Inc. Exhibit 10.2 to the Company's Form 10-Q for
the quarterly period ended March 31, 1999 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.54* Separation Agreement and Release of Claims entered into by Jill L.
Force and Vencor, Inc. Exhibit 10.8 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.55* Separation Agreement and Release of Claims entered into by Frank W.
Anastasio and Vencor, Inc.
10.56* Employment Agreement dated as of February 12, 1999 between Vencor
Operating, Inc. and Edward L. Kuntz. Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended March 31, 1999 (Comm. File
No. 001-14057) is hereby incorporated by reference.
10.57* Employment Agreement dated as of September 28, 1998 between Vencor
Operating, Inc. and Richard A. Schweinhart.
</TABLE>
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
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<C> <S>
10.58* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and Richard E. Chapman.
10.59* Employment Agreement dated as of January 4, 1999 between Vencor
Operating, Inc. and Donald D. Finney. Exhibit 10.4 to the Company's
Form 10-Q for the quarterly period ended March 31, 1999 (Comm. File
No. 001-14057) is hereby incorporated by reference.
10.60* Amendment No. 1 to Employment Agreement dated as of November 5, 1999
between Vencor Operating, Inc. and Donald D. Finney.
10.61* Employment Agreement dated as of April 19, 1999 between Vencor
Operating, Inc. and Owen E. Dorsey. Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended June 30, 1999 (Comm. File No. 001-
14057) is hereby incorporated by reference.
10.62* Amendment No. 1 to Employment Agreement dated as of November 5, 1999
between Vencor Operating, Inc. and Owen E. Dorsey.
10.63* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and Frank J. Battafarano.
10.64* Amendment to Employment Agreement dated as of September 28, 1998
between Vencor Operating, Inc. and Frank J. Battafarano.
10.65* Amendment No. 2 to Employment Agreement dated as of November 5, 1999
between Vencor Operating, Inc. and Frank J. Battafarano.
10.66* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and James H. Gillenwater, Jr.
10.67* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and M. Suzanne Riedman.
10.68* Amendment to Employment Agreement dated as of September 28, 1998
between Vencor Operating, Inc. and M. Suzanne Riedman.
10.69* Amendment No. 2 to Employment Agreement dated as of November 5, 1999
between Vencor Operating, Inc. and M. Suzanne Riedman.
10.70* Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and Richard A. Lechleiter.
10.71* Amendment to Employment Agreement dated as of September 28, 1998
between Vencor Operating, Inc. and Richard A. Lechleiter.
10.72* Amendment No. 2 to Employment Agreement dated as of November 5, 1999
between Vencor Operating, Inc. and Richard A. Lechleiter.
10.73* Form of Vencor, Inc. Retention Agreement. Exhibit 10.3 to the
Company's Form 10-Q for the quarterly period ended June 30, 1999
(Comm. File No. 001-14057) is hereby incorporated by reference.
10.74 Form of Agreement regarding Preferred Stock dated as of August 17,
1999 between Vencor Operating, Inc., Vencor, Inc. and certain officers
of the Company. Exhibit 10.9 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999 (Comm. File No. 001-14057)
is hereby incorporated by reference.
10.75 Distribution Agreement between the Company and Ventas, Inc. Exhibit
10.2 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.76 Form of Master Lease Agreement between the Company and Ventas, Inc.
Exhibit 10.3 to the Company's Form 10, as amended, dated April 27,
1998 (Comm. File No. 001-14057) is hereby incorporated by reference.
</TABLE>
84
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
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<C> <S>
10.77 Form of First Amendment to Master Lease Agreement dated December 31,
1998 between the Company and Ventas, Inc. Exhibit 10.47 to the
Company's Form 10-K for the year ended December 31, 1998 (Comm. File
No. 001-14057) is hereby incorporated by reference.
10.78 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.
10.79 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.
10.80 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.
10.81 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.
10.82 Development Agreement between the Company and Ventas, Inc. Exhibit
10.4 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.83 Participation Agreement between the Company and Ventas, Inc. Exhibit
10.5 to the Company's Form 10, as amended, dated April 27, 1998 (Comm.
File No. 001-14057) is hereby incorporated by reference.
10.84 Agreement and Plan of Reorganization between the Company and Ventas,
Inc. Exhibit 10.1 to the Company's Form 10, as amended, dated April
27, 1998 (Comm. File No. 001-14057) is hereby incorporated by
reference.
10.85 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.
10.86 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.
10.87 Amendment Number 1 to the Second Standstill Agreement dated April 12,
1999 dated as of May 5, 1999 between the Company and Ventas, Inc.
Exhibit 10.12 to the Company's Form 10-Q for the quarterly period
ended March 31, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.88 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.
10.89 Amendment Number 2 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 1 to the Tolling Agreement dated April 12,
1999 dated as of May 8, 1999 between the Company and Ventas, Inc.
Exhibit 10.13 to the Company's Form 10-Q for the quarterly period
ended March 31, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.90 Amendment Number 4 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 3 to the Tolling Agreement dated April 12,
1999. Exhibit 99.2 to the Current Report on Form 8-K of the Company
dated June 7, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.91 Amendment Number 5 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 4 to the Tolling Agreement dated April 12,
1999. Exhibit 99.2 to the Current Report on Form 8-K of the Company
dated July 7, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.92 Amendment Number 6 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 5 to the Tolling Agreement dated April 12,
1999. Exhibit 10.15 to the Company's Form 10-Q for the quarterly
period ended June 30, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.93 Amendment Number 7 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 6 to the Tolling Agreement dated April 12,
1999. Exhibit 10.6 to the Company's Form 10-Q for the quarterly period
ended September 30, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
10.94 Stipulation Agreement by and among Ventas, Inc., Ventas Realty,
Limited Partnership, Vencor Operating, Inc. and Vencor, Inc. Exhibit
10.7 to the Company's Form 10-Q for the quarterly period ended
September 30, 1999 (Comm. File No. 001-14057) is hereby incorporated
by reference.
10.95 Other Debt Instruments-Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished to the
Commission upon request.
16 Letter from Ernst & Young LLP regarding a change in certifying
accountants. Exhibit 16 to the Current Report on Form 8-K of the
Company dated November 2, 1999 (Comm. File No. 001-14057) is hereby
incorporated by reference.
21 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule (included only in filings submitted under the
Electronic Data Gathering, Analysis, and Retrieval system).
</TABLE>
- --------
* Compensatory plan or arrangement required to be filed as an exhibit pursuant
to Item 14(c) of Annual Report on Form 10-K.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on October 4, 1999 announcing
that the Bankruptcy Court gave final approval of the DIP Financing. The
Company filed a Current Report on Form 8-K on November 5, 1999 announcing that
the Company, upon approval of its Board of Directors, appointed PwC as its
independent auditors for the fiscal year ending December 31, 1999 to replace
Ernst & Young effective November 2, 1999. In addition, the Company filed a
Current Report on Form 8-K on December 6, 1999 announcing that its fourth
quarter operating results are expected to be impacted negatively by a charge
related to the valuation of accounts receivable.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this Report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is included in appendix page F-47 of
this Report.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000
Vencor, Inc.
/s/ Edward L. Kuntz
By: _________________________________
Edward L. Kuntz
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ulysses L. Bridgeman, Jr. Director March 30, 2000
______________________________________
Ulysses L. Bridgeman, Jr.
/s/ Elaine L. Chao Director March 30, 2000
______________________________________
Elaine L. Chao
/s/ Donna R. Ecton Director March 30, 2000
______________________________________
Donna R. Ecton
/s/ Stanley C. Gault Director March 30, 2000
______________________________________
Stanley C. Gault
/s/ Edward L. Kuntz Chairman of the Board, Chief March 30, 2000
______________________________________ Executive Officer and
Edward L. Kuntz President (Principal
Executive Officer)
/s/ Richard A. Lechleiter Vice President, Finance, March 30, 2000
______________________________________ Corporate Controller and
Richard A. Lechleiter Treasurer (Principal
Accounting Officer)
/s/ William H. Lomicka Director March 30, 2000
______________________________________
William H. Lomicka
/s/ Richard A. Schweinhart Senior Vice President and March 30, 2000
______________________________________ Chief Financial Officer
Richard A. Schweinhart (Principal Financial
Officer)
</TABLE>
87
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP...................................... F-2
Report of Ernst & Young LLP............................................... F-3
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Balance Sheet, December 31, 1999 and 1998.................. F-5
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 1999, 1998 and 1997................................. F-6
Consolidated Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Quarterly Consolidated Financial Information (Unaudited)................ F-46
Financial Statement Schedule (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998
and 1997............................................................... F-47
</TABLE>
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP
To the Board of Directors and Stockholders
of Vencor, Inc.:
In our opinion, the 1999 consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of Vencor, Inc. and its subsidiaries (the "Company") at
December 31, 1999, and the consolidated results of their operations and their
cash flows for the year ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. In addition, in our
opinion, the 1999 financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein for 1999 when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on the 1999 financial statements and
financial statement schedule based on our audit. We conducted our audit of
these 1999 statements in accordance with auditing standards generally accepted
in the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
The 1999 consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in the notes to the
consolidated financial statements, on September 13, 1999, the Company filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Proceedings"); however, as of March 30, 2000,
it had not filed a plan of reorganization. The Bankruptcy Proceedings, other
matters discussed in the notes to the financial statements, and the Company's
financial position, results of operations and cash flows as of and for the
year ended December 31, 1999, raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that might result from the
resolution of the Bankruptcy Proceedings or other matters discussed in the
notes to the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
March 30, 2000
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP
To the Board of Directors and Stockholders
Vencor, Inc.
We have audited the accompanying consolidated balance sheet of Vencor, Inc. as
of December 31, 1998 and the consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. Our audits also included the 1998 and 1997 financial statement schedule
listed on page F-1. These financial statements and schedule for 1998 and 1997
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vencor, Inc. at December 31, 1998 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1998 and 1997
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for
1998 and 1997, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
The accompanying 1998 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 2, the Company incurred a net loss in 1998 and was not in
compliance with certain covenants of a loan agreement at December 31, 1998. In
addition, the Company had a working capital deficiency at December 31, 1998.
These conditions raise substantial doubts about the Company's ability to
continue as a going concern. The 1998 consolidated financial statements do not
include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 13, 1999
F-3
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $2,665,641 $2,999,739 $3,116,004
---------- ---------- ----------
Salaries, wages and benefits............... 1,566,227 1,753,023 1,788,053
Supplies................................... 347,789 340,053 347,127
Rent....................................... 305,120 234,144 89,474
Other operating expenses................... 942,198 942,391 446,340
Depreciation and amortization.............. 93,196 124,617 123,865
Interest expense........................... 80,442 107,008 102,736
Investment income.......................... (5,188) (4,688) (6,057)
---------- ---------- ----------
3,329,784 3,496,548 2,891,538
---------- ---------- ----------
Income (loss) before reorganization costs
and income taxes.......................... (664,143) (496,809) 224,466
Reorganization costs....................... 18,606 - -
---------- ---------- ----------
Income (loss) before income taxes.......... (682,749) (496,809) 224,466
Provision for income taxes................. 500 76,099 89,338
---------- ---------- ----------
Income (loss) from operations.............. (683,249) (572,908) 135,128
Cumulative effect of change in accounting
for start-up costs........................ (8,923) - -
Extraordinary loss on extinguishment of
debt, net of income tax
benefit of $48,789 in 1998 and $2,634 in
1997...................................... - (77,937) (4,195)
---------- ---------- ----------
Net income (loss).................... (692,172) (650,845) 130,933
Preferred stock dividend requirements...... (1,046) (697) -
---------- ---------- ----------
Income (loss) available to common
stockholders........................ $ (693,218) $ (651,542) $ 130,933
========== ========== ==========
Earnings (loss) per common share:
Basic:
Income (loss) from operations.......... $ (9.72) $ (8.39) $ 1.96
Cumulative effect of change in
accounting for start-up costs......... (0.13) - -
Extraordinary loss on extinguishment of
debt.................................. - (1.14) (0.06)
---------- ---------- ----------
Net income (loss).................... $ (9.85) $ (9.53) $ 1.90
========== ========== ==========
Diluted:
Income (loss) from operations.......... $ (9.72) $ (8.39) $ 1.92
Cumulative effect of change in
accounting for start-up costs......... (0.13) - -
Extraordinary loss on extinguishment of
debt.................................. - (1.14) (0.06)
---------- ---------- ----------
Net income (loss).................... $ (9.85) $ (9.53) $ 1.86
========== ========== ==========
Shares used in computing earnings (loss)
per common share:
Basic.................................... 70,406 68,343 68,938
Diluted.................................. 70,406 68,343 70,359
</TABLE>
See accompanying notes.
F-4
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 148,350 $ 34,551
Accounts and notes receivable less allowance for loss
of $180,055--1999 and $106,471--1998................ 324,135 528,183
Inventories.......................................... 28,956 28,594
Income taxes......................................... 8,884 15,315
Other................................................ 81,559 78,317
---------- ----------
591,884 684,960
Property and equipment, at cost:
Land................................................. 26,002 22,256
Buildings............................................ 215,508 163,846
Equipment............................................ 330,925 456,825
Construction in progress (estimated cost to complete
and equip after December 31, 1999--$6 million)...... 42,725 106,940
---------- ----------
615,160 749,867
Accumulated depreciation............................. (243,526) (262,551)
---------- ----------
371,634 487,316
Goodwill less accumulated amortization of $17,817--1999
and $45,628--1998..................................... 173,818 456,644
Investment in affiliates............................... 15,874 35,707
Assets held for sale................................... 17,217 28,524
Other.................................................. 65,547 81,221
---------- ----------
$1,235,974 $1,774,372
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 101,219 $ 152,103
Salaries, wages and other compensation............... 159,482 150,906
Due to third party payors............................ 52,205 155,333
Other accrued liabilities............................ 83,967 139,254
Long-term debt due within one year................... - 9,048
Long-term debt in default classified as current...... - 760,885
---------- ----------
396,873 1,367,529
Long-term debt......................................... - 6,600
Deferred credits and other liabilities................. 56,250 85,255
Liabilities subject to compromise...................... 1,159,417 -
Series A preferred stock (subject to compromise for
1999)................................................. 1,743 1,743
Contingencies
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; authorized 10,000
shares; none issued and outstanding................. - -
Common stock, $0.25 par value; authorized 180,000
shares; issued 70,278 shares--1999 and 70,146
shares--1998........................................ 17,570 17,537
Capital in excess of par value....................... 667,078 665,447
Accumulated deficit.................................. (1,062,957) (369,739)
---------- ----------
(378,309) 313,245
---------- ----------
$1,235,974 $1,774,372
========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
Shares
---------------- Par Capital
Common Value in Retained Common
Common Treasury Common Excess of Earnings Treasury
Stock Stock Stock Par Value (Deficit) Stock Total
------ -------- ------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 72,615 (3,730) $18,154 $ 713,527 $ 150,870 $ (85,460) $ 797,091
Net income............. 130,933 130,933
Increase in equity
resulting from
secondary public
offering of Atria
Communities, Inc.
common stock.......... 22,553 22,553
Issuance of common
stock in connection
with employee benefit
plans................. 855 496 214 29,336 6,212 35,762
Repurchase of common
stock................. (2,925) (81,651) (81,651)
Other.................. 662 662
------ ------ ------- --------- ----------- --------- ---------
Balances, December 31,
1997................... 73,470 (6,159) 18,368 766,078 281,803 (160,899) 905,350
Net loss............... (650,845) (650,845)
Non-cash spin-off
transactions with
Ventas, Inc.:
Property and equipment,
net................... (953,534) (953,534)
Long-term debt......... 991,768 991,768
Common treasury stock.. (5,917) 5,917 (1,479) (156,390) 157,869 -
Series A preferred
stock................. (17,700) (17,700)
Deferred income taxes.. 15,907 15,907
Issuance of common
stock in connection
with employee benefit
plans................. 2,593 242 648 14,396 3,030 18,074
Preferred stock
dividend
requirements.......... (697) (697)
Other.................. 4,922 4,922
------ ------ ------- --------- ----------- --------- ---------
Balances, December 31,
1998................... 70,146 - 17,537 665,447 (369,739) - 313,245
Net loss............... (692,172) (692,172)
Issuance of common
stock in connection
with employee benefit
plans................. 132 33 309 342
Preferred stock
dividend
requirements.......... (1,046) (1,046)
Other.................. 1,322 1,322
------ ------ ------- --------- ----------- --------- ---------
Balances, December 31,
1999................... 70,278 - $17,570 $ 667,078 $(1,062,957) $ - $(378,309)
====== ====== ======= ========= =========== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $(692,172) $(650,845) $ 130,933
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization.............. 93,196 124,617 123,865
Provision for doubtful accounts............ 114,578 55,561 31,176
Deferred income taxes...................... - 71,496 53,164
Extraordinary loss on extinguishment of
debt...................................... - 126,726 6,829
Unusual transactions....................... 411,615 506,003 -
Gain on sale of investment in Atria
Communities, Inc.......................... - (98,461) -
Reorganization costs....................... 18,606 - -
Cumulative effect of change in accounting
for start-up costs........................ 8,923 - -
Other...................................... 19,247 2,173 (9,737)
Change in operating assets and
liabilities:
Accounts and notes receivable............. 90,428 43,649 (87,914)
Inventories and other assets.............. 5,868 (11,920) (7,196)
Accounts payable.......................... 25,580 52,437 (14,177)
Income taxes.............................. 6,431 (17,167) 22,850
Due to third party payors................. 99,370 155,333 -
Other accrued liabilities................. 45,401 (36,406) 16,251
--------- --------- -----------
Net cash provided by operating activities
before reorganization costs............. 247,071 323,196 266,044
Payment of reorganization costs............ (15,684) - -
--------- --------- -----------
Net cash provided by operating
activities.............................. 231,387 323,196 266,044
--------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment......... (111,493) (267,288) (281,672)
Acquisition of TheraTx, Incorporated....... - - (359,439)
Acquisition of Transitional Hospitals
Corporation............................... - - (615,620)
Other acquisitions......................... - (24,227) (36,630)
Sale of investment in Atria Communities,
Inc....................................... - 177,500 -
Sale of investment in Colorado MEDtech,
Inc....................................... - 22,001 -
Sale of other assets....................... 12,289 37,827 75,988
Surety bond deposits....................... (17,213) - -
Series A preferred stock loans............. - (15,930) -
Net change in investments.................. 6,377 13,164 (4,513)
Other...................................... (2,548) (5,203) (11,774)
--------- --------- -----------
Net cash used in investing activities.... (112,588) (62,156) (1,233,660)
--------- --------- -----------
Cash flows from financing activities:
Net change in borrowings under revolving
lines of credit........................... 55,000 (251,146) 418,700
Issuance of long-term debt................. - 700,000 2,818
Net proceeds from senior subordinated notes
offerings................................. - 294,000 731,812
Redemption of senior subordinated notes.... - (732,547) -
Repayment of long-term debt................ (26,776) (281,316) (130,516)
Payment of debtor-in-possession deferred
financing costs........................... (3,752) - -
Payment of other deferred financing costs.. (2,068) (11,334) (22,052)
Other issuances of common stock............ 3 227 13,832
Repurchase of common stock................. - - (81,651)
Other...................................... (27,407) - (207)
--------- --------- -----------
Net cash provided by (used in) financing
activities.............................. (5,000) (282,116) 932,736
--------- --------- -----------
Change in cash and cash equivalents........ 113,799 (21,076) (34,880)
Cash and cash equivalents at beginning of
period.................................... 34,551 55,627 90,507
--------- --------- -----------
Cash and cash equivalents at end of
period.................................... $ 148,350 $ 34,551 $ 55,627
========= ========= ===========
Supplemental information:
Interest payments.......................... $ 35,783 $ 129,395 $ 76,864
Income tax payments (refunds).............. (5,931) (31,576) 16,042
</TABLE>
See accompanying notes.
F-7
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
Reporting Entity
Vencor, Inc. ("Vencor" or the "Company") provides long-term healthcare
services primarily through the operation of nursing centers and hospitals. At
December 31, 1999, the Company's health services division operated 295 nursing
centers (38,573 licensed beds) in 31 states and a rehabilitation therapy
business. The Company's hospital division operated 56 hospitals (4,931
licensed beds) in 23 states and an institutional pharmacy business.
The Company and substantially all of its subsidiaries filed voluntary
petitions for protection under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code") on September 13, 1999. The Company currently is
operating its businesses as a debtor-in-possession subject to the jurisdiction
of the United States Bankruptcy Court in Delaware (the "Bankruptcy Court").
Accordingly, the consolidated financial statements of the Company have been
prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted
accounting principles applicable to a going concern, which assumes that assets
will be realized and liabilities will be discharged in the normal course of
business. The consolidated financial statements do not include any adjustments
that might result from the resolution of the Chapter 11 Cases (as defined) or
other matters discussed in the accompanying notes. The Company's recent
operating losses, liquidity issues and the Chapter 11 Cases raise substantial
doubt about the Company's ability to continue as a going concern. The ability
of the Company to continue as a going concern and the appropriateness of using
the going concern basis of accounting are dependent upon, among other things,
(i) the Company's ability to comply with the terms of the DIP Financing (as
defined), (ii) confirmation of a Plan of Reorganization (as defined) under the
Bankruptcy Code, (iii) the Company's ability to achieve profitable operations
after such confirmation, and (iv) the Company's ability to generate sufficient
cash from operations to meet its obligations. The Plan of Reorganization and
other actions during the Chapter 11 Cases could change materially the amounts
currently recorded in the consolidated financial statements. See Note 2.
On May 1, 1998, Ventas, Inc. ("Ventas" or the "Company's predecessor")
(formerly known as Vencor, Inc.) completed the spin-off (the "Spin-off") of
its healthcare operations to its stockholders through the distribution of
Vencor common stock. Ventas retained ownership of substantially all of its
real property and leases such real property to the Company pursuant to four
master lease agreements. In anticipation of the Spin-off, the Company was
incorporated on March 27, 1998 as a Delaware corporation. For accounting
purposes, the consolidated historical financial statements of Ventas became
the historical financial statements of the Company upon consummation of the
Spin-off. Any discussion concerning events prior to May 1, 1998 refers to the
Company's business as it was conducted by Ventas prior to the Spin-off. See
Notes 2 and 20.
On March 21, 1997, the Company acquired TheraTx, Incorporated ("TheraTx"), a
provider of rehabilitation and respiratory therapy management services and an
operator of 26 nursing centers, pursuant to a cash tender offer (the "TheraTx
Merger"). See Note 4.
On June 24, 1997, the Company acquired a controlling interest in
Transitional Hospitals Corporation ("Transitional"), an operator of 19 long-
term acute care hospitals, pursuant to a cash tender offer. The Company
completed the merger of its wholly owned subsidiary with and into Transitional
on August 26, 1997 (the "Transitional Merger"). See Note 5.
F-8
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
Basis of Presentation
The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated. Investments in affiliates in
which the Company has a 50% or less interest are accounted for by either the
equity or cost method.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.
The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying consolidated financial
statements include the operations of TheraTx and Transitional since March 21,
1997 and June 24, 1997, respectively. The Company finalized the purchase price
allocations related to these transactions in 1998.
In September 1998, the Company sold approximately 88% of its investment in
its assisted living affiliate, Atria Communities, Inc. ("Atria") resulting
from the merger of Atria and Kapson Senior Quarters Corp. In connection with
the merger, the Company retained approximately 12% of the outstanding capital
stock of the surviving entity and accounts for such investment under the cost
method of accounting. From July 1, 1997 to the date of sale, the Company
accounted for Atria under the equity method of accounting. Prior to July 1,
1997, such accounts were consolidated with those of the Company and provisions
related to minority interests in the earnings and equity of Atria were
recorded since the consummation of the initial public offering in August 1996.
See Notes 8 and 11.
Impact of Recent Accounting Pronouncements
Beginning in 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income," ("SFAS 130"), which established new rules for the reporting of
comprehensive income and its components. SFAS 130 requires, among other
things, unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported as changes in common
stockholders' equity, to be disclosed as other comprehensive income. There
were no significant comprehensive income items for the years ended December
31, 1999, 1998 and 1997.
Beginning in 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires revised disclosures for segments of a company based upon management's
approach to defining business operating segments. See Note 10.
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, 1997, was not significant.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which was adopted by the Company in the first
quarter
F-9
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
of 1999. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 did
not have a material effect on the Company's consolidated financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133") which was required to be adopted in fiscal years beginning after
June 15, 1999. In June 1999, FASB delayed the effective date of SFAS 133 for
one year. Management has not determined the effect, if any, of SFAS 133 on the
Company's consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
Revenues
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
A summary of revenues by payor type follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Medicare................................. $ 918,395 $1,038,669 $1,082,260
Medicaid................................. 902,032 869,923 861,832
Private and other........................ 906,849 1,136,828 1,215,899
---------- ---------- ----------
2,727,276 3,045,420 3,159,991
Elimination.............................. (61,635) (45,681) (43,987)
---------- ---------- ----------
$2,665,641 $2,999,739 $3,116,004
========== ========== ==========
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted highly liquid investments
with an original maturity of three months or less when purchased. Carrying
values of cash and cash equivalents approximate fair value due to the short-
term nature of these instruments.
Accounts Receivable
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients. Amounts recorded
include estimated provisions for loss related to uncollectible accounts and
disputed items that have continuing significance, such as third-party
reimbursements that continue to be claimed in current cost reports.
Inventories
Inventories consist primarily of medical supplies and are stated at the
lower of cost (first-in, first-out) or market.
F-10
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--ACCOUNTING POLICIES (Continued)
Property and Equipment
Depreciation expense, computed by the straight-line method, was $68.9
million in 1999, $90.9 million in 1998 and $105.3 million in 1997.
Depreciation rates for buildings range generally from 20 to 45 years.
Estimated useful lives of equipment vary from 5 to 15 years.
Goodwill
Costs in excess of the fair value of identifiable net assets of acquired
entities are amortized using the straight-line method principally over 40
years. Amortization expense recorded for 1999, 1998 and 1997 totaled $23.3
million, $27.2 million and $11.4 million, respectively.
Effective October 1, 1998, the Company reduced the amortization period for
goodwill related to its rehabilitation therapy business to seven years. In the
fourth quarter of 1999, in connection with the realignment of Vencare, the
Company wrote off all of the goodwill associated with its rehabilitation
therapy business. See Note 3.
Effective January 1, 2000, the Company will adopt an amortization period of
20 years from the date of acquisition for goodwill.
Long-Lived Assets
The Company regularly reviews the carrying value of certain long-lived
assets and the related identifiable intangible assets with respect to any
events or circumstances that indicate impairment or adjustment to the
amortization period. If such circumstances suggest the recorded amounts cannot
be recovered, calculated based on estimated future cash flows (undiscounted),
the carrying values of such assets are reduced to fair value. See Note 8.
Professional Liability Risks
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
Derivative Instruments
The Company is a party to interest rate swap agreements that eliminate the
impact of changes in interest rates on certain outstanding floating rate debt.
Each interest rate swap agreement is associated with all or a portion of the
principal balance of a specific debt obligation. These agreements involve the
exchange of amounts based on variable rates for amounts based on fixed
interest rates over the life of the agreement, without an exchange of the
notional amount upon which the payments are based. The differential to be paid
or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt, and the related amount
payable to or receivable from counterparties is included in accrued interest.
The fair values of the swap agreements are not recognized in the consolidated
financial statements. Gains and losses on terminations of interest rate swap
agreements are deferred (included in other assets) and amortized as an
adjustment to interest expense over the remaining term of the original
contract life of the terminated swap agreement.
Earnings per Common Share
Basic earnings per common share are based upon the weighted average number
of common shares outstanding. Diluted earnings per common share for 1997
include the effect of employee stock options aggregating 1,421,000 shares. No
incremental shares are included in the 1999 and 1998 calculations of the
diluted loss per common share since the result would be antidilutive.
F-11
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 cases have been consolidated for purposes of joint
administration under Case Nos. 99-3199 (MFW) through 99-3327 (MFW)
(collectively, the "Chapter 11 Cases"). The Company currently is operating its
businesses as a debtor-in-possession subject to the jurisdiction of the
Bankruptcy Court.
On September 14, 1999, the Company received approval from the Bankruptcy
Court to pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. The Bankruptcy Court also approved orders
granting authority, among other things, to pay pre-petition claims of certain
critical vendors, utilities and patient obligations. All other pre-petition
liabilities are classified in the consolidated balance sheet as liabilities
subject to compromise. The Company currently is paying the post-petition
claims of all vendors and providers in the ordinary course of business.
In connection with the Chapter 11 Cases, the Company entered into a $100
million debtor-in-possession financing agreement (the "DIP Financing") with a
bank group led by Morgan Guaranty Trust Company of New York (collectively, the
"DIP Lenders"). The Bankruptcy Court granted final approval of the DIP
Financing on October 1, 1999. The DIP Financing, which was initially scheduled
to mature on March 13, 2000, is comprised of a $75 million tranche A revolving
loan (the "Tranche A Loan") and a $25 million tranche B revolving loan (the
"Tranche B Loan"). Interest is payable at prime rate plus 2 1/2% on the
Tranche A Loan and prime rate plus 4 1/2% on the Tranche B Loan.
Available aggregate borrowings under the Tranche A Loan were initially
limited to $45 million in September 1999 and increased to $65 million in
October, $70 million in November and $75 million thereafter. Pursuant to a
recent amendment to the DIP Financing, the aggregate borrowing limitations
under the Tranche A Loans are limited to approximately $68 million until
maturity. Borrowings under the Tranche B Loan require the approval of lenders
holding at least 75% of the credit exposure under the DIP Financing. The DIP
Financing is secured by substantially all of the assets of the Company and its
subsidiaries, including certain owned real property. The DIP Financing
contains standard representations and warranties and other affirmative and
restrictive covenants. As of March 29, 2000, there were no outstanding
borrowings under the DIP Financing.
Since the consummation of the DIP Financing, the Company and the DIP Lenders
have agreed to five amendments to the DIP Financing. These amendments approved
various changes to the DIP Financing including (i) extending the period of
time for the Company to file its plan of reorganization, (ii) approving
certain transactions and (iii) revising the Company's cash plan originally
submitted with the DIP Financing. In December 1999, the Company informed the
DIP Lenders that it planned to record a significant charge to earnings in the
fourth quarter of 1999 related to the valuation of accounts receivable that
could have resulted in noncompliance with certain covenants in the DIP
Financing requiring minimum Consolidated EBITDAR and a minimum Net Amount of
Eligible Accounts (both as defined in the DIP Financing). In connection with
the third amendment to the DIP Financing, the Company received a waiver from
compliance with these covenants of the DIP Financing through February 14,
2000. The Company received subsequent waivers from compliance with these
covenants in later amendments. In connection with the most recent amendment to
the DIP Financing dated February 23, 2000, the parties agreed, among other
things, to (i) extend the maturity date of the DIP Financing until June 30,
2000, (ii) extend the period of time for the Company to file its plan of
reorganization to May 1, 2000, and (iii) revise certain financial covenants.
The Bankruptcy Court granted approval of this amendment to the DIP Financing
on March 10, 2000.
At December 31, 1999, the Company was not in compliance with the DIP
Financing covenant related to the minimum Net Amount of Eligible Accounts
(accounts receivable). The Company intends to seek an amendment or waiver to
the DIP Financing to remedy this event of default. Since there were no
outstanding borrowings under the DIP Financing at December 31, 1999, the event
of default had no effect on the Company's consolidated
F-12
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
financial statements. However, if the Company is not successful in obtaining
an amendment or waiver to remedy the event of default, its ability to borrow
under the DIP Financing to finance its operations during the pendency of the
Chapter 11 Cases may be limited.
On November 4, 1999, the Company received approval (subject to certain
conditions) to implement a management retention plan (the "Management
Retention Plan") to enhance the ability of the Company to retain key
management employees during the reorganization period. Under the Management
Retention Plan, bonuses aggregating $7.3 million will be awarded to certain
key management employees based upon various percentages of their annual
salary. The Management Retention Plan provides that the retention bonuses will
be paid in three equal amounts upon: (i) the Bankruptcy Court's approval of
the Management Retention Plan, (ii) the effective date of the Plan of
Reorganization (as defined) and (iii) three months following the effective
date of the Plan of Reorganization.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. The automatic stay does
not necessarily apply to certain actions against Ventas for which the Company
has agreed to indemnify Ventas in connection with the Spin-off. In addition,
the Company may assume or reject executory contracts, including lease
obligations, under the Bankruptcy Code. Parties affected by these rejections
may file claims with the Bankruptcy Court in accordance with the
reorganization process.
As previously disclosed, the Company is developing a plan of reorganization
(the "Plan of Reorganization") through negotiations with key parties including
its senior bank lenders (the "Senior Lenders"), the holders of the Company's
$300 million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "1998
Notes"), Ventas and the Department of Justice (the "DOJ"), acting on behalf of
the Health Care Financing Administration ("HCFA") and the Department of Health
and Human Services' Office of the Inspector General ("HHS"). A substantial
portion of pre-petition liabilities are subject to settlement under the Plan
of Reorganization to be submitted by the Company.
The Plan of Reorganization must be voted upon by the impaired creditors of
the Company and approved by the Bankruptcy Court. There can be no assurance
that the Plan of Reorganization to be proposed by the Company will be approved
by the requisite holders of claims, confirmed by the Bankruptcy Court or that
it will be consummated. If the Plan of Reorganization is not accepted by the
required number of impaired creditors and the Company's exclusive right to
file and solicit acceptance of a plan of reorganization ends, any party in
interest may subsequently file its own plan of reorganization for the Company.
The Bankruptcy Court currently has extended the Company's exclusive right to
submit a plan of reorganization until May 16, 2000. A plan of reorganization
must be confirmed by the Bankruptcy Court after certain findings required by
the Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy Court may
confirm a plan of reorganization notwithstanding the non-acceptance of the
plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are satisfied. As previously announced,
the Company has indicated that any Plan of Reorganization will result in the
Company's common stock having little, if any, value.
Events Leading to Reorganization
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. Prior to the commencement of the Chapter 11 Cases, the Company
received a series of temporary waivers of these covenant violations. The
waivers generally included certain borrowing limitations under the $300
million revolving credit portion of the Credit Agreement. The final waiver was
scheduled to expire on September 24, 1999.
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,
F-13
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
the Company reached an agreement with HCFA to extend the repayment of such
amounts over 60 monthly installments (the "HCFA Agreement"). Under the HCFA
Agreement, monthly payments of approximately $1.5 million commenced in May
1999. Beginning in December 1999, the balance of the overpayments bears
interest at a statutory rate approximating 13.4%, resulting in a monthly
payment of approximately $2.0 million through March 2004. If the Company is
delinquent with two consecutive payments, the HCFA Agreement will be defaulted
and all subsequent Medicare reimbursement payments to the Company may be
withheld. Amounts due under the HCFA Agreement aggregate $80.3 million and
have been classified as liabilities subject to compromise in the Company's
consolidated balance sheet at December 31, 1999. The Company has received
Bankruptcy Court approval to continue to make the monthly payments under the
HCFA Agreement during the pendency of the Chapter 11 Cases.
On May 3, 1999, the Company elected not to make the interest payment of
approximately $14.8 million due on the 1998 Notes. The failure to pay interest
resulted in an event of default under the 1998 Notes.
In accordance with SOP 90-7, outstanding borrowings under the Credit
Agreement ($506 million) and the principal amount of the 1998 Notes ($300
million) are presented as liabilities subject to compromise in the Company's
consolidated balance sheet at December 31, 1999. If the Chapter 11 Cases had
not been filed, the Company would have reported a working capital deficit
approximating $1 billion at December 31, 1999. The consolidated financial
statements do not include adjustments that might result from the resolution of
the Chapter 11 Cases or other matters discussed in the accompanying notes.
During the pendency of the Chapter 11 Cases, the Company is continuing to
record the contractual amount of interest expense related to the Credit
Agreement. No interest costs have been recorded related to the 1998 Notes
since the filing of the Chapter 11 Cases. Contractual interest expense for the
1998 Notes for this period was $8.9 million.
As previously reported, the Company has been informed by the DOJ that the
Company and Ventas are the subjects of ongoing investigations into various
Medicare reimbursement issues, including hospital cost reporting issues,
Vencare billing practices and various quality of care issues in the hospitals
and nursing centers formerly operated by Ventas and currently operated by the
Company. The Company has cooperated fully in these investigations. The DOJ has
informed the Company that it has intervened in several pending qui tam actions
asserted against the Company and/or Ventas in connection with these
investigations. The Company and Ventas are engaged in active discussions with
the DOJ that may result in a resolution of some or all of the DOJ
investigations including the pending qui tam actions. In addition, the DOJ has
filed proofs of claims with respect to certain alleged claims in the Chapter
11 Cases. The Company believes that the DOJ's intervention in these actions
will facilitate the ability of the parties to reach a final resolution. Such a
resolution with the DOJ could include a payment to the Federal government
which could have a material adverse effect on the Company's liquidity and
financial position. See Note 24.
Agreements with Ventas
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Agreement and Plan of Reorganization governing the Spin-off
(the "Spin-off Agreement"). The Company was seeking a reduction in rent and
other concessions under its Master Lease Agreements (as defined) with Ventas.
On March 31, 1999, the Company and Ventas entered into a standstill agreement
(the "Standstill Agreement") which provided that both companies would postpone
through April 12, 1999 any claims either may have against the other. On April
12, 1999, the Company and Ventas entered into a second standstill agreement
(the "Second Standstill") which provided that neither party would pursue any
claims against the other or any other third party related to the Spin-off as
long as the Company complied with certain rent 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 would be extended and tolled from April 12, 1999 until May
5, 1999 or until the termination of the Second Standstill (the "Tolling
Agreement").
F-14
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
As a result of the Company's failure to pay rent, Ventas served the Company
with notices of nonpayment under the Master Lease Agreements. Subsequently,
the Company and Ventas entered into further amendments to the Second
Standstill and the Tolling Agreement to extend the time during which no
remedies may be pursued by either party and to extend the date by which the
Company may cure its failure to pay rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
a stipulation (the "Stipulation") which provides for the payment by the
Company of a reduced monthly rent of approximately $15.1 million beginning in
September 1999. The Stipulation was approved by the Bankruptcy Court. The
difference between the $18.9 million base rent under the Master Lease
Agreements and the reduced monthly rent is being accrued as an administrative
expense subject to compromise in the Chapter 11 Cases. Unpaid August 1999 rent
of approximately $18.9 million will constitute a claim by Ventas in the
Chapter 11 Cases which claim is potentially subject to dispute. During the
pendency of the Chapter 11 Cases, the Company is recording the contractual
amount of the $18.9 million monthly base rent.
The Stipulation also continues to toll any statutes of limitations or other
time constraints in a bankruptcy proceeding for claims that might be asserted
by the Company against Ventas. The Stipulation automatically renews for one-
month periods unless either party provides a 14-day notice of termination. The
Stipulation also may be terminated prior to its expiration upon a payment
default by the Company, the consummation of the Plan of Reorganization or the
occurrence of certain defaults under the DIP Financing.
The Stipulation also provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may seek to pursue claims against Ventas
arising out of the Spin-off and seek judicial relief barring Ventas from
exercising any remedies based on the Company's failure to pay some or all of
the rent to Ventas. The Company's failure to pay rent or otherwise comply with
the Stipulation, in the absence of judicial relief, would result in an "Event
of Default" under the Master Lease Agreements. Upon an Event of Default under
the Master Lease Agreements, assuming Ventas were to be granted relief from
the automatic stay by the Bankruptcy Court, the remedies available to Ventas
include, without limitation, terminating the Master Lease Agreements,
repossessing and reletting the leased properties and requiring the Company to
(i) remain liable for all obligations under the Master Lease Agreements,
including the difference between the rent under the Master Lease Agreements
and the rent payable as a result of reletting the leased properties or (ii)
pay the net present value of the rent due for the balance of the terms of the
Master Lease Agreements. Such remedies, however, would be subject to the
supervision of the Bankruptcy Court.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities, consisting
primarily of long-term debt, amounts due to third party payors and certain
accounts payable and accrued liabilities, represent the Company's estimate of
known or potential claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments based on assertions of
additional claims, negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims, treatment under the Plan of Reorganization and other events.
Payment terms for these amounts will be established in connection with the
Plan of Reorganization.
F-15
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (Continued)
The Company has received approval from the Bankruptcy Court to pay pre-
petition and post-petition employee wages, salaries, benefits and other
employee obligations. The Bankruptcy Court also approved orders granting
authority, among other things, to pay pre-petition claims of certain critical
vendors, utilities and patient obligations. All other pre-petition liabilities
are classified in the consolidated balance sheet as liabilities subject to
compromise.
A summary of the principal categories of claims classified as liabilities
subject to compromise under the Chapter 11 Cases follows (in thousands):
<TABLE>
<S> <C>
Long-term debt:
Credit Agreement............................................... $ 506,114
1998 Notes..................................................... 300,000
Amounts due under the HCFA Agreement........................... 80,296
8 5/8% Senior Subordinated Notes............................... 2,391
Unamortized deferred financing costs........................... (12,626)
Other.......................................................... 4,592
----------
880,767
----------
Due to third-party payors........................................ 112,694
Accounts payable................................................. 33,693
Accrued liabilities:
Interest....................................................... 45,521
Ventas rent.................................................... 33,884
Other.......................................................... 52,858
----------
132,263
----------
$1,159,417
==========
</TABLE>
Substantially all of the liabilities subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
NOTE 3--VENCARE REALIGNMENT
During 1999, the Company operated its Vencare ancillary services business
which provided respiratory and rehabilitation therapies and medical and
pharmacy management services to nursing centers and other healthcare
providers. As a result of significant declines in the demand for ancillary
services caused by the Balanced Budget Act of 1997 (the "Budget Act"),
management completed a realignment of its Vencare division in the fourth
quarter of 1999. Vencare's rehabilitation, speech and occupational therapies
were integrated into the Company's nursing center division and the division
was renamed to the health services division. Vencare's institutional pharmacy
business was assigned to the hospital division. Vencare's respiratory therapy
and other ancillary businesses have been discontinued.
In connection with the realignment, the Company recorded a charge
aggregating $56.3 million in the fourth quarter of 1999. See Note 8.
F-16
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--THERATX MERGER
On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired...................................... $633,793
Fair value of liabilities assumed.................................. (259,439)
--------
Net assets acquired.............................................. 374,354
Cash received from acquired entity................................. (14,915)
--------
Net cash paid.................................................... $359,439
========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $315.2 million. During 1997, the Company completed
the sales of certain non-strategic assets acquired in connection with the
TheraTx merger, the proceeds from which approximated $54.6 million. No gain or
loss was recognized in connection with these transactions. Purchase price
adjustments recorded in 1998 increased goodwill by $7.6 million.
NOTE 5--TRANSITIONAL MERGER
On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which
the Company paid $16.00 per common share. The Company
completed the merger of its wholly owned subsidiary with and into Transitional
on August 26, 1997. A summary of the Transitional Merger follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired...................................... $713,336
Fair value of liabilities assumed.................................. (44,842)
--------
Net assets acquired.............................................. 668,494
Cash received from acquired entity................................. (52,874)
--------
Net cash paid.................................................... $615,620
========
</TABLE>
The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $364.7 million. Purchase price adjustments recorded
in 1998 increased goodwill by $15.6 million.
NOTE 6--BUSINESS COMBINATIONS OTHER THAN THERATX AND TRANSITIONAL
The Company has acquired a number of healthcare facilities (including
certain previously leased facilities) and other related businesses,
substantially all of which have been accounted for by the purchase method.
Accordingly, the aggregate purchase price of these transactions has been
allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based upon their respective fair values. The consolidated
financial statements include the operations of acquired entities since the
respective acquisition dates. The pro forma effect of these acquisitions on
the Company's results of operations prior to consummation was not significant.
The following is a summary of acquisitions consummated during 1998 and 1997
under the purchase method of accounting (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Fair value of assets acquired.............................. $32,286 $71,601
Fair value of liabilities assumed.......................... (8,059) (34,971)
------- -------
Net cash paid for acquisitions........................... $24,227 $36,630
======= =======
</TABLE>
F-17
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--BUSINESS COMBINATIONS OTHER THAN THERATX AND TRANSITIONAL (Continued)
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $7.9 million in 1998 and $5.7 million
in 1997.
NOTE 7--PRO FORMA INFORMATION (UNAUDITED)
The pro forma effect of the TheraTx Merger and Transitional Merger assuming
that the transactions occurred on January 1, 1997 follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year ended
December 31,
1997
------------
<S> <C>
Revenues....................................................... $3,364,274
Income from operations......................................... 98,446
Net income..................................................... 94,251
Earnings per common share:
Basic:
Income from operations..................................... $ 1.43
Net income................................................. 1.37
Diluted:
Income from operations..................................... $ 1.40
Net income................................................. 1.34
</TABLE>
For the period presented, pro forma financial data have been derived by
combining the financial results of the Company and TheraTx (based upon year
end reporting periods ending on December 31) and Transitional (based upon year
end reporting period ending on November 30).
Pro forma income from operations for 1997 includes costs incurred by both
TheraTx and Transitional in connection with the acquisitions which reduced net
income by $29.7 million.
NOTE 8--UNUSUAL TRANSACTIONS
Operating results for each of the last three years include certain unusual
transactions. These transactions are included in other operating expenses in
the consolidated statement of operations (unless otherwise indicated) for the
respective periods in which they were recorded.
1999
The following table summarizes the pretax impact of unusual transactions
recorded during 1999 (in millions):
<TABLE>
<CAPTION>
Quarters
-------------------------
First Second Third Fourth Year
----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment........... $330.4 $330.4
Investment in BHC..................... $15.2 15.2
Cancellation of software development
project................................ 5.6 5.6
Realignment of Vencare division......... 56.3 56.3
Retirement plan curtailment............. 7.3 7.3
Corporate properties.................... (2.4) (2.4)
--- ----- --- ------ ------
$ - $20.8 $ - $391.6 $412.4
=== ===== === ====== ======
</TABLE>
F-18
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNUSUAL TRANSACTIONS (Continued)
Long-lived asset impairment--SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
requires impairment losses to be recognized for long-lived assets used in
operations when indications of impairment are present and the estimate of
undiscounted future cash flows is not sufficient to recover asset carrying
amounts. SFAS 121 also requires that long-lived assets held for disposal be
carried at the lower of carrying value or fair value less costs of disposal,
once management has committed to a plan of disposal.
Operating results and related cash flows for 1999 did not meet management's
expectations. These expectations were the basis upon which the Company valued
its long-lived assets at December 31, 1998, in accordance with SFAS 121. In
addition, certain events occurred in 1999 which had a negative impact on the
Company's operating results and are expected to impact negatively its
operations in the future. In connection with continuing discussions with the
DOJ, the Company has agreed to exclude certain expenses from its hospital
Medicare cost reports beginning September 1, 1999 for which the Company had
been reimbursed in prior years. Medicare revenues related to the reimbursement
of such costs aggregated $18 million in 1999 and $47 million in both 1998 and
1997. In addition, as more fully described in Note 9, hospital revenues in
1999 were reduced by approximately $19 million as a result of disputes with
certain insurers who issued Medicare supplement insurance policies to
individuals who became patients of the Company's hospitals. The Company also
reviewed the expected impact of the Balanced Budget Refinement Act (the
"BBRA") enacted in November 1999 (which provided a measure of relief for some
impact of the Budget Act) and the realignment of the Vencare ancillary
services business completed in the fourth quarter of 1999. The actual and
expected future impact of these issues served as an indication to management
that the carrying values of the Company's long-lived assets may be impaired.
In accordance with SFAS 121, management estimated the future undiscounted
cash flows for each of its facilities and compared these estimates to the
carrying values of the underlying assets. As a result of these estimates, the
Company reduced the carrying amounts of the assets associated with 71 nursing
centers and 21 hospitals to their respective estimated fair values. The
determination of the fair values of the impaired facilities was based upon the
net present value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property
Goodwill and Equipment Total
-------- ------------- ------
<S> <C> <C> <C>
Health services division...................... $ 18.3 $ 37.7 $ 56.0
Hospital division............................. 198.9 75.5 274.4
------ ------ ------
$217.2 $113.2 $330.4
====== ====== ======
</TABLE>
Effective January 1, 2000, the Company will adopt an amortization period of
20 years from the date of acquisition for goodwill. This change will increase
amortization expense by approximately $5 million in 2000. The write-off of
goodwill discussed above (assuming no change in amortization period) will
reduce amortization expense by approximately $6 million in 2000.
Investment in BHC--In connection with the Transitional Merger, the Company
acquired a 44% voting equity interest (61% equity interest) in Behavioral
Healthcare Corporation ("BHC"), an operator of psychiatric and behavioral
clinics. In the second quarter of 1999, the Company wrote off its remaining
investment in BHC aggregating $15.2 million as a result of deteriorating
financial performance. See the discussion of unusual transactions recorded in
1998 for further information related to the Company's investment in BHC.
Cancellation of software development project--In the second quarter of 1999,
the Company canceled a nursing center software development project and charged
previously capitalized costs to operations.
F-19
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNUSUAL TRANSACTIONS (Continued)
Realignment of Vencare division--As discussed in Note 3, the Company
realigned the Vencare ancillary services division in the fourth quarter of
1999. As a result, the Company recorded a charge aggregating $56.3 million,
including the write-off of goodwill totaling $42.3 million. The remainder of
the charge related to the write-down of certain equipment to net realizable
value and the recording of employee severance costs.
Retirement plan curtailment--In December 1999, the Board of Directors
approved the curtailment of benefits under the Company's supplemental
executive retirement plan, resulting in an actuarially determined charge of
$7.3 million. Under the terms of the curtailment, plan benefits were vested
for each eligible participant through December 31, 1999 and the accrual of
future benefits under the plan was substantially eliminated. The Board of
Directors also deferred the time at which certain benefits would be paid by
the Company.
Corporate properties--During 1999, the Company adjusted estimated property
loss provisions recorded in the fourth quarter of 1998, resulting in a pretax
credit of $2.4 million.
1998
The following table summarizes the pretax impact of unusual transactions
recorded during 1998 (in millions):
<TABLE>
<CAPTION>
Quarters
---------------------------
First Second Third Fourth Year
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Income)/expense
Asset valuation losses:
Long-lived asset impairment......... $307.8 $307.8
Investment in BHC................... $ 8.5 43.1 51.6
Wisconsin nursing center............ 27.5 27.5
Corporate properties................ $ 8.8 2.9 15.1 26.8
Acquired entities................... 13.5 13.5
Gain on sale of investments........... (98.5) (13.0) (111.5)
Losses from termination of
construction projects................ 71.3 71.3
Spin-off transaction costs............ $7.7 9.6 17.3
Write-off of clinical information
systems.............................. 10.1 10.1
Doubtful accounts related to sold
operations........................... 9.6 9.6
Settlement of litigation.............. 7.8 7.8
Loss on sale and closure of home
health and hospice businesses........ 7.3 7.3
---- ----- ------ ------ ------
$7.7 $25.7 $ (6.2) $411.9 $439.1
==== ===== ====== ====== ======
</TABLE>
Long-lived asset impairment--The Balanced Budget established, among other
things, a new Medicare prospective payment system ("PPS") for nursing centers.
All of the Company's nursing centers became subject to PPS effective July 1,
1998. During the first three years, the per diem rates for nursing centers are
based on a blend of facility-specific and Federal costs. Thereafter, the per
diem rates will be based solely on Federal costs. The revenues recorded under
PPS in the Company's health services division are substantially less than the
cost-based reimbursement it received before the enactment of the Budget Act.
The Budget Act also reduced payments to the Company's hospitals by reducing
incentive payments pursuant to the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), allowable costs for capital expenditures
F-20
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNUSUAL TRANSACTIONS (Continued)
and bad debts, and payments for services to patients transferred from a
general acute care hospital. The reductions in allowable costs for capital
expenditures became effective in the fourth quarter of 1997. The reductions in
TEFRA incentive payments and allowable costs for bad debts became effective in
the third and fourth quarters of 1998. The reduction for payments for services
to patients transferred from a general acute care hospital became effective in
the fourth quarter of 1998. These reductions had a material adverse impact on
hospital revenues in 1998 and may impact adversely the Company's ability to
develop additional long-term care hospitals in the future.
The Company provided ancillary services to both Company-operated and non-
affiliated nursing centers. While most of the nursing center industry became
subject to PPS on or after January 1, 1999, management believed that Vencare's
ability to maintain services and revenues was impacted adversely during 1998,
particularly in the third and fourth quarters, since nursing centers were
reluctant to enter into ancillary service contracts while transitioning to the
new fixed payment system under PPS. Medicare reimbursements to nursing centers
under PPS include substantially all services provided to patients, including
ancillary services. Management believed that the decline in demand for its
Vencare services in 1998, particularly respiratory therapy and rehabilitation
therapy, was mostly attributable to efforts by nursing center customers to
reduce operating costs. In addition, as a result of these regulatory changes,
many nursing centers have elected to provide ancillary services to their
patients through internal staff and no longer contract with outside parties
for ancillary services.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under these rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The new limits became effective for services
provided on or after April 10, 1998 and negatively impacted operating results
of the Company's ancillary services businesses in 1998.
These significant regulatory changes and the impact of such changes on the
Company's operating results in the third and fourth quarters of 1998 served as
an indication to management that the carrying values of the assets of its
nursing center and hospital facilities, as well as certain portions of its
ancillary services business, may be impaired.
In accordance with SFAS 121, management estimated the future undiscounted
cash flows for each of its facilities and ancillary services lines of business
and compared these estimates to the carrying values of the underlying assets.
As a result of these estimates, the Company reduced the carrying amounts of
the assets associated with 110 nursing centers, 12 hospitals and a portion of
the goodwill associated with the rehabilitation therapy business to their
respective estimated fair values. The determination of the fair values of the
impaired facilities and rehabilitation therapy business was based upon the net
present value of estimated future cash flows.
A summary of the impairment charges follows (in millions):
<TABLE>
<CAPTION>
Property
Goodwill and Equipment Total
-------- ------------- ------
<S> <C> <C> <C>
Health services division:
Nursing centers............................. $ 27.7 $ 71.6 $ 99.3
Ancillary services.......................... 99.2 0.2 99.4
Hospital division............................. 74.4 34.7 109.1
------ ------ ------
$201.3 $106.5 $307.8
====== ====== ======
</TABLE>
In addition to the above impairment charges, the amortization period for the
remaining goodwill associated with the rehabilitation therapy business
acquired as part of the TheraTx Merger was reduced from forty years to
F-21
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNUSUAL TRANSACTIONS (Continued)
seven years, effective October 1, 1998. Management believed that the
provisions of the Budget Act altered the expected long-term cash flows and
business prospects associated with this business to such an extent that a
shorter amortization period was deemed appropriate. The change in the
amortization period resulted in an additional pretax charge to operations of
$6.4 million in the fourth quarter of 1998. In the fourth quarter of 1999, in
connection with the realignment of Vencare, the Company wrote off all of the
goodwill associated with the rehabilitation therapy business.
Investment in BHC--Subsequent to the Transitional Merger, the Company had
been unsuccessful in its attempts to sell its investment in BHC. In July 1998,
the Company entered into an agreement to sell its interest in BHC for an
amount less than its carrying value and accordingly, a provision for loss of
$8.5 million was recorded during the third quarter. In November 1998, the
agreement to sell the Company's interest in BHC was terminated by the
prospective buyer, indicating to the Company that the carrying amount of its
investment may be impaired. Following an independent appraisal, the Company
recorded a $43.1 million write-down of the investment in the fourth quarter of
1998. The net carrying amount of the investment aggregated $20.0 million at
December 31, 1998.
Wisconsin nursing center--The Company recorded an asset impairment charge of
$27.5 million in the fourth quarter of 1998 related to a nursing center in
Wisconsin that is leased from Ventas. The impairment resulted primarily from
certain fourth quarter regulatory actions by state and Federal agencies with
respect to the operation of the facility. In the fourth quarter of 1998, the
facility reported a pretax loss of $4.2 million and is not expected to
generate positive cash flows in the future.
Corporate properties and acquired entities--During 1998, the Company
recorded $26.8 million of charges related to the valuation of certain
corporate assets, the most significant of which relates to previously
capitalized amounts and expected property disposal losses associated with the
cancellation of a corporate headquarters construction project. The Company
also recorded $13.5 million of asset write-downs associated with the
acquisition of The Hillhaven Corporation ("Hillhaven") (the "Hillhaven
Merger"), the TheraTx Merger and the Transitional Merger, including provisions
for obsolete or abandoned computer equipment and miscellaneous receivables.
Gain on sale of investments--In September 1998, the Company sold its
investment in Atria for $177.5 million in cash and an equity interest in the
surviving corporation, resulting in a gain of $98.5 million. In November 1998,
the Company's investment in Colorado MEDtech, Inc. was sold at a gain of $13.0
million. Proceeds from the sale were $22.0 million.
Losses from termination of construction projects--In the third quarter of
1998, as a result of substantial reductions in Medicare reimbursement to the
Company's nursing centers and hospitals in connection with the Budget Act,
management determined to suspend all acquisition and development activities,
terminate the construction of substantially all of its development properties,
and close two recently acquired hospitals. Accordingly, the Company recorded
pretax charges aggregating $71.3 million, of which $53.9 million related to
the cancellation of construction projects and the remainder related to the
planned closure of the hospitals. In connection with the construction
termination charge, the Company decided that it would not replace certain
facilities that previously were accounted for as assets intended for disposal.
Accordingly, the $53.9 million charge discussed above included a $10.0 million
reversal of a previously recorded valuation allowance (the amount necessary to
reduce the carrying value to fair value less costs of disposal) related to
such facilities.
Spin-off transaction costs--The Spin-off was completed on May 1, 1998.
Direct costs related to the transaction totaled $17.3 million and primarily
included costs for professional services.
F-22
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNUSUAL TRANSACTIONS (Continued)
Write-off of clinical information systems--During 1997, the Company began
the installation of its proprietary clinical information system, VenTouch(TM),
in several of its nursing centers. During the pilot process, the Company
determined that VenTouch(TM) did not support effectively the nursing center
processes, especially in facilities with lower acuity patients. Accordingly,
management determined in the fourth quarter of 1998 to remove VenTouch(TM)
from these facilities during 1999. A loss of $10.1 million has been recorded
to reflect the write-off of the equipment and estimated costs of removal from
the facilities.
Doubtful accounts related to sold operations--In the third quarter of 1998,
the Company recorded $9.6 million of additional provisions for doubtful
accounts for accounts receivable associated with previously sold facilities.
Settlement of litigation--The Company settled a legal action entitled
Highland Pines Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al.
(assumed in connection with the TheraTx Merger) which resulted in a payment of
$16.2 million. Approximately $7.8 million of the settlement was charged to
earnings in the fourth quarter of 1998, and the remainder of such costs had
been previously accrued in connection with the purchase price allocation.
Loss on sale and closure of home health and hospice businesses--The Company
began operating its home health and hospice businesses in 1996. These
operations generally were unprofitable. In the second quarter of 1998,
management decided to cease operations and either close or sell these
businesses, resulting in a loss of $7.3 million.
1997
During 1997, the Company completed the reorganization of the institutional
pharmacy business and, in the fourth quarter, adjusted the accrued costs of
these activities originally recorded in 1996. The adjustment increased pretax
income by $8.7 million. In addition, changes in estimates and gains related to
the disposition of assets increased pretax income by $5.1 million during 1997.
NOTE 9--FOURTH QUARTER ADJUSTMENTS
In addition to the unusual transactions discussed in Note 8, during the
fourth quarter of 1999 and 1998, the Company recorded certain adjustments
which significantly impacted operating results. A summary of such adjustments
follows (in millions):
<TABLE>
<CAPTION>
Health Services
Division Hospital Division
----------------- ------------------
Nursing Ancillary
Centers Services Hospitals Pharmacy Corporate Total
------- --------- --------- -------- --------- ------
1999
<S> <C> <C> <C> <C> <C> <C>
(Income)/expense
Provision for doubtful
accounts............... $40.2 $26.8 $ 6.5 $8.9 $ 82.4
Medicare supplement
insurance disputes..... 18.8 18.8
Third-party
reimbursements and
contractual allowances,
including amounts due
from government
agencies and other
payors that are subject
to dispute............. 2.0 59.6 61.6
Professional liability
risks.................. 10.5 0.3 0.6 11.4
Employee benefits....... (6.3) (1.5) (1.8) (9.6)
Incentive compensation.. 2.2 (1.9) (1.1) (0.8)
Inventories............. 0.9 6.3 7.2
Other................... 1.7 (0.4) 2.0 (4.4) $(2.8) (3.9)
----- ----- ----- ---- ----- ------
$51.2 $25.2 $83.8 $9.7 $(2.8) $167.1
===== ===== ===== ==== ===== ======
</TABLE>
F-23
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--FOURTH QUARTER ADJUSTMENTS (Continued)
<TABLE>
<CAPTION>
Health Services
Division Hospital Division
----------------- ------------------
Nursing Ancillary
Centers Services Hospitals Pharmacy Corporate Total
------- --------- --------- -------- --------- -----
1998
<S> <C> <C> <C> <C> <C> <C>
(Income)/expense
Provision for doubtful
accounts............... $14.0 $ 6.8 $ 5.7 $2.5 $29.0
Third-party
reimbursements and
contractual allowances,
including amounts due
from government
agencies and other
payors that are subject
to dispute............. 4.8 11.5 11.4 27.7
Change in goodwill
amortization period
related to
rehabilitation therapy
business............... 6.4 6.4
Taxes other than
income................. $ 6.4 6.4
Compensated absences.... 2.1 1.3 (0.8) 0.7 3.3
Incentive compensation.. (1.0) (0.4) (0.8) (0.1) (2.9) (5.2)
Litigation and
regulatory actions..... 3.5 3.5
Miscellaneous
receivables............ 5.2 5.2
Gain on sale of assets.. (2.0) (2.0)
Other................... 1.2 0.4 (1.0) 0.3 3.7 4.6
----- ----- ----- ---- ----- -----
$21.1 $24.0 $14.5 $7.9 $11.4 $78.9
===== ===== ===== ==== ===== =====
</TABLE>
The Company regularly reviews its accounts receivable and records provisions
for loss based upon the best available evidence. Factors such as changes in
collection patterns, the composition of patient accounts by payor type, the
status of ongoing disputes with third-party payors (including both government
and non-government sources), the effect of increased regulatory activities,
general industry conditions and the financial condition of the Company and its
ancillary service customers, among other things, are considered by management
in determining the expected collectibility of accounts receivable.
During the past two years, the Company has recorded significant adjustments
in the fourth quarter related to contractual allowances and doubtful accounts
in each of its divisions. These adjustments represented changes in estimates
resulting from management's assessment of its collection processes, the
general financial deterioration of the long-term healthcare industry and, in
1999, the realignment of the Vencare businesses (including the cancellation of
unprofitable contracts and the discontinuance of certain services) and the
filing of the Chapter 11 Cases in September 1999.
In addition, the Company recorded a significant adjustment in the fourth
quarter of 1999 related to professional liability risks. This adjustment was
recorded based upon actuarially determined estimates completed in the fourth
quarter and reflects substantial increases in claims and litigation activity
in the Company's nursing center business during 1999.
F-24
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--BUSINESS SEGMENT DATA
The Company operates two business segments: the health services division and
the hospital division. The health services division operates nursing centers
and a rehabilitation therapy business. The hospital division operates
hospitals and an institutional pharmacy business. The operations of the
Company's independent and assisted living business, Atria, were consolidated
for accounting purposes through June 30, 1997, accounted for under the equity
method from July 1, 1997 until September 1998 and under the cost method
thereafter.
The following table represents the Company's revenues, operating results and
assets by operating segment and gives effect to the realignment of the former
Vencare businesses for all periods presented. The Company defines operating
income as earnings before interest, income taxes, depreciation, amortization
and rent. Operating income reported for each of the Company's business
segments excludes allocations of corporate overhead.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Health services division:
Nursing centers........................... $1,594,244 $1,667,343 $1,766,403
Rehabilitation services................... 195,731 264,574 230,525
Other ancillary services.................. 43,527 168,165 244,303
Elimination............................... (128,267) (124,500) (65,911)
---------- ---------- ----------
1,705,235 1,975,582 2,175,320
Hospital division:
Hospitals................................. 850,548 919,847 785,829
Pharmacy.................................. 171,493 149,991 167,643
---------- ---------- ----------
1,022,041 1,069,838 953,472
Atria..................................... - - 31,199
---------- ---------- ----------
2,727,276 3,045,420 3,159,991
Elimination of pharmacy charges to Company
nursing centers.......................... (61,635) (45,681) (43,987)
---------- ---------- ----------
$2,665,641 $2,999,739 $3,116,004
========== ========== ==========
Income (loss) from operations:
Operating income (loss):
Health services division:
Nursing centers.......................... $ 185,764 $ 216,575 $ 242,889
Rehabilitation services.................. 3,233 18,594 47,683
Other ancillary services................. 4,166 30,183 39,653
---------- ---------- ----------
193,163 265,352 330,225
Hospital division:
Hospitals................................ 136,903 248,983 237,445
Pharmacy................................. 719 15,327 27,209
---------- ---------- ----------
137,622 264,310 264,654
Atria..................................... - - 9,945
Corporate overhead........................ (108,940) (126,265) (84,173)
Unusual transactions...................... (412,418) (439,125) 13,833
Reorganization costs...................... (18,606) - -
---------- ---------- ----------
Operating income (loss).................. (209,179) (35,728) 534,484
Rent...................................... (305,120) (234,144) (89,474)
Depreciation and amortization............. (93,196) (124,617) (123,865)
Interest, net............................. (75,254) (102,320) (96,679)
---------- ---------- ----------
Income (loss) before income taxes......... (682,749) (496,809) 224,466
Provision for income taxes................ 500 76,099 89,338
---------- ---------- ----------
$ (683,249) $ (572,908) $ 135,128
========== ========== ==========
</TABLE>
F-25
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--BUSINESS SEGMENT DATA (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Assets:
Health services division..................... $ 489,316 $ 710,764 $1,608,404
Hospital division............................ 337,218 791,065 1,230,301
Corporate.................................... 409,440 272,543 496,034
---------- ---------- ----------
$1,235,974 $1,774,372 $3,334,739
========== ========== ==========
</TABLE>
NOTE 11--INVESTMENTS IN AFFILIATES
Affiliated companies accounted for on the equity method include BHC and
various other healthcare related companies. Affiliated companies accounted for
on the cost basis include Atria (after September 1998). Summarized financial
data reported by these affiliates and a summary of the amounts recorded in the
Company's consolidated financial statements as of and for the years ended
December 31, 1999 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
1999
--------------------------------
Atria BHC Other Total
----- -------- ------- --------
<S> <C> <C> <C> <C>
Financial position:
Current assets............................ $ - $ 43,386 $ 8,770 $ 52,156
Current liabilities....................... - 39,919 3,856 43,775
Working capital........................... - 3,467 4,914 8,381
Noncurrent assets......................... - 151,339 15,427 166,766
Noncurrent liabilities.................... - 77,584 15,347 92,931
Stockholders' equity...................... - 77,222 4,994 82,216
Results of operations:
Revenues.................................. - 259,407 26,758 286,165
Net income (loss)......................... - (45,255) 1,728 (43,527)
Amounts recorded by the Company:
Investment in affiliates.................. 9,237 - 6,637 15,874
Equity in earnings (loss)................. - (4,788) 444 (4,344)
<CAPTION>
1998
--------------------------------
Atria BHC Other Total
----- -------- ------- --------
<S> <C> <C> <C> <C>
Financial position:
Current assets............................ $ - $68,762 $ 7,907 $ 76,669
Current liabilities....................... - 27,725 3,234 30,959
Working capital........................... - 41,037 4,673 45,710
Noncurrent assets......................... - 189,752 16,001 205,753
Noncurrent liabilities.................... - 108,311 17,024 125,335
Stockholders' equity...................... - 122,478 3,650 126,128
Results of operations:
Revenues.................................. - 300,464 27,680 328,144
Net income (loss)......................... - (3,334) 2,078 (1,256)
Amounts recorded by the Company:
Investment in affiliates.................. 9,237 20,000 6,470 35,707
Equity in earnings (loss)................. 2,388 (1,429) 6,073 7,032
</TABLE>
F-26
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--INCOME TAXES
Provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ - $3,945 $31,006
State................................................. 500 658 5,168
---- ------- -------
500 4,603 36,174
Deferred................................................ - 71,496 53,164
---- ------- -------
$500 $76,099 $89,338
==== ======= =======
</TABLE>
Reconciliation of Federal statutory tax expense to the provision for income
taxes follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
Income tax expense (benefit) at Federal
rate....................................... $(242,085) $(173,883) $78,563
State income taxes, net of Federal income
tax benefit................................ (24,209) (17,388) 8,085
Merger and restructuring costs.............. - 5,943 -
Goodwill amortization....................... 8,541 8,823 3,512
Write-off of goodwill....................... 99,902 77,482 -
Gain on sale of Atria....................... - (37,908) -
Acquisition costs and merger adjustments.... - 8,851 -
Valuation allowance......................... 146,381 202,949 -
Reorganization costs........................ 4,672 - -
Other items, net............................ 7,298 1,230 (822)
--------- --------- -------
$ 500 $ 76,099 $89,338
========= ========= =======
</TABLE>
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Depreciation................. $ - $11,275 $ - $26,707
Insurance.................... 10,666 - 5,572 -
Doubtful accounts............ 143,193 - 77,036 -
Property..................... 105,555 - 91,927 -
Compensation................. 16,234 - 10,599 -
Subsidiary net operating
losses (expiring in 2019)... 56,087 - 33,519 -
Other........................ 47,086 18,216 18,775 7,772
--------- ------- --------- -------
378,821 $29,491 237,428 $34,479
======= =======
Reclassification of deferred
tax liabilities............. (29,491) (34,479)
--------- ---------
Net deferred tax assets...... 349,330 202,949
Valuation allowance.......... (349,330) (202,949)
--------- ---------
$ - $ -
========= =========
</TABLE>
F-27
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--INCOME TAXES (Continued)
Prior to 1998, management believed that recorded deferred tax assets
ultimately would be realized. Management's conclusions at that time were based
primarily on the existence of sufficient taxable income within the allowable
carryback periods to realize the tax benefits of deductible temporary
differences recorded at December 31, 1997. For the fourth quarter of 1998, the
Company reported a pretax loss of $506 million. Additionally, the Company
revised its operating budgets as a result of the Budget Act and the less than
expected operating results in 1998. Based upon these revised forecasts,
management does not believe that the Company can generate sufficient taxable
income to realize the net deferred tax assets recorded at December 31, 1999
and 1998. As a result of these estimates, the Company recorded a deferred tax
asset valuation allowance aggregating $203 million in 1998 and $146 million in
1999. The deferred tax valuation allowance included in the consolidated
balance sheet at December 31, 1999 totaled $349 million.
At the time of the Spin-off, the Company recorded both a deferred tax asset
and a valuation allowance for identical amounts in connection with the
difference in book and tax basis of the Company's investment in Atria which
resulted from the Spin-off. The valuation allowance was recorded due to the
litigation and other uncertainties associated with the realization of the
deferred tax asset, based upon the available evidence at the time of the Spin-
off. During the third quarter of 1998, upon favorable resolution of such
litigation and completion of the Atria sale, the Company adjusted the
valuation allowance that had been recorded in the second quarter of 1998.
NOTE 13--PROFESSIONAL LIABILITY RISKS
The Company insures a substantial portion of its professional liability
risks through a wholly owned insurance subsidiary. Provisions for such risks
underwritten by the subsidiary were $39.1 million for 1999, $16.7 million for
1998 and $10.7 million for 1997.
Investments held for the payment of claims and expenses incident thereto,
included principally in current assets, aggregated $48.2 million (including
$12.6 million due to the Company under reinsurance agreements) and $24.9
million at December 31, 1999 and 1998, respectively. Allowances for
professional liability risks, included principally in deferred credits and
other liabilities, were $43.7 million and $24.2 million at December 31, 1999
and 1998, respectively. The allowances for professional liability risks are
net of reinsurance recoveries of $22.2 million and $21.6 million at December
31, 1999 and 1998, respectively.
F-28
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--LONG-TERM DEBT
Capitalization
All long-term debt at December 31, 1999 was subject to compromise. A summary
of long-term debt at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Senior collateralized debt, 8% to 12% (rates
generally floating) payable in periodic installments
through 2017........................................ $ 1,851 $ 1,944
Term A Loan, 7.9% to 8.6% (rates generally floating)
payable in periodic installments through 2003....... 224,623 232,261
Term B Loan, 8.4% to 9.1% (rates generally floating)
payable in periodic installments through 2005....... 226,491 233,207
Bank revolving credit agreement due 2003 (floating
rates averaging 10%)................................ 55,000 -
9 7/8% Senior Subordinated Notes due 2005............ 300,000 300,000
8 5/8% Senior Subordinated Notes due 2007............ 2,391 2,391
Amounts due to HCFA, 13.4% payable in monthly
installments through 2004........................... 80,296 -
Unamortized deferred financing costs................. (12,626) -
Other................................................ 2,741 6,730
--------- ---------
Total debt, average life of five years (rates
averaging 9.5%)................................... 880,767 776,533
Amounts due within one year.......................... - (9,048)
Amounts in default classified as current............. - (760,885)
Amounts subject to compromise........................ (880,767) -
--------- ---------
Long-term debt..................................... $ - $ 6,600
========= =========
</TABLE>
In accordance with SOP 90-7, unamortized deferred financing costs have been
classified as reductions of long-term debt subject to compromise.
In connection with the Chapter 11 Cases, the Company entered into the DIP
Financing with certain lenders. At December 31, 1999, the Company was not in
compliance with the DIP Financing covenant related to the minimum Net Amount
of Eligible Accounts (accounts receivable). The Company intends to seek an
amendment or waiver to the DIP Financing to remedy this event of default.
Since there were no outstanding borrowings under the DIP Financing at December
31, 1999, the event of default had no effect on the Company's consolidated
financial statements. However, if the Company is not successful in obtaining
an amendment or waiver to remedy the event of default, its ability to borrow
under the DIP Financing to finance its operations during the pendency of the
Chapter 11 Cases may be limited.
In connection with the Spin-off, the Company consummated the $1.0 billion
Credit Agreement which includes (i) a five-year $300 million revolving credit
facility (the "Revolving Credit Facility"), (ii) a $250 million Term A Loan
(the "Term A Loan") payable in various installments over five years, (iii) a
$250 million Term B Loan (the "Term B Loan") payable in installments of 1% per
year with the outstanding balance due in seven years and (iv) a $200 million
Bridge Loan (the "Bridge Loan") which was repaid in September 1998 primarily
from the proceeds of the sale of the Company's investment in Atria. Interest
is payable, depending on certain leverage ratios and other factors, at a rate
of prime plus 2% to 3 1/2% for the Revolving Credit Facility, LIBOR plus 3/4%
to 3% for the Term A Loan, and LIBOR plus 2 1/4% to 3 1/2% for the Term B
Loan.
F-29
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--LONG-TERM DEBT (Continued)
On April 30, 1998, the Company completed the private placement of $300
million aggregate principal amount of the 1998 Notes, which are not callable
by the Company until 2002. On September 10, 1998, the Company exchanged the
1998 Notes for publicly registered securities having identical terms and
conditions.
Approximately $826 million of debt subject to compromise would have been
classified as current liabilities if the Chapter 11 Cases had not been filed.
Refinancing Activities
In connection with the Spin-off, the Company refinanced substantially all of
its long-term debt, resulting in after-tax losses of $77.9 million in 1998.
In connection with the TheraTx Merger and the Transitional Merger, the
Company refinanced its bank debt, resulting in after-tax losses of $4.2
million in 1997.
Other Information
At December 31, 1999, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $100
million of floating rate debt outstanding. The agreements provide for fixed
rates on $100 million of floating rate debt at 6.4% plus 3/8% to 1 1/8% and
expires in May 2000. The fair value of the swap agreements, or the estimated
amount the Company would pay to terminate the agreements based on current
interest rates, is not recognized in the consolidated financial statements.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
against the Company are subject to an automatic stay and other contractual
obligations against the Company may not be enforced. In addition, the Company
may assume or reject executory contracts under the Bankruptcy Code.
If the Chapter 11 Cases had not been filed, the scheduled maturities of
long-term debt in years 2001 through 2004 would be $79.8 million, $148.1
million, $100.7 million and $184.9 million, respectively.
The estimated fair value of the Company's long-term debt was $485.3 million
and $725.1 million at December 31, 1999 and 1998, respectively, compared to
carrying amounts aggregating $893.4 million and $776.5 million. The estimate
of fair value includes the effect of the interest rate swap agreements and is
based upon the quoted market prices for the same or similar issues of long-
term debt, or on rates available to the Company for debt of the same remaining
maturities. The estimated fair value of the interest rate swap agreements was
$157,000 and $3.9 million (both payable positions) at December 31, 1999 and
1998, respectively.
F-30
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--LEASES
The Company leases real estate and equipment under cancelable and non-
cancelable arrangements. The Company may assume or reject executory contracts,
including lease agreements, under the Bankruptcy Code. The Company has not
rejected any lease agreements since the Chapter 11 Cases were filed. Future
minimum payments and related sublease income under non-cancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Minimum Payments
----------------------------- Sublease
Ventas Other Total Income
---------- ------- ---------- --------
<S> <C> <C> <C> <C>
2000................................ $ 229,620 $57,532 $ 287,152 $ 7,014
2001................................ 234,212 44,801 279,013 5,152
2002................................ 238,897 31,859 270,756 2,523
2003................................ 243,674 24,873 268,547 2,479
2004................................ 248,548 15,177 263,725 2,017
Thereafter.......................... 1,458,134 93,188 1,551,322 11,525
</TABLE>
Sublease income aggregated $2.4 million, $6.9 million and $8.0 million for
1999, 1998 and 1997, respectively.
NOTE 16--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Principal contingencies are described below:
Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. The Company is contesting certain
issues raised in audits of prior year cost reports.
Professional liability risks--The Company has provided for loss for
professional liability risks based upon actuarially determined estimates.
Actual settlements may differ from the provisions for loss.
Interest rate swap agreements--The Company is a party to certain
agreements which reduce the impact of changes in interest rates on $100
million of its floating rate long-term debt. In the event of nonperformance
by other parties to these agreements, the Company may incur a loss to the
extent that market rates exceed contract rates.
Guarantees of indebtedness--Letters of credit and guarantees of
indebtedness aggregated $13.1 million at December 31, 1999.
Income taxes--The Company is contesting adjustments proposed by the
Internal Revenue Service for years 1993 through 1997. In addition, the
Company claims that it is entitled to certain prior year tax refunds
currently held by Ventas.
Litigation--The Company is a party to certain material litigation and
regulatory actions as well as various suits and claims arising in the
ordinary course of business. See Note 24.
F-31
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--CAPITAL STOCK
Plan Descriptions
The Company has plans under which options to purchase common stock may be
granted to officers, employees and certain non-employee directors. Options
have been granted at not less than market price on the date of grant. Exercise
provisions vary, but most options are exercisable in whole or in part
beginning one to four years after grant and ending ten years after grant.
Activity in the plans is summarized below:
<TABLE>
<CAPTION>
Shares Weighted
under Option Price Average
Option per Share Exercise Price
---------- --------------- --------------
<S> <C> <C> <C>
Balances, December 31, 1996..... 3,686,823 $0.53 to $38.38 $23.54
Granted....................... 1,309,900 25.50 to 43.88 30.47
Assumed in connection with
TheraTx Merger............... 475,643 0.20 to 38.83 27.05
Exercised..................... (775,431) 0.53 to 35.46 17.90
Canceled or expired........... (301,765) 19.92 to 34.25 26.78
----------
Balances, December 31, 1997..... 4,395,170 0.20 to 43.88 26.77
Granted....................... 6,422,132 3.81 to 10.98 7.00
Exchange offer:
Canceled..................... (5,721,027) 6.12 to 16.87 10.14
Issued....................... 4,631,694 5.50 5.50
Exercised..................... (48,431) 0.12 to 10.96 2.69
Canceled or expired........... (855,904) 3.67 to 16.58 8.22
----------
Balances, December 31, 1998..... 8,823,634 0.08 to 16.58 5.72
Granted....................... 423,000 0.63 to 4.50 2.50
Exercised..................... (7,031) 0.34 0.34
Canceled or expired........... (1,196,924) 0.34 to 16.58 6.19
----------
Balances, December 31, 1999..... 8,042,679 $0.08 to $15.09 $ 5.50
==========
</TABLE>
A summary of stock options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Number Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of At December 31, Contractual Exercise At December 31, Exercise
Exercise Prices 1999 Life Price 1999 Price
--------------- --------------- ------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$0.08 to $9.32.......... 368,509 1 to 4 years $5.66 368,509 $5.66
$5.50 to $15.09......... 2,355,151 5 to 7 years 6.53 2,054,852 6.57
$0.63 to $10.59......... 5,319,019 8 to 10 years 5.04 2,924,594 5.53
--------- ---------
8,042,679 $5.50 5,347,955 $5.94
========= =========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1999 approximated eight years. Shares of common stock available
for future grants were 3,824,628, 2,670,846 and 3,980,678 at December 31,
1999, 1998 and 1997, respectively. The number of options exercisable at
December 31, 1998 and December 31, 1997 was 1,321,370 and 1,531,755,
respectively.
In connection with the Spin-off, options outstanding prior thereto were
bifurcated on a one-for-one basis between the Company and Ventas, and
corresponding option prices were adjusted in proportion to the fair values
F-32
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--CAPITAL STOCK (Continued)
of the respective common stocks immediately following the Spin-off. Option
data for periods prior to the Spin-off have not been restated.
On December 19, 1998, the Company completed the exchange of employee stock
options. The exchange offer entitled employees to exchange outstanding stock
options for a reduced number of options with an exercise price equal to the
closing price of the Company's common stock on November 9, 1998. Exchange
ratios were calculated using a Black-Scholes option valuation model. The
exchange resulted in the cancellation of options to purchase approximately 5.7
million shares and the issuance of options to purchase approximately 4.6
million shares.
The Company maintains long-term incentive agreements with certain officers
and key employees whereby the Company may annually issue shares of common
stock to such individuals in satisfaction of predetermined performance goals.
Share awards aggregated 74,330 for 1997. No share awards were issued for 1999
and 1998.
In connection with the Spin-off, the Company adopted an employee incentive
compensation and a stock option plan for non-employee directors. These plans
replaced similar plans in effect prior to the Spin-off.
In May 1997, stockholders voted to approve an employee incentive
compensation plan and a stock option plan for non-employee directors. Shares
issuable under the plans aggregated 3,400,000 and 200,000, respectively.
Statement No. 123 Data
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is equal to the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value of such options was estimated at the date of grant using a
Black-Scholes option valuation model with the following weighted average
assumptions: risk-free interest rate of 5.30% for 1999, 4.96% for 1998 and
5.50% for 1997; no dividend yield; expected term of seven years and volatility
factors of the expected market price of the Company's common stock of .82 for
1999, .42 for 1998 and .31 for 1997.
A Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because the changes
in the subjective input assumptions can affect materially the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the respective vesting period. The
weighted average fair values of options granted during 1999, 1998 and 1997
F-33
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--CAPITAL STOCK (Continued)
under a Black-Scholes valuation model were $1.92, $2.62, and $13.75,
respectively. Pro forma information follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Pro forma income (loss) available to
common stockholders..................... $(703,104) $(657,942) $120,941
Pro forma earnings (loss) per common
share:
Basic.................................. $ (9.99) $ (9.63) $ 1.75
Diluted................................ $ (9.99) $ (9.63) $ 1.71
</TABLE>
NOTE 18--EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution retirement plans covering
employees who meet certain minimum eligibility requirements. Benefits are
determined as a percentage of a participant's contributions and generally are
vested based upon length of service. Retirement plan expense was $10.8 million
for 1999, $12.7 million for 1998 and $13.0 million for 1997. Amounts equal to
retirement plan expense are funded annually.
The Company also established a supplemental executive retirement plan in
1998 covering certain officers under which benefits are determined based
primarily upon participants' compensation and length of service to the
Company. The cost of the plan aggregated $11.0 million for 1999 and $4.2
million for 1998. In January 1999, the Company funded $3.7 million of plan
obligations to participants through the purchase of annuities. No amounts were
funded in 1998. As discussed in Note 8, the plan was curtailed by the Board of
Directors in December 1999.
NOTE 19--ACCRUED LIABILITIES
A summary of other accrued liabilities at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Patient accounts......................................... $23,893 $ 25,370
Professional liability risks............................. 22,632 11,963
Taxes other than income.................................. 11,353 17,303
Merger related costs..................................... 1,518 3,561
Canceled construction project costs...................... 994 12,981
Litigation and regulatory actions........................ - 28,890
Due to Ventas, Inc. ..................................... - 6,967
Interest................................................. - 6,519
Other.................................................... 23,577 25,700
------- --------
$83,967 $139,254
======= ========
</TABLE>
NOTE 20--TRANSACTIONS WITH VENTAS
For the purpose of governing certain of the ongoing relationships between
the Company and Ventas after the Spin-off and to provide mechanisms for an
orderly transition, the Company and Ventas entered into various agreements.
The most significant agreements are as follows:
Master Lease Agreements
Ventas retained substantially all of the real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing centers) in
the Spin-off and leases them to the Company under four master lease
F-34
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20--TRANSACTIONS WITH VENTAS (Continued)
agreements which set forth the material terms governing each of the leased
properties. In August 1998, the Company and Ventas entered into a fifth lease
agreement with respect to a nursing center in Corydon, Indiana (the "Corydon
Lease"). The provisions of the Corydon Lease, except for the provisions
relating to rental amounts and the termination date, are substantially similar
to the terms of the other master lease agreements with Ventas. The four master
lease agreements, as amended, and the Corydon Lease shall be referred to
herein collectively as the "Master Lease Agreements" and each, a "Master Lease
Agreement."
The leased properties include land, buildings, structures, and other
improvements on the land, easements and similar appurtenances to the land and
improvements and permanently affixed equipment, machinery and other fixtures
relating to the operation of the facilities.
There are multiple bundles of leased properties under each Master Lease
Agreement with each bundle containing approximately seven to twelve leased
properties. All leased properties within a bundle have the same base terms,
ranging from 10 to 15 years. At the option of the Company, all, but not less
than all, of the leased properties in a bundle may be extended for one five-
year renewal term beyond the base term at the then existing rental rate plus
2% per annum. At the option of the Company, all, but not less than all, of the
leased properties in a bundle may be extended for two additional five-year
renewal terms thereafter at the then fair market value rental rate. The base
and renewal terms of each leased property are subject to termination upon
default by either party and certain other conditions described in the Master
Lease Agreements.
The Master Lease Agreements are structured as triple-net leases or absolute-
net leases. In addition to the base annual rent of approximately $222 million,
plus 2% per annum if certain lessee revenue parameters are obtained, the
Company is required to pay all insurance, taxes, utilities and maintenance
related to the leased properties. Rent expense related to Ventas in 1999 and
in 1998 (eight months) aggregated $225 million and $148 million, respectively.
An "Event of Default" will be deemed to have occurred under any Master Lease
Agreement if, among other things, the Company fails to pay rent or other
amounts within five days after notice; the Company fails to comply with
covenants continuing for 30 days or, so long as diligent efforts to cure such
failure are being made, such longer period (not to exceed 180 days) as is
necessary to cure such failure; certain bankruptcy or insolvency events occur,
including filing a petition of bankruptcy or a petition for reorganization
under the Bankruptcy Code; the Company ceases to operate any leased property
as a provider of healthcare services for a period of 30 days; the Company
loses any required healthcare license, permit or approval; the Company fails
to maintain insurance; the Company creates or allows to remain certain liens;
a reduction occurs in the number of licensed beds in excess of 10% of the
number of licensed beds in the applicable facility on the date the applicable
facility was leased; certification for reimbursement under Medicare with
respect to a participating facility is revoked; any breach of any material
representation or warranty of the tenant; a tenant becomes subject to
regulatory sanctions and has failed to cure or satisfy such regulatory
sanctions within its specified cure period in any material respect with
respect to any facility; or a default under any guaranty of the lease or under
certain indemnity agreements between the Company and Ventas.
Except as noted below, upon an Event of Default under a particular Master
Lease Agreement, Ventas may, at its option, exercise the following remedies:
(i) after not less than ten (10) days' notice to the Company, terminate the
Master Lease Agreement, repossess the leased property and relet the leased
property to a third party and require the Company pay to Ventas, as liquidated
damages, the net present value of the rent for the balance of the term,
discounted at the prime rate; (ii) without terminating the Master Lease
Agreement, repossess the leased property and relet the leased property with
the Company remaining liable under the Master Lease Agreement for all
obligations to be performed by the Company thereunder, including the
difference, if any,
F-35
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20--TRANSACTIONS WITH VENTAS (Continued)
between the rent under the Master Lease Agreement and the rent payable as a
result of the reletting of the leased property; and (iii) seek any and all
other rights and remedies available under law or in equity.
If an Event of Default is caused by (i) the loss of any required healthcare
license, permit or approval, (ii) a reduction in the number of licensed beds
in excess of 10% of the number of licensed beds in the applicable facility or
a revocation of certification for reimbursement under Medicare with respect to
any facility that participates in such programs, or (iii) the tenant becoming
subject to regulatory sanctions and failing to cure or satisfy such regulatory
sanctions within its specified cure period, Ventas may, if it so desires,
terminate the lease with respect to the applicable facility that is the
subject of the Event of Default and collect liquidated damages attributable to
such facility multiplied by the number of years remaining on the lease;
provided, however, that upon the occurrence of the fifth Event of Default as
set forth in this paragraph, determined on a cumulative basis, Ventas would be
permitted to exercise all of the rights and remedies set forth in the Master
Lease Agreement with respect to all facilities covered under the Master Lease
Agreement, without regard to the facility from which the Event of Default
emanated.
Any remedies provided under the Master Lease Agreements currently are
subject to the supervision of the Bankruptcy Court. See Note 2.
Development Agreement
Under the terms of the Development Agreement, the Company, if it so desires,
will complete the construction of certain development properties substantially
in accordance with the existing plans and specifications for each such
property. Upon completion of each such development property, Ventas has the
option to purchase the development property from the Company at a purchase
price equal to the amount of the Company's actual costs in acquiring,
developing and improving such development property prior to the purchase date.
If Ventas purchases the development property, the Company will lease the
development property from Ventas. The annual base rent under such a lease will
be ten percent of the actual costs incurred by the Company in acquiring and
developing the development property. The other terms of the lease for the
development property will be substantially similar to those set forth in the
Master Lease Agreements. Since the Spin-off, the Company has sold one skilled
nursing center to Ventas under the Development Agreement for $6.2 million.
Participation Agreement
Under the terms and conditions of the Participation Agreement, the Company
has a right of first offer to become the lessee of any real property acquired
or developed by Ventas which is to be operated as a hospital, nursing center
or other healthcare facility, provided that the Company and Ventas negotiate a
mutually satisfactory lease arrangement.
The Participation Agreement also provides, subject to certain terms, that
the Company will provide Ventas with a right of first offer to purchase or
finance any healthcare related real property that the Company determines to
sell or mortgage to a third party, provided that the Company and Ventas
negotiate mutually satisfactory terms for such purchase or mortgage.
The Participation Agreement will expire April 30, 2001. The Company and
Ventas each have the right to terminate the Participation Agreement in the
event of a change of control.
Transition Services Agreement
The Transition Services Agreement provided that the Company provide Ventas
with transitional administrative and support services, including but not
limited to finance and accounting, human resources, risk
F-36
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20--TRANSACTIONS WITH VENTAS (Continued)
management, legal, and information systems support through December 31, 1998.
Ventas paid the Company $1.6 million in 1998 under the Transition Services
Agreement.
Tax Allocation Agreement
The Tax Allocation Agreement provides that Ventas will be liable for taxes
of the Ventas consolidated group attributable to periods prior to the Spin-off
with respect to the portion of such taxes attributable to the property held by
Ventas after the Spin-off and the Company will be liable for such pre-
distribution taxes with respect to the portion of such taxes attributable to
the property held by the Company after the Spin-off. The Tax Allocation
Agreement further provides that Ventas will be liable for any taxes
attributable to the Spin-off except that the Company will be liable for any
such taxes to the extent that the Company derives certain future tax benefits
as a result of the payment of such taxes. Ventas and its subsidiaries are
liable for taxes payable with respect to periods after the Spin-off that are
attributable to Ventas operations and the Company and its subsidiaries are
liable for taxes payable with respect to periods after the Spin-off that are
attributable to the Company's operations. If, in connection with a tax audit
or filing of an amended return, a taxing authority adjusts the tax liability
of either the Company or Ventas with respect to taxes for which the other
party was liable under the Tax Allocation Agreement, such other party would be
liable for the resulting tax assessment or would be entitled to the resulting
tax refund. During 1998, $6.7 million was received from Ventas under the Tax
Allocation Agreement. At December 31, 1998, the Company owed Ventas $5.9
million for a tax settlement under the Tax Allocation Agreement (which was
repaid to Ventas in January 1999). This transaction had no impact on earnings.
The Company and Ventas disagree with respect to certain interpretations of
the Tax Allocation Agreement described above. In February 2000, Ventas
received a refund of approximately $26.6 million of Federal taxes and interest
in connection with its 1998 consolidated income tax return. The Company claims
that it is entitled to the refund under the provisions of the Tax Allocation
Agreement. No provision for loss has been recorded for this issue in the
accompanying consolidated financial statements.
NOTE 21--OTHER RELATED PARTY TRANSACTIONS
In connection with the Spin-off, the Company loaned certain executive
officers an amount equal to the estimated personal income taxes payable by
them as a result of the Spin-off (the "Tax Loans"). Each Tax Loan is evidenced
by a promissory note which has a term of ten years and bears interest at 5.77%
per annum. Principal on the Tax Loans is scheduled to be repaid in ten equal
annual installments which began on June 15, 1999. Interest is payable
quarterly; however, any interest payment on the Tax Loans is forgiven if the
officer remains in his or her position with the Company on the date on which
such interest payment is due. Moreover, in the event of a change in control of
the Company, the entire balance of the Tax Loan will be forgiven. The terms of
the Tax Loans with certain former executive officers were amended in
connection with their severance agreements to provide that the payment of the
principal and interest on the Tax Loans be deferred until the fifth
anniversary of their respective date of termination. All Tax Loans made to
current executive officers have been repaid in full.
As part of the Spin-off, the Company issued $17.7 million of its 6% Series A
Non-Voting Convertible Preferred Stock (the "Preferred Stock") to Ventas as
part of the consideration for its healthcare operations and assets. The
Preferred Stock (par value $1,000) includes a ten-year mandatory redemption
provision and is convertible into common stock at a price of $12.50 per share.
In connection with the purchases of the Preferred Stock, the Company loaned
certain officers 90% of the purchase price ($15.9 million) of the Preferred
Stock (the "Preferred Stock Loans"). Each Preferred Stock Loan is evidenced by
a promissory note which has a ten year term and bears interest at 5.74%,
payable annually. No principal payments are due under the promissory notes
F-37
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 21--OTHER RELATED PARTY TRANSACTIONS (Continued)
until their maturity. The promissory notes are secured by a first priority
security interest in the Preferred Stock purchased by each such officer. As of
December 31, 1999, $15.7 of these loans remained outstanding. The terms of the
Preferred Stock Loans with certain former officers were amended in connection
with their severance agreements to provide, generally, that (i) the Preferred
Stock Loan will not be due and payable until April 30, 2008, (ii) payments on
the Preferred Stock Loan will be deferred until the fifth anniversary of the
date of termination, (iii) interest payments will be forgiven if the average
closing price of the common stock for the 90 days prior to any interest
payment date is less than $8.00 and (iv) during the five-day period following
the expiration of the fifth anniversary of the date of termination, the former
officer will have the right to put the Preferred Stock underlying the
Preferred Stock Loan to the Company at par.
In August 1999, the Company entered into agreements with certain officers
which permit such officer to put the Preferred Stock to the Company for an
amount equal to the outstanding principal and interest on the officer's
Preferred Stock Loan ("Preferred Stock Agreements"). The officer can put the
Preferred Stock to the Company between January 1, 2000 and December 31, 2000.
As of March 29, 2000, no officer had exercised the put option. The Preferred
Stock Agreements were entered into with each officer employed by the Company
in August 1999 who owned the Preferred Stock.
NOTE 22--FAIR VALUE DATA
A summary of fair value data at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $148,350 $148,350 $34,551 $34,551
Restricted funds (included in other
current assets)........................ 26,005 26,005 26,220 26,220
Long-term debt, including amounts due
within one year........................ 893,393 485,314 776,533 725,064
Interest rate swap agreements (included
in long-term debt)..................... - 157 - 3,860
</TABLE>
NOTE 23--REPURCHASES OF COMMON STOCK
In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
the Company's common stock at an aggregate cost of $81.7 million. This
transaction was financed primarily through bank borrowings.
NOTE 24--LITIGATION
Summary descriptions of various significant legal and regulatory activities
follow:
On September 13, 1999, the Company and substantially all of its subsidiaries
filed voluntary petitions for protection under Chapter 11 of the Bankruptcy
Code. The Chapter 11 Cases have been styled In re: Vencor, Inc., et al.,
Debtors and Debtors in Possession, Case Nos. 99-3199 (MFW) through 99-3327
(MFW), Chapter 11, Jointly Administered. See Note 2.
On March 18, 1999, the Company served Ventas with a demand for mediation
pursuant to the Spin-off Agreement. The Company was seeking a reduction in
rent and other concessions under its Master Lease Agreements with Ventas. 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. On April 12, 1999, the Company and
Ventas entered into the Second Standstill which provided that neither party
would pursue any claims against the other or any other third party related to
the Spin-off as long as the Company complied with certain rent payment terms.
The Second Standstill was scheduled to terminate on
F-38
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
May 5, 1999. Pursuant to the Tolling Agreement, the Company and Ventas also
agreed that any statutes of limitations or other time-related constraints in a
bankruptcy or other proceeding that might be asserted by one party against the
other would be extended and tolled from April 12, 1999 until May 5, 1999 or
until the termination of the Second Standstill. As a result of the Company's
failure to pay rent, Ventas served the Company with notices of nonpayment
under the Master Lease Agreements. Subsequently, the Company and Ventas
entered into further amendments to the Second Standstill and the Tolling
Agreement to extend the time during which no remedies may be pursued by either
party and to extend the date by which the Company may cure its failure to pay
rent.
In connection with the Chapter 11 Cases, the Company and Ventas entered into
the Stipulation which provides for the payment by the Company of a reduced
monthly rent of approximately $15.1 million beginning in September 1999. The
Stipulation was approved by the Bankruptcy Court. The Stipulation also
continues to toll any statutes of limitations or other time constraints in a
bankruptcy proceeding for claims that might be asserted by the Company against
Ventas. The Stipulation automatically renews for one-month periods unless
either party provides a 14-day notice of termination. The Stipulation also may
be terminated prior to its expiration upon a payment default by the Company,
the consummation of the Plan of Reorganization or the occurrence of certain
defaults under the DIP Financing. The Stipulation also provides that the
Company will continue to fulfill its indemnification obligations arising from
the Spin-off.
If the Company and Ventas are unable to resolve their disputes or maintain
an interim resolution, the Company may seek to pursue claims against Ventas
arising out of the Spin-off and seek judicial relief barring Ventas from
exercising any remedies based on the Company's failure to pay some or all of
the rent to Ventas. The Company's failure to pay rent or comply with the
Stipulation, in the absence of judicial relief, would result in an "Event of
Default" under the Master Lease Agreements. Upon an Event of Default under the
Master Lease Agreements, assuming Ventas were to be granted relief from the
automatic stay by the Bankruptcy Court, the remedies available to Ventas
include terminating the Master Lease Agreements, repossessing and reletting
the leased properties and requiring the Company to (i) remain liable for all
obligations under the Master Lease Agreements, including the difference
between the rent under the Master Lease Agreements and the rent payable as a
result of reletting the leased properties or (ii) pay the net present value of
the rent due for the balance of the terms of the Master Lease Agreements. Such
remedies, however, would be subject to the supervision of the Bankruptcy
Court.
The Company's subsidiary, TheraTx, is a plaintiff in a declaratory judgment
action entitled TheraTx, Incorporated v. James W. Duncan, Jr., et al., No.
1:95-CV-3193, filed in the United States District Court for the Northern
District of Georgia and currently pending in the United States Court of
Appeals for the Eleventh Circuit, No. 99-11451-FF. 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 "Commission"). The court granted summary judgment for
the defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. The Company and the
defendants/counterclaimants both have appealed the court's rulings. The
Company is defending the action vigorously.
F-39
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
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 Federal and state laws governing such policies. Various courts
have issued various rulings on the different issues, some of which have been
adverse to the Company and 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 and liquidity would be
materially adversely affected.
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 current and former 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 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. In December 1998, the Company filed a motion to dismiss
the case. The court converted the Company's motion to dismiss into a motion
for summary judgment and granted summary judgment as to all defendants. The
plaintiff has appealed the ruling to the United States Court of Appeals for
the Sixth Circuit. The Company is defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of the Company and
Ventas. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the Company and Ventas have an effective remedy. The
Company believes that the allegations in the complaint are without merit and
intends to defend this action vigorously.
F-40
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--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 common stock
during the period from February 26, 1997 through May 4, 1997, inclusive. The
complaint alleges that Transitional purchased shares of its common stock from
members of the investing public after it had received a written offer to
acquire all of Transitional's common stock and without making the required
disclosure that such an offer had been made. The complaint further alleges
that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had
reached an advanced stage with actual firm offers at substantial premiums to
the trading price of Transitional's stock having been made which were actively
being considered by Transitional's Board of Directors. The complaint asserts
claims pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and
common law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. In June 1998, the court granted the Company's
motion to dismiss with leave to amend the Section 10(b) claim and the state
law claims for misrepresentation. The court denied the Company's motion to
dismiss the Section 14(e) and Section 20(a) claims, after which the Company
filed a motion for reconsideration. On March 23, 1999, the court granted the
Company's motion to dismiss all remaining claims and the case was dismissed.
The plaintiff has appealed this ruling. The Company is defending this action
vigorously.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of
Los Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various
causes of action arising out of the Company's sale and lease of several
nursing centers to Lenox in 1997. Lenox subsequently removed certain of its
causes of action and refiled these claims before the United States District
Court for the Western District of Kentucky in a case entitled Lenox
Healthcare, Inc. v. Vencor, Inc., et al., Case No. 3:99 CV-348-H. The Company
has asserted counterclaims, including RICO claims, against Lenox in the
Kentucky action. The Company believes that the allegations made by Lenox in
both complaints are without merit and intends to defend these actions
vigorously. Lenox and its subsidiaries filed for protection under Chapter 11
of the Bankruptcy Code on November 3, 1999. The Company has not determined the
effect, if any, such filing will have on the Company's financial condition,
results of operations or liquidity. By virtue of both the Company's and
Lenox's separate filings for Chapter 11 protection, the two Lenox actions and
the Company's counterclaims are stayed.
The Company has been informed by the DOJ that the Company and Ventas are the
subjects of ongoing investigations into various Medicare reimbursement issues,
including hospital cost reporting issues, Vencare billing practices and
various quality of care issues in the hospitals and nursing centers formerly
operated by Ventas and currently operated by the Company. These investigations
include some matters for which the Company indemnified Ventas in the Spin-off.
In cases where neither the Company nor any of its subsidiaries are defendants
but Ventas is the defendant, the Company had agreed to defend and indemnify
Ventas for such claims as part of the Spin-off. The Stipulation entered into
with Ventas provides that the Company will continue to fulfill its
indemnification obligations arising from the Spin-off. The Company has
cooperated fully in the investigations.
The DOJ has informed the Company that it has intervened in several pending
qui tam actions asserted against the Company and/or Ventas in connection with
these investigations. The Company and Ventas are engaged in active settlement
discussions with the DOJ that may result in a resolution of some or all of the
DOJ investigations including the pending qui tam actions. In addition, the DOJ
has filed proofs of claims with respect to certain alleged claims in the
Chapter 11 Cases. Such a resolution with the DOJ could include a payment to
the
F-41
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
Federal government which could have a material adverse effect on the Company's
liquidity and financial position. However, there can be no assurance that a
settlement or other resolution will be consummated with the DOJ.
The following is a summary of the qui tam actions pending against the
Company and/or Ventas in which the DOJ has intervened. In connection with the
DOJ's intervention, the courts have ordered these previously non-public
actions to be unsealed. Certain of the actions described below name other
defendants in addition to the Company and Ventas.
(a) The Company, Ventas and the Company's subsidiary, American X-Rays,
Inc. ("AXR"), are defendants in a civil qui tam action styled United States
ex rel. Doe v. American X-Rays Inc., et al., No. LR-C-95-332, pending in
the United States District Court for the Eastern District of Arkansas and
served on AXR on July 7, 1997. The DOJ intervened in the suit which was
brought under the Federal Civil False Claims Act and added the Company and
Ventas as defendants. 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. AXR provided portable X-ray
services to nursing centers (including some of those operated by Ventas or
the Company) and other healthcare providers. 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. The Company has defended this action vigorously. The court
has dismissed the action based upon the possible pending settlement between
the DOJ and Vencor and Ventas. 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. However, the Company has received several grand jury
subpoenas for documents and witnesses which it has moved to quash.
(b) The Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"),
Ventas and Hillhaven (former parent company to Medisave), are the
defendants in a civil qui tam action styled United States ex rel. Danley v.
Medisave Pharmacies, Inc., et al., No. CV-N-96-00170-HDM, filed in the
United States District Court for the District of Nevada on March 15, 1996.
The plaintiff alleges that Medisave, an institutional pharmacy provider,
formerly owned by Ventas and owned by the Company since the Spin-off: (1)
charged the Medicare program for unit dose drugs when bulk drugs were
administered and charged skilled nursing facilities more for the same drugs
for Medicare patients than for non-Medicare patients; (2) improperly
claimed special dispensing fees that it was not entitled to under Medicaid;
and (3) recouped unused drugs from skilled nursing facilities and returned
these drugs to its stock without crediting Medicare or Medicaid, all in
violation of the Federal Civil False Claims Act. The complaint also alleges
that Medisave had a policy of offering kickbacks, such as free equipment,
to skilled nursing centers to secure and maintain their business. The
complaint seeks treble damages, other unspecified damages, civil penalties,
attorneys' fees and other costs. The Company disputes the allegations in
the complaint. The defendants intend to defend this action vigorously.
(c) Ventas and the Company's subsidiary, Vencare, Inc. ("Vencare"), among
others, are defendants in the action styled United States ex rel. Roberts
v. Vencor, Inc., et al., No. 3:97CV-349-J, filed in the United States
District Court for the Western District of Kansas on June 25, 1996 and
consolidated with the action styled United States of America ex rel.
Meharg, et al. v. Vencor, Inc., et al., No. 3:98SC-737-H, filed in the
United States District Court for the Middle District of Florida on June 4,
1998. The complaint alleges that the defendants knowingly submitted and
conspired to submit false claims and statements to the Medicare
F-42
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
program in connection with their purported provision of respiratory therapy
services to skilled nursing center residents. The defendants allegedly
billed Medicare for respiratory therapy services and supplies when those
services were not medically necessary, billed for services not provided,
exaggerated the time required to provide services or exaggerated the
productivity of their therapists. It is further alleged that the defendants
presented false claims and statements to the Medicare program in violation
of the Federal Civil False Claims Act, by, among other things, allegedly
causing skilled nursing centers with which they had respiratory therapy
contracts, to present false claims to Medicare for respiratory therapy
services and supplies. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorneys' fees and other costs. The
Company disputes the allegations in the complaint. The defendants intend to
defend this action vigorously.
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et
al., No. 97-10400-GAO, filed in the United States District Court for the
District of Massachusetts on October 15, 1998, the Company's subsidiary,
Transitional, and two unrelated entities, Gambro Healthcare, Inc. and
Dialysis Holdings, Inc., are defendants in this suit alleging that they
violated the Federal Civil False Claims Act and the Medicare and Medicaid
antikickback, antifraud and abuse amendments (the "Antikickback
Amendments") and committed common law fraud, unjust enrichment and payment
by mistake of fact. Specifically, the complaint alleges that a predecessor
to Transitional formed a joint venture with Damon Clinical Laboratories to
create and operate a clinical testing laboratory in Georgia that was then
used to provide lab testing for dialysis patients, and that the joint
venture billed at below cost in return for referral of substantially all
non-routine testing in violation of the Antikickback Amendments. It is
further alleged that a predecessor to Transitional and Damon Clinical
Laboratories used multiple panel testing of end stage renal disease rather
than single panel testing that allegedly resulted in the generation of
additional revenues from Medicare and that the entities allegedly added
non-routine tests to tests otherwise ordered by physicians that were not
requested or medically necessary but resulted in additional revenue from
Medicare in violation of the Antikickback Amendments. Transitional has
moved to dismiss the case. Transitional disputes the allegations in the
complaint and is defending the action vigorously.
(e) The Company and/or Ventas are defendants in the action styled United
States ex rel. Huff and Dolan v. Vencor, Inc., et al., No. 97-4358 AHM
(Mcx), filed in the United States District Court for the Central District
of California on June 13, 1997. The plaintiff alleges that the defendant
violated the Federal Civil False Claims Act by submitting false claims to
the Medicare, Medicaid and CHAMPUS programs by allegedly: (1) falsifying
patient bills and submitting the bills to the Medicare, Medicaid and
CHAMPUS programs, (2) submitting bills for intensive and critical care not
actually administered to patients, (3) falsifying patient charts in
relation to the billing, (4) charging for physical therapy services
allegedly not provided and pharmacy services allegedly provided by non-
pharmacists, and (5) billing for sales calls made by nurses to prospective
patients. The complaint seeks treble damages, other unspecified damages,
civil penalties, attorneys' fees and other costs. Defendants dispute the
allegations in the complaint. The Company, on behalf of itself and Ventas,
intends to defend this action vigorously.
(f) Ventas is the defendant in the action styled United States ex rel.
Brzycki v. Vencor, Inc., Civ. No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997.
Ventas is alleged to have knowingly violated the Federal Civil False Claims
Act by submitting and conspiring to submit false claims to the Medicare
program. The complaint alleges that Ventas: (1) fabricated diagnosis codes
by ordering medically unnecessary services, such as respiratory therapy;
(2) changed referring physicians' diagnoses in order to qualify for
Medicare reimbursement; and (3) billed Medicare for oxygen use by patients
regardless of whether the oxygen was actually administered to particular
patients.
F-43
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
The complaint further alleges that Ventas paid illegal kickbacks to
referring health care professionals in the form of medical consulting
service agreements as an alleged inducement to refer patients, in violation
of the Federal Civil False Claims Act, the Antikickback Amendments and the
Stark provisions. It is additionally alleged that Ventas consistently
submitted Medicare claims for clinical services that were not performed or
were performed at lower actual costs. The complaint seeks unspecified
damages, civil penalties, attorneys' fees and costs. Ventas disputes the
allegations in the complaint. The Company, on behalf of Ventas, intends to
defend the action vigorously.
(g) United States ex rel. Lanford and Cavanaugh v. Vencor, Inc., et al.,
Civ. No. 97-CV-2845, was filed against Ventas in the United States District
Court for the Middle District of Florida, on November 24, 1997. The United
States of America intervened in this civil qui tam lawsuit on May 17, 1999.
On July 23, 1999, the United States filed its amended complaint in the
lawsuit and added the Company as a defendant. The lawsuit alleges that the
Company and Ventas knowingly submitted false claims and false statements to
the Medicare and Medicaid programs including, but not limited to, claims
for reimbursement of costs for certain ancillary services performed in
defendants' nursing centers and for third party nursing center operators
that the United States alleges are not properly reimbursable costs through
the hospitals' cost reports. The lawsuit involves the Company's hospitals
which were owned by Ventas prior to the Spin-off. The complaint does not
specify the amount of damages sought. The Company and Ventas dispute the
allegations in the amended complaint and intend to defend this action
vigorously.
(h) In United States ex rel. Harris and Young v. Vencor, Inc., et al.,
filed in the Eastern District of Missouri on May 25, 1999, the defendants
include the Company, Vencare and Ventas. The defendants allegedly submitted
and conspired to submit false claims for payment to the Medicare and
CHAMPUS programs, in violation of the Federal Civil False Claims Act.
According to the complaint, the Company, through its subsidiary, Vencare,
allegedly (1) over billed for respiratory therapy services, (2) rendered
medically unnecessary treatment, and (3) falsified supply, clinical and
equipment records. The defendants also allegedly encouraged or instructed
therapist to falsify clinical records and over prescribe therapy services.
The complaint seeks treble damages, other unspecified damages, civil
penalties, attorneys' fees and other costs. The Company disputes the
allegations in the complaint and intends to defend this action vigorously.
(i) In United States ex rel. George Mitchell, et al. v. Vencor, Inc., et
al., filed in the United States District Court for the Southern District of
Ohio on August 13, 1999, the defendants, consisting of the Company and its
two subsidiaries, Vencare and Vencor Hospice, Inc., are alleged to have
violated the Federal Civil False Claims Act by obtaining improper
reimbursement from Medicare concerning the treatment of hospice patients.
Defendants are alleged to have obtained inflated Medicare reimbursement for
admitting, treating and/or failing to discharge in a timely manner hospice
patients who were not "hospice appropriate." The complaint further alleges
that the defendants obtained inflated reimbursement for providing
medications for these hospice patients. The complaint alleges damages in
excess of $1,000,000. The Company disputes the allegations in the complaint
and intends to defend vigorously the action.
(j) In Gary Graham, on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., filed in the United States District Court for the
Southern District of Florida on or about June 8, 1999, the defendants,
including the Company, its subsidiary, Vencor Operating, Inc., Ventas,
Hillhaven and Medisave, are alleged to have presented or caused to be
presented false or fraudulent claims for payment to the Medicare program in
violation of, among other things, the Federal Civil False Claims Act. The
complaint alleges that Medisave, a subsidiary of the Company which was
transferred from Ventas to the Company in
F-44
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--LITIGATION (Continued)
the Spin-off, systematically up-charged for drugs and supplies dispensed to
Medicare patients. The complaint seeks unspecified damages, civil
penalties, interest, attorneys' fees and other costs. The Company disputes
the allegations in the complaint and intends to defend this action
vigorously.
(k) In United States, et al., ex rel. Phillips-Minks, et al. v.
Transitional Corp., et al., filed in the United States District Court for
Southern District of California on July 23, 1998, the defendants, including
Transitional and Ventas, are alleged to have submitted and conspired to
submit false claims and statements to Medicare, Medicaid, and other Federal
and state funded programs during a period commencing in 1993. The conduct
complained of allegedly violates the Federal Civil False Claims Act, the
California False Claims Act, the Florida False Claims Act, the Tennessee
Health Care False Claims Act, and the Illinois Whistleblower Reward and
Protection Act. Defendant allegedly submitted improper and erroneous claims
to Medicare, Medicaid and other programs, for improper or unnecessary
services and services not performed, inadequate collections efforts
associated with billing and collecting bad debts, inflated and nonexistent
laboratory charges, false and inadequate documentation of claims, splitting
charges, shifting revenues and expenses, transferring patients to hospitals
that are reimbursed by Medicare at a higher level, failing to return
duplicate reimbursement payments, and improperly allocating hospital
insurance expenses. In addition, the complaint alleges that the defendants
were inconsistent in their reporting of cost report data, paid kickbacks to
increase patient referrals to hospitals, and incorrectly reported employee
compensation resulting in inflated employee 401(k) contributions. The
complaint seeks unspecified damages. The Company disputes the allegations
in the complaint and intends to defend this action vigorously.
In connection with the Spin-off, 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 Stipulation entered into with Ventas provides that the Company
will continue to fulfill its indemnification obligations arising from the
Spin-off.
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 the DOJ, HCFA or
other regulatory agencies will not initiate additional investigations related
to the Company's businesses 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 the
Company's management and may have a disruptive effect upon the Company's
operations.
NOTE 25--SUBSEQUENT EVENT
In January 2000, the Company filed its hospital cost reports for the year
ended August 31, 1999. These documents are filed annually in settlement of
amounts due to or from the various agencies administering the reimbursement
programs. These cost reports indicated amounts due from the Company
aggregating $58 million. The liability arose during 1999 as part of the
Company's routine settlement of Medicare reimbursement overpayments. Such
amounts are classified as liabilities subject to compromise in the
consolidated balance sheet at December 31, 1999 and, accordingly, no funds
were disbursed by the Company in settlement of such pre-petition liabilities.
F-45
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999
--------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................ $700,232 $688,892 $681,924 $594,593
Net loss:
Loss from operations(a)........... (14,670) (40,531) (42,442) (585,606)(b)
Cumulative effect of change in
accounting for start-up costs.... (8,923) - - -
Net loss........................ (23,593) (40,531) (42,442) (585,606)
Per common share:
Basic earnings (loss):
Loss from operations............. (0.21) (0.58) (0.61) (8.32)
Cumulative effect of change in
accounting for start-up costs... (0.13) - - -
Net loss........................ (0.34) (0.58) (0.61) (8.32)
Diluted earnings (loss):
Loss from operations............. (0.21) (0.58) (0.61) (8.32)
Cumulative effect of change in
accounting for start-up costs... (0.13) - - -
Net loss........................ (0.34) (0.58) (0.61) (8.32)
Market prices(c):
High............................ 5.00 1.13 0.26 0.27
Low............................. 0.81 0.13 0.06 0.07
<CAPTION>
1998
--------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................ $823,316 $778,706 $718,115 $679,602
Net income (loss):
Income (loss) from operations(a).. 18,881 (23,452) 37,582 (605,919)(b)
Extraordinary loss on
extinguishment of debt........... - (77,937) - -
Net income (loss)............... 18,881 (101,389) 37,582 (605,919)
Per common share:
Basic earnings (loss):
Income (loss) from operations.... 0.28 (0.35) 0.55 (8.68)
Extraordinary loss on
extinguishment of debt.......... - (1.15) - -
Net income (loss)............... 0.28 (1.50) 0.55 (8.68)
Diluted earnings (loss):
Income (loss) from operations.... 0.28 (0.35) 0.54 (8.68)
Extraordinary loss on
extinguishment of debt.......... - (1.15) - -
Net income (loss)............... 0.28 (1.50) 0.54 (8.68)
Market prices(d):
After Spin-off:
High............................ - 12.88 7.25 5.75
Low............................. - 6.56 2.94 3.50
</TABLE>
- --------
(a) Includes the effect of certain unusual transactions and a charge to
establish a deferred tax valuation allowance. See Notes 8 and 12 of the
Notes to Consolidated Financial Statements for a description of these
transactions.
(b) Includes certain charges related to year-end adjustments. See Note 9 of
the Notes to Consolidated Financial Statements for a description of these
adjustments.
(c) Vencor common stock has traded on the OTC Bulletin Board under the ticker
symbol of VCRI since June 10, 1999.
(d) Vencor common stock traded on the New York Stock Exchange under the ticker
symbol VC through June 7, 1999.
F-46
<PAGE>
VENCOR, INC.
(Debtor-in-Possession)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Balance
Beginning Costs and Deductions at End
of Period Expenses Acquisitions or Payments of Period
---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowances for loss on
accounts and notes
receivable:
Year ended December
31, 1997............. $ 23,915 $ 31,176 $21,187 $(19,255) $ 57,023
Year ended December
31, 1998............. 57,023 64,008(a) - (14,560) 106,471
Year ended December
31, 1999............. 106,471 114,578 - (40,994) 180,055
Allowances for loss on
assets held for
disposition:
Year ended December
31, 1997............. 68,088 - 7,225 (43,891) 31,422
Year ended December
31, 1998............. 31,422 64,676(b) - (18,172) 77,926
Year ended December
31, 1999............. 77,926 10,135(c) - (13,245) 74,816
</TABLE>
- --------
(a) Includes unusual charges of $8.4 million.
(b) Reflects provision for loss associated with the sale or closure of home
health and hospice operations, planned disposal of cancelled construction
projects and corporate office properties, and closure of two hospitals.
(c) Included in unusual transactions related to corporate properties.
F-47
<PAGE>
Exhibit 4.3
INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, dated as of
September 16, 1999, among VENCOR OPERATING, INC., a Delaware corporation,
having its principal office at One Vencor Place, 680 South Fourth Street,
Louisville, Kentucky 40202 (the "Company"), VENCOR, INC., a Delaware
corporation, having its principal office at One Vencor Place, 680 South Fourth
Street, Louisville, Kentucky 40202 (the "Guarantor"), CHASE MANHATTAN TRUST
COMPANY, NATIONAL ASSOCIATION (successor to PNC Bank, National Association), a
national association duly organized and existing under the laws of the United
States, having its principal corporate trust office at One Oxford Centre, 301
Grant Street, Pittsburgh, PA 15219 (the "Resigning Trustee"), and HSBC BANK USA,
a banking corporation and trust company duly organized and existing under the
laws of the State of New York, having its principal corporate trust office at
140 Broadway, New York, New York 10005 (the "Successor Trustee");
RECITALS
--------
There are presently issued and outstanding $300,000,000 in aggregate
principal amount of the Company's 9 7/8% Guaranteed Senior Subordinated Notes
due 2005 (the "Securities") under an Indenture, dated as of April 30, 1998 (the
"Indenture") between the Company, the Guarantor and the Resigning Trustee.
The Resigning Trustee wishes to resign as Trustee, Registrar and
Paying Agent under the Indenture; the Company and the Guarantor wish to appoint
the Successor Trustee to succeed the Resigning Trustee as Trustee, Registrar and
Paying Agent under the Indenture; and the Successor Trustee wishes to accept
appointment as Trustee, Registrar and Paying Agent under the Indenture.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein, the receipt and sufficiency of which is hereby acknowledged, the
Company, the Guarantor, the Resigning Trustee and the Successor Trustee agree as
follows:
ARTICLE ONE
THE RESIGNING TRUSTEE
Section 101. Pursuant to Section 5.10 of the Indenture, the Resigning
-----------
Trustee hereby notifies the Company and the Guarantor that the Resigning Trustee
is hereby resigning as Trustee under the Indenture.
Section 102. The Resigning Trustee hereby represents and warrants to
-----------
the Successor Trustee that:
(a) No covenant or condition contained in the Indenture has been
waived by the Resigning Trustee.
<PAGE>
(b) There is no action, suit or proceeding pending or, to the
best of the knowledge of the responsible Trust Officers of the
Resigning Trustee assigned to its Corporate Trust Department,
threatened against the Resigning Trustee before any court or
governmental authority arising out of any action or omission by the
Resigning Trustee as Trustee under the Indenture.
Section 103. The Resigning Trustee hereby assigns, transfers,
-----------
delivers and confirms to the Successor Trustee all right, title and interest of
the Resigning Trustee in and to the trust under the Indenture, and all the
rights, powers, trusts, privileges and duties of the Trustee under the
Indenture. The Resigning Trustee shall execute and deliver such further
instruments and shall do such other things as the Successor Trustee may
reasonably require so as to more fully and certainly vest and confirm in the
Successor Trustee all the rights, powers, trusts, privileges and duties hereby
assigned, transferred, delivered and confirmed to the Successor Trustee.
Section 104. The Resigning Trustee hereby resigns as Paying Agent for
-----------
the Securities, as Registrar for the Securities and as the office or agency
maintained by the Company and the Guarantor pursuant to Section 3.02 of the
Indenture.
Section 105. The Resigning Trustee agrees to indemnify the Successor
-----------
Trustee and save the Successor Trustee harmless from and against any and all
costs, claims, liabilities, losses or damages whatsoever (including the
reasonable fees, expenses and disbursements of the Successor Trustee's counsel
and other advisors), that the Successor Trustee suffers or incurs without
negligence or bad faith on its part arising solely out of actions or omissions
of the Resigning Trustee. The Successor Trustee will furnish to the Resigning
Trustee, promptly after receipt, all papers with respect to any action the
outcome of which would make operative the indemnity provided for in this
Section. The Successor Trustee shall notify the Resigning Trustee promptly in
writing (and, in any event, within no later than the fifth Business Day) of any
claim for which it may seek indemnity. The Resigning Trustee shall have the
option to defend the claim and the Successor Trustee shall cooperate fully in
the defense. If the Resigning Trustee shall assume the defense, then the
Resigning Trustee shall not pay for separate counsel of the Successor Trustee.
The Resigning Trustee shall not be obligated to pay for any settlement made
without its consent.
ARTICLE TWO
THE COMPANY and THE GUARANTOR
Section 201. (i) The Company hereby certifies that annexed hereto
-----------
marked Exhibit A is a copy of resolutions duly adopted by the Board of Directors
of the Company, and in full force and effect on the date hereof authorizing
certain officers of the Company to: (a) accept the Resigning Trustee's
resignation as Trustee under the Indenture; (b) appoint the Successor Trustee as
Trustee under the Indenture; and (c) execute and deliver such agreements and
other instruments as may be necessary or desirable to effectuate the succession
of the Successor Trustee as Trustee under the Indenture. The Company shall
deliver a Secretary's Certificate of the Secretary or an Assistant Secretary
certifying as to the annexed resolutions. (ii) The Guarantor hereby certifies
that annexed hereto marked Exhibit B is a copy of resolutions duly adopted by
the Board of Directors of the Guarantor, and in full force and effect on the
date
2
<PAGE>
hereof authorizing certain officers of the Company to: (a) accept the Resigning
Trustee's resignation as Trustee under the Indenture; (b) appoint the Successor
Trustee as Trustee under the Indenture; and (c) execute and deliver such
agreements and other instruments as may be necessary or desirable to effectuate
the succession of the Successor Trustee as Trustee under the Indenture. The
Guarantor shall deliver a Secretary's Certificate of the Secretary or an
Assistant Secretary certifying as to the annexed resolutions.
Section 202. The Company and the Guarantor hereby appoint the
-----------
Successor Trustee as Trustee under the Indenture and confirm to the Successor
Trustee all the rights, powers, trusts and duties of the Trustee under the
Indenture. The Company shall execute and deliver such further instruments and
shall do such other things as the Successor Trustee may reasonably require so as
to more fully and certainly vest and confirm in the Successor Trustee all the
rights, powers, privileges and duties hereby assigned, transferred, delivered
and confirmed to the Successor Trustee.
Section 203. The Company and the Guarantor hereby appoint the
-----------
Successor Trustee as Paying Agent for the Securities, as Registrar for the
Securities and as the Company's and the Guarantor's office or agency maintained
pursuant to Section 3.02 of the Indenture.
Section 204. The Company hereby acknowledges and reaffirms its
-----------
obligations to the Successor Trustee as set forth in Section 5.07 of the
Indenture, which obligations shall survive the execution hereof.
ARTICLE THREE
THE SUCCESSOR TRUSTEE
Section 301. The Successor Trustee hereby represents and warrants to
-----------
the Resigning Trustee, to the Company and to the Guarantor that the Successor
Trustee is qualified and eligible under the provisions of Section 5.09 of the
Indenture to act as Trustee under the Indenture.
Section 302. The Successor Trustee hereby accepts its appointment as
-----------
Trustee under the Indenture and shall hereby be vested with all the rights,
powers, trusts and duties of the Trustee under the Indenture.
Section 303. Promptly after the execution and delivery of this
-----------
Instrument, the Successor Trustee shall cause a notice, a form of which is
annexed hereto marked Exhibit C, to be sent to each Holder of the Securities in
accordance with the provisions of the Indenture.
ARTICLE FOUR
MISCELLANEOUS
Section 401. Except as otherwise expressly provided or unless the
-----------
context otherwise requires, all terms used herein which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
3
<PAGE>
Section 402. This Instrument and the resignation, appointment and
-----------
acceptance effected hereby shall be effective as of the close of business on the
date first above written upon the execution and delivery hereof by each of the
parties hereto.
Section 403. Notwithstanding the resignation of the Resigning Trustee
-----------
effected hereby, the Company and the Guarantor shall remain obligated under
Section 5.07 of the Indenture to compensate, reimburse and indemnify the
Resigning Trustee in connection with its prior trusteeship under the Indenture.
Section 404. This Instrument shall be governed by and construed in
-----------
accordance with the laws of the jurisdiction which govern the Indenture and its
construction.
Section 405. This Instrument may be executed in any number of
-----------
counterparts each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
[Remainder of Page Intentionally Left Blank]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Instrument of
Resignation, Appointment and Acceptance to be duly executed as of the day and
year first above written.
VENCOR OPERATING, INC.
By /s/ James H. Gillenwater, Jr.
------------------------------
Name: James H. Gillenwater, Jr.
Title: Senior Vice President
VENCOR, INC.
By /s/ James H. Gillenwater, Jr.
------------------------------
Name: James H. Gillenwater, Jr.
Title: Senior Vice President
CHASE MANHATTAN TRUST COMPANY, NATIONAL
ASSOCIATION
By /s/ Francis J. Grippo
----------------------
Name: Francis J. Grippo
Title: Vice President
HSBC BANK USA
By /s/ Metin Caner
----------------
Name: Metin Caner
Title: Vice President
<PAGE>
EXHIBIT A
---------
BOARD RESOLUTIONS
of
VENCOR OPERATING, INC.
----------------------
The following is a true copy of resolutions duly adopted on
September 10, 1999, by the Board of Directors of Vencor Operating, Inc.:
"RESOLVED, that any officer of this Company is hereby
authorized to accept the resignation of The Chase Manhattan
Bank (successor to PNC Bank, National Association), as
Trustee under the Indenture, dated as of April 30, 1998, of
Vencor Operating, Inc., and to appoint HSBC Bank USA as
Successor Trustee under said Indenture; and
FURTHER RESOLVED, that any officer of this Company is hereby
authorized to enter into such agreements and other
instruments as may be necessary or desirable to effectuate
the appointment of said Successor Trustee under said
Indenture."
<PAGE>
EXHIBIT B
---------
BOARD RESOLUTIONS
of
VENCOR, INC.
------------
The following is a true copy of resolutions duly adopted on
September 10, 1999, by the Board of Directors of Vencor, Inc.:
"RESOLVED, that any officer of this Guarantor is hereby
authorized to accept the resignation of The Chase Manhattan
Bank (successor to PNC Bank, National Association), as
Trustee under the Indenture, dated as of April 30, 1998, of
Vencor Operating, Inc., and to appoint HSBC Bank USA as
Successor Trustee under said Indenture; and
FURTHER RESOLVED, that any officer of this Guarantor is
hereby authorized to enter into such agreements and other
instruments as may be necessary or desirable to effectuate
the appointment of said Successor Trustee under said
Indenture."
<PAGE>
EXHIBIT C
---------
Notice to Holders of Vencor Operating, Inc. 9 7/8% Guaranteed Senior
Subordinated Notes due 2005:
We hereby notify you of the resignation of The Chase Manhattan Bank
(successor to PNC Bank, National Association), as Trustee under the Indenture,
dated as of April 30, 1998, pursuant to which your Notes were issued and are
outstanding.
Vencor Operating, Inc. and Vencor, Inc., as Guarantor of your Notes,
have appointed HSBC Bank USA, whose Corporate Trust Office is located at 140
Broadway, New York, New York 10005, as Successor Trustee under the Indenture,
which appointment has been accepted and has become effective.
HSBC BANK USA,
as Successor Trustee
<PAGE>
Exhibit 10.8
FIRST AMENDMENT TO DEBTOR-IN-POSSESSION CREDIT AGREEMENT
AND
FIRST AMENDMENT TO SECURITY AGREEMENT
October 21, 1999
Reference is made to (i) that certain Debtor-in-Possession Credit
Agreement dated as of September 13, 1999 (as heretofore amended, supplemented or
otherwise modified, the "DIP Credit Agreement"), by and among VENCOR, INC., a
Delaware corporation ("Vencor"), and VENCOR OPERATING, INC., a Delaware
corporation ("Vencor Opco"), each as debtor and debtor-in-possession, and EACH
OF VENCOR'S SUBSIDIARIES LISTED ON THE SIGNATURE PAGES THEREOF, each as debtor
and debtor-in-possession (each such subsidiary, Vencor and Vencor Opco
individually referred to herein as a "Borrower" and, collectively, on a joint
and several basis, as "Borrowers"); THE LENDERS LISTED ON THE SIGNATURE PAGES
THEREOF (each individually referred to herein as a "Lender" and collectively as
"Lenders"); MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as arranger (in such
capacity, "Arranger"), collateral agent and administrative agent for the
Lenders, and as an issuing bank for Letters of Credit thereunder, and (ii) that
certain Security Agreement dated as of September 13, 1999 (as heretofore
amended, supplemented or otherwise modified, the "Security Agreement"), among
the Borrowers, the Subsidiary Guarantor and Morgan Guaranty Trust Company of New
York, as collateral agent (in such capacity, "Collateral Agent"). Capitalized
terms used herein without definition herein shall have the meanings assigned to
such terms in either the DIP Credit Agreement or Security Agreement, as
appropriate.
Borrowers and Lenders desire to amend the DIP Credit Agreement to: (i)
provide for the ability of the Borrowers to post cash or make deposits with
bonding companies for the issuance of bonds necessitated by either regulatory or
judicial requirements for an aggregate amount of $5,000,000, and (ii) comply
with the terms of Section 5.13 of the DIP Credit Agreement. Accordingly,
Borrowers and the undersigned Lenders hereby agree that:
1. the definition of "Permitted Encumbrances" set forth in Section
1.01 of the DIP Credit Agreement is hereby amended by (i) deleting the "and" at
the end of subparagraph (b) thereof; (ii) deleting the "." immediately after
subparagraph (c) thereof, and substituting therefor "; and"; and (iii) adding a
new subparagraph (d) at the end thereof as follows:
" (d) any other Liens incurred in the ordinary course of business in
connection with any obligation of any Vencor Company to post cash or make
deposits with any bonding company for the issuance of bonds necessitated by
either regulatory or judicial requirements in an aggregate amount of up to
$5,000,000.";
<PAGE>
2. Section 2.05(a)(i) of the DIP Credit Agreement is hereby amended
by adding immediately after the reference to "$15,000,000" and before the semi-
colon, the phrase "(less any amounts posted in cash or deposited with any
bonding company by any Vencor Company as permitted under subparagraph (d) of the
definition of Permitted Encumbrances)"; and
3. Section 5.13 of the DIP Credit Agreement is hereby amended by
deleting in its entirety and substituting therefor the following:
"Section 5.13 Government Settlement. The Borrowers shall
---------------------
cause all existing disputes with the United States with respect
to Medicare and/or under the False Claims Act to be settled in a
manner satisfactory to Determining Lenders by the close of
business on Monday, November 29, 1999 or such later date that
Determining Lenders may otherwise consent to (such date, in any
event, being the "Default Date"). Notwithstanding anything to the
contrary herein, failure to cause such disputes to be so settled
by the Default Date shall be deemed a Material Adverse Effect and
an immediate Event of Default on such Default Date for all
purposes hereunder and under the other Financing Documents."
Borrowers, Subsidiary Guarantor and Lenders further desire to amend
the Security Agreement to reflect the provisions of the Borrowing Order which
require all proceeds of the Collateral to be held in trust by the Borrowers, or
any of their successors or assigns, for the benefit of the Secured Parties.
Accordingly, Borrowers, Subsidiary Guarantor and the undersigned Lenders hereby
agree that Section 12 of the Security Agreement is hereby amended by adding
immediately after subsection (d) thereof a new subsection (e) as follows:
"(e) Upon the giving of the Enforcement Notice, without
limiting any of the rights or remedies of the Collateral Agent,
or any Secured Party, to collect directly from any account debtor
or obligor, including the U.S. (as defined in the Interim
Borrowing Order), all proceeds of the Collateral received by any
Lien Grantor or any successors or assigns, including any trustee
appointed or elected in any Chapter 11 Case or any superseding
chapter 7 cases, shall be held in trust for the Collateral Agent
for the benefit of the Secured Parties."
On and after the First Amendment Effective Date (as defined below),
each reference in the DIP Credit Agreement and the Security Agreement to "this
Agreement", "hereunder", "hereof", "herein" or words of like import referring to
such DIP Credit Agreement or Security Agreement, respectively, and each
reference in the other Financing Documents to the "DIP Credit Agreement" or
"Security Agreement", "thereunder", "thereof" or words of like import referring
to such DIP Credit Agreement or Security Agreement, as the case may be, shall
mean and be a reference to such DIP Credit Agreement or Security Agreement, as
the case may be, as amended by this Amendment (such DIP Credit Agreement and
Security Agreement, as so amended, being the "Amended Agreements"). Except as
specifically amended by this Amendment, the DIP Credit Agreement, Security
Agreement and such other Financing Documents shall remain in full force and
effect and are hereby ratified and confirmed. The execution, delivery and
performance of this Amendment shall not, except as expressly provided herein,
constitute a waiver of any provision of, or operate as a waiver of any right,
power or
2
<PAGE>
remedy of any Agent or any Lender under the DIP Credit Agreement, Security
Agreement or any of such other Financing Documents.
In order to induce Lenders to enter into this Amendment, each Borrower
and Subsidiary Guarantor (for purposes of this paragraph only, hereinafter
collectively referred to as the Lien Grantors, as defined in the Security
Agreement), by its execution of a counterpart of this Amendment, represents and
warrants that (a) such Lien Grantor has the corporate power and authority and
all material governmental licenses, authorizations, consents, registrations and
approvals required to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Amended
Agreements, (b) the execution and delivery of this Amendment and the performance
of the Amended Agreements have been duly authorized by all necessary corporate
action on the part of such Lien Grantor, (c) the execution and delivery by such
Lien Grantor of this Amendment and the performance by such Lien Grantor of the
Amended Agreements do not and will not (i) contravene any provision of such Lien
Grantor's charter, articles or certificate of incorporation or by-laws, any
unanimous agreement of all the shareholders of such Lien Grantor or any
applicable United States federal law, or any applicable law of any state, or any
other jurisdiction in which such Lien Grantor's material assets are located,
(ii) constitute, or result in a breach of, or a default under, or be in conflict
with, any material deed, indenture, mortgage, franchise, license, judgment,
agreement or instrument to which such Lien Grantor is a party or by which such
Lien Grantor is bound, (iii) result in any Lien on any of such Lien Grantor's
property or assets, or (iv) require any approval of stockholders or any approval
or consent of any Person under any document referred to in clause (iii) above,
(d) the execution and delivery by such Lien Grantor of this Amendment and the
performance by such Lien Grantor of the relevant Amended Agreements do not and
will not require any registration with, consent or approval of, or notice to, or
other action to, with or by, any Governmental Authority or regulatory body, (e)
this Amendment and the Amended Agreements have been duly executed and delivered
by such Lien Grantor and are the legally valid and binding obligations of such
Lien Grantor, enforceable against such Lien Grantor in accordance with their
respective terms, (f) for purposes of the Borrowing Order (i) this Amendment
constitutes a non-material modification of the DIP Credit Agreement, the
Security Agreement and the Financing Documents, and (ii) notice of this
Amendment has been given to and received by the Committee (as defined in the
Borrowing Order), (g) with respect to the Borrowers, after giving effect to this
Amendment, the representations and warranties contained in Article 4 of the DIP
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date, (h) with respect to the Borrowers and the Subsidiary Guarantor, after
giving effect to this Amendment, the representations and warranties contained in
Section 2 of the Security Agreement are and will be true, correct and complete
in all material respects on and as of the First Amendment Effective Date to the
same extent as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true, correct and complete in all material respects on and as of
such earlier date, and (i) after giving effect to this Amendment, no event has
occurred and is continuing or will result from the consummation of the
transactions contemplated by this Amendment that would constitute an Event of
Default.
3
<PAGE>
This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Amendment shall
become effective (the date of such effectiveness being the "First Amendment
Effective Date") with respect to the DIP Credit Agreement and the Security
Agreement upon the execution of a counterpart hereof by the Borrowers, the
Subsidiary Guarantor and Required Lenders and receipt by the Borrowers, the
Subsidiary Guarantor and Agent of written or telephonic notification of such
execution and authorization of delivery thereof; provided that, in addition to
--------
the foregoing conditions to effectiveness, the amendment to Section 5.13 of the
DIP Credit Agreement set forth in numbered paragraph 3 above shall become
effective upon the execution and delivery of a counterpart hereof by Determining
Lenders.
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
[Remainder of page intentionally left blank]
4
<PAGE>
BORROWERS:
Advanced Infusion Systems, Inc.
American X-Rays, Inc.
C.P.C. of Louisiana, Inc.
Community Behavioral Health System, Inc.
Community Psychiatric Centers of Arkansas, Inc.
Community Psychiatric Centers of California
Community Psychiatric Centers of Florida, Inc.
Community Psychiatric Centers of Idaho, Inc.
Community Psychiatric Centers of Indiana, Inc.
Community Psychiatric Centers of Kansas, Inc.
Community Psychiatric Centers of Mississippi, Inc.
Community Psychiatric Centers of Missouri, Inc.
Community Psychiatric Centers of North Carolina, Inc.
Community Psychiatric Centers of Oklahoma, Inc.
Community Psychiatric Centers of Utah, Inc.
Community Psychiatric Centers Properties Incorporated
Community Psychiatric Centers Properties of Oklahoma, Inc.
Community Psychiatric Centers Properties of Texas, Inc.
Community Psychiatric Centers Properties of Utah, Inc.
Courtland Gardens Health Center, Inc.
CPC Investment Corp.
CPC Managed Care Health Services, Inc.
CPC of Georgia, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
First Rehab, Inc.
Florida Hospital Properties, Inc.
Health Care Holdings, Inc.
Health Care Technology, Inc.
Helian ASC of Northridge, Inc.
Helian Health Group, Inc.
Helian Recovery Corporation
Homestead Health Center, Inc.
Horizon Healthcare Services, Inc.
S-1
<PAGE>
Interamericana Health Care Group
J.B. Thomas Hospital, Inc.
Lafayette Health Care Center, Inc.
MedEquities, Inc.
Medisave of Tennessee, Inc.
Medisave Pharmacies, Inc.
Old Orchard Hospital, Inc.
Palo Alto Surgecenter Corporation
Peachtree-Parkwood Hospital, Inc.
PersonaCare, Inc.
PersonaCare Living Center of Clearwater, Inc.
PersonaCare of Bradenton, Inc.
PersonaCare of Clearwater, Inc.
PersonaCare of Connecticut, Inc.
PersonaCare of Georgia, Inc.
PersonaCare of Huntsville, Inc.
PersonaCare of Little Rock, Inc.
PersonaCare of Ohio, Inc.
PersonaCare of Owensboro, Inc.
PersonaCare of Pennsylvania, Inc.
PersonaCare of Pompano East, Inc.
PersonaCare of Pompano West, Inc.
PersonaCare of Reading, Inc.
PersonaCare of San Antonio, Inc.
PersonaCare of San Pedro, Inc.
PersonaCare of Shreveport, Inc.
PersonaCare of St. Petersburg, Inc.
PersonaCare of Warner Robbins, Inc.
PersonaCare of Wisconsin, Inc.
PersonaCare Properties, Inc.
ProData Systems, Inc.
Recovery Inns of America, Inc.
Respiratory Care Services, Inc.
Stamford Health Facilities, Inc.
THC-Chicago, Inc.
THC-Hollywood, Inc.
THC-Houston, Inc.
THC-Minneapolis, Inc.
THC-North Shore, Inc.
THC-Orange County, Inc.
THC-San Diego, Inc.
THC-Seattle, Inc.
TheraTx Healthcare Management, Inc.
TheraTx Health Services, Inc.
TheraTx Management Services, Inc.
TheraTx Medical Supplies, Inc.
S-2
<PAGE>
TheraTx Rehabilitation Services, Inc.
TheraTx Staffing, Inc.
Transitional Hospitals Corporation, a Delaware Corporation
Transitional Hospitals Corporation, a Nevada Corporation
Transitional Hospitals Corporation of Indiana, Inc.
Transitional Hospitals Corporation of Louisiana, Inc.
Transitional Hospitals Corporation of Michigan, Inc.
Transitional Hospitals Corporation of Nevada, Inc.
Transitional Hospitals Corporation of New Mexico, Inc.
Transitional Hospitals Corporation of Tampa, Inc.
Transitional Hospitals Corporation of Texas, Inc.
Transitional Hospitals Corporation of Wisconsin, Inc.
Tucker Nursing Center, Inc.
Tunstall Enterprises, Inc.
VC-OIA, Inc.
VC-TOHC, Inc.
VC-WM, Inc.
Vencare, Inc.
Vencare Rehab Services, Inc.
Vencor Facility Services, Inc.
Vencor Holdings, L.L.C.
Vencor Home Care Services, Inc.
Vencor Hospice, Inc.
Vencor Hospitals East, L.L.C.
Vencor Hospitals West, L.L.C.
Vencor, Inc.
Vencor Insurance Holdings, Inc.
Vencor Investment Company
Vencor Nevada, L.L.C.
Vencor Nursing Centers East, L.L.C.
Vencor Nursing Centers Central L.L.C.
Vencor Nursing Centers North, L.L.C.
Vencor Nursing Centers South, L.L.C.
Vencor Nursing Centers West, L.L.C.
Vencor Operating, Inc.
Vencor Pediatric Care, Inc.
Vencor Provider Network, Inc.
Ventech Systems, Inc.
S-3
<PAGE>
by: Vencor Operating, Inc., as agent and attorney-in-
fact for each of the foregoing entities
By: /s/ Richard A. Schweinhart
----------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
Stamford Health Associates, L.P.
by: Stamford Health Facilities, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
Vencor Home Care and Hospice Indiana Partnership
by: Vencor Home Care Services, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
by: Vencor Hospice, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-4
<PAGE>
Vencor Hospitals Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
by: Vencor Nursing Centers Limited Partnership,
Its General Partner
by: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-5
<PAGE>
Vencor Nursing Centers Central Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
by: Vencor Nursing Centers Limited Partnership, Its
General Partner
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-6
<PAGE>
Vencor Nursing Centers Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
by: Vencor Hospitals Limited Partnership,
Its General Partner
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-7
<PAGE>
SUBSIDIARY GUARANTOR:
CARIBBEAN BEHAVIORAL HEALTH SYSTEMS, INC.
By: /s/ Richard A. Schweinhart
----------------------------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-8
<PAGE>
AGENTS AND LENDERS:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Arranger,
Collateral Agent and Administrative Agent and as a
Lender
By: /s/ Houston A. Stebbins
-----------------------
Name: Houston A. Stebbins
Title: Vice President
S-9
<PAGE>
ABLECO FINANCE LLC, as a Lender
By: /s/ Kevin Genda
---------------------------------------------------
Name: Kevin Genda
Title: Chief Credit Officer
S-10
<PAGE>
APPALOOSA INVESTMENT LIMITED PARTNERSHIP I, as a Lender
By: /s/ Ronald M. Goldstein
---------------------------------------------------
Name: Ronald M. Goldstein
Title: Chief Financial Officer
S-11
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By: /s/ Kevin Driscoll
---------------------------------------------------
Name: Kevin Driscoll
Title: Director
S-12
<PAGE>
CHASE SECURITIES INC, AS AGENT FOR THE CHASE MANHATTAN
BANK, as a Lender
By: /s/ Howard J. Golden
---------------------------------------------------
Name: Howard J. Golden
Title: Authorized Signatory
S-13
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P., as a Lender
By: /s/ Mark Denatale
---------------------------------------------------
Name: Mark Denatale
Title:
S-14
<PAGE>
PARIBAS, as a Lender
By: /s/ Albert A. Young, Jr.
---------------------------------------------------
Name: Albert A. Young, Jr.
Title: Director
By: /s/ Amy Kirschner
---------------------------------------------------
Name: Amy Kirschner
Title: Vice President
S-15
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST, as a Lender
By: VAN KAMPEN INVESTMENT ADVISORY CORP.
By: /s/ Douglas J. Smith
-----------------------------------------------
Name: Douglas J. Smith
Title: Vice President
S-16
<PAGE>
FRANKLIN MUTUAL ADVISERS LLC, as a Lender
By: ______________________________________________
Name:
Title:
S-17
<PAGE>
FRANKLIN FLOATING RATE TRUST, as a Lender
By: ______________________________________________
Name:
Title:
S-18
<PAGE>
Exhibit 10.9
SECOND AMENDMENT TO DEBTOR-IN-POSSESSION CREDIT AGREEMENT
November 19, 1999
Reference is made to that certain Debtor-In-Possession Credit
Agreement dated as of September 13, 1999 (as heretofore amended, supplemented or
otherwise modified, the "DIP Credit Agreement"), by and among Vencor, Inc., a
Delaware corporation ("Vencor"), and Vencor Operating, Inc., a Delaware
corporation ("Vencor Opco"), each as debtor and debtor-in-possession, and each
of Vencor's subsidiaries listed on the signature pages thereof, each as debtor
and debtor-in-possession (each such subsidiary, Vencor and Vencor Opco
individually referred to herein as a "Borrower" and, collectively, on a joint
and several basis, as the "Borrowers"); the Lenders listed on the signature
pages thereof; and Morgan Guaranty Trust Company of New York, as arranger,
collateral agent and administrative agent (in such capacity, "Administrative
Agent") for the Lenders, and as an issuing bank for Letters of Credit
thereunder. Capitalized terms used herein without definition herein shall have
the meanings assigned to such terms in the DIP Credit Agreement.
The Borrowers and the undersigned Lenders hereby agree to amend the
DIP Credit Agreement as follows:
1. Section 1.01 of the DIP Credit Agreement is hereby amended by
inserting therein the following definitions in alphabetical order:
"Dixfield Note" means a promissory note issued by the
purchaser of the Dixfield Property in the principal amount of
$197,500, which promissory note shall bear interest at the rate
of 9.0% per annum, shall mature and be due and payable in full
not later than one year from the date of issuance thereof and
shall be in the form delivered to the Administrative Agent in
connection with the execution of the Second Amendment, with no
modifications thereto which are deemed material by the
Administrative Agent other than those approved by Required
Lenders.
"Dixfield Property" means the land and related improvements
owned by Vencor Nursing Centers East, LLC at 100 Weld Street,
Dixfield, Maine.
"Government Settlement Term Sheet" means the term sheet
contained in Schedule 14.
-----------
"Second Amendment" means that certain Second Amendment to
Debtor-In-Possession Credit Agreement dated as of November 19,
1999, by and among the Borrowers, the Collateral Agent, the
Administrative Agent and the Lenders party thereto.
<PAGE>
2. Section 1.01 of the DIP Credit Agreement is hereby further amended
by adding at the end of the definition of "Net Cash Proceeds" contained therein
the following sentence:
"Anything contained herein to the contrary notwithstanding, (i)
the Borrowers shall be deemed to receive Net Cash Proceeds from
the sale of the Dixfield Property in the principal amount of the
Dixfield Note at the time of such sale (and the amount of such
Net Cash Proceeds shall be applied as Net Cash Proceeds from an
Asset Sale of a Property Held For Sale in accordance with Section
2.08(a)), and (ii) no payments on the Dixfeld Note thereafter
received by any of the Borrowers shall be deemed Net Cash
Proceeds hereunder."
3. Section 5.10 of the DIP Credit Agreement is hereby amended by
deleting the reference contained therein to "three months" and substituting
therefor "four months".
4. Section 5.13 of the DIP Credit Agreement is hereby amended by
deleting it in its entirety therefrom.
5. Section 7.03(b) of the DIP Credit Agreement is hereby amended by
adding at the end thereof the following sentence:
"Anything contained herein to the contrary notwithstanding, the
Borrowers may receive a portion of the consideration for the sale
of the Dixfield Property in the form of the Dixfield Note,
provided that (i) the Dixfield Note shall be pledged pursuant to
--------
the Collateral Documents promptly after the issuance thereof, and
delivered to the Collateral Agent with appropriate instruments of
transfer relating thereto, and (ii) the obligations of the issuer
of the Dixfield Note shall be secured by a mortgage on such
issuer's interest in the Dixfield Property in favor of Vencor
Nursing Centers East, LLC."
6. Section 8.01 of the DIP Credit Agreement is hereby amended by
adding "or" at the end of subdivision (p) thereof and adding immediately after
subdivision (p) a new subdivision (q) as follows:
"(q) the disputes with the United States with respect to Medicare
and/or under the False Claims Act shall be settled on terms less
favorable (in any respect deemed material by Determining Lenders)
with respect to the interests of the Borrowers or the Lenders
than the terms set forth in the Government Settlement Term Sheet;
or the United States shall assert against any of the Borrowers or
any Subsidiary Guarantor any claim deemed material by Determining
Lenders other than those claims which are described in paragraphs
2.a and 2.b of the Government Settlement Term Sheet;"
7. The DIP Credit Agreement is hereby amended by adding a new
Schedule 14 thereto in the form of Annex A attached hereto.
- -----------
The amendment to Section 5.13 of the DIP Credit Agreement contained in
numbered paragraph 4 above shall not be deemed or construed in any respect as a
determination
2
<PAGE>
by the Lenders or Determining Lenders that the terms set forth in the Government
Settlement Term Sheet represent a settlement of the claims of the United States
against the Borrowers and Subsidiary Guarantor which is or would be satisfactory
in form or substance to the Lenders or Determining Lenders.
The undersigned Lenders hereby also approve, pursuant to Section
7.03(b)(i) of the DIP Credit Agreement, the Asset Sale or Asset Sales of any
equipment and related items used in connection with the Borrowers' in-patient
and out-patient respiratory care services provided at third-party acute care
hospitals; provided, that (i) the consideration received from such Asset Sale or
--------
Asset Sales shall be in an amount at least equal to the fair market value of the
property sold, which shall not exceed $255,000, (ii) such property shall be sold
solely for cash consideration, and (iii) the Borrowers shall comply with all
applicable provisions of the DIP Credit Agreement with respect to such Asset
Sale or Asset Sales.
On and after the Second Amendment Effective Date (as defined below),
each reference in the DIP Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the DIP Credit
Agreement, and each reference in the other Financing Documents to the "DIP
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the DIP Credit Agreement, shall mean and be a reference to the DIP Credit
Agreement as amended by this Second Amendment to Debtor-In-Possession Credit
Agreement (this "Amendment"; the DIP Credit Agreement, as so amended, being the
"Amended Agreement"). Except as specifically amended by this Amendment, the DIP
Credit Agreement and such other Financing Documents shall remain in full force
and effect and are hereby ratified and confirmed. The execution, delivery and
performance of this Amendment shall not, except as expressly provided herein,
constitute a waiver of any provision of, or operate as a waiver of any right,
power or remedy of any Agent or any Lender under, the DIP Credit Agreement or
any of such other Financing Documents, and nothing in this Amendment shall be
deemed to constitute approval by any Lender of any Asset Sale not expressly
approved herein.
In order to induce Lenders to enter into this Amendment, each
Borrower, by its execution of a counterpart of this Amendment, represents and
warrants that (a) such Borrower has the corporate or other power and authority
and all material Governmental Approvals required to enter into this Amendment
and to carry out the transactions contemplated by, and perform its obligations
under, the Amended Agreement, (b) the execution and delivery of this Amendment
and the performance of the Amended Agreement have been duly authorized by all
necessary corporate or other action on the part of such Borrower, (c) the
execution and delivery by such Borrower of this Amendment and the performance by
such Borrower of the Amended Agreement do not and will not contravene, or
constitute a default under, any Applicable Laws (including an applicable order
of the Court) or any provision of its Organizational Documents, or of any
agreement or other instrument binding upon it or result in or require the
imposition of any Liens (other than the Liens created by the Collateral
Documents) on any of its assets, (d) the execution and delivery by such Borrower
of this Amendment and the performance by such Borrower of the Amended Agreement
do not and will not require any action by or in respect of, or filing with, any
governmental body, agency or official (except for the Court and such as shall
have been made at or before the time required and shall be in full force and
effect on and after the date when made), (e) this Amendment and the Amended
Agreement have been duly executed and delivered by such Borrower and constitute
the valid and binding obligations of such
3
<PAGE>
Borrower, enforceable in accordance with their respective terms, except as may
be limited by general principles of equity, (f) for purposes of the Borrowing
Order (i) this Amendment constitutes a non-material modification of the DIP
Credit Agreement and the Financing Documents, and (ii) notice of this Amendment
has been given to and received by counsel to the Committee (as defined in the
Borrowing Order), (g) after giving effect to this Amendment, the representations
and warranties contained in Article 4 of the DIP Credit Agreement are and will
be true, correct and complete in all material respects on and as of the Second
Amendment Effective Date to the same extent as though made on and as of that
date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date, and (h) after giving
effect to this Amendment, no event has occurred and is continuing or will result
from the consummation of the transactions contemplated by this Amendment that
would constitute a Default or an Event of Default.
This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Amendment shall
become effective (the date of such effectiveness being the "Second Amendment
Effective Date") upon satisfaction of the following conditions: (i) the
Borrowers and Required Lenders shall have executed counterparts of this
Amendment, and the Borrowers and the Administrative Agent shall have received
written or telephonic notification of such execution and authorization of
delivery thereof; and (ii) the Administrative Agent shall have received from the
Borrowers an amendment fee in the aggregate amount of $200,000 for ratable
distribution on the Second Amendment Effective Date to each Lender that has
executed and delivered this Amendment on or prior to November 29, 1999 according
to the ratio of (x) the Commitment of such executing Lender to (y) the aggregate
Commitments of all such executing Lenders. Anything contained herein to the
contrary notwithstanding, the amendments to Section 5.13 and Section 8.01 of the
DIP Credit Agreement set forth in numbered paragraphs 4 and 6 above shall become
effective only upon satisfaction of the conditions set forth in the immediately
preceding sentence and the execution and delivery of a counterpart hereof by the
Borrowers and Determining Lenders
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
[Remainder of page intentionally left blank]
4
<PAGE>
BORROWERS:
Advanced Infusion Systems, Inc.
American X-Rays, Inc.
C.P.C. of Louisiana, Inc.
Community Behavioral Health System, Inc.
Community Psychiatric Centers of Arkansas, Inc.
Community Psychiatric Centers of California
Community Psychiatric Centers of Florida, Inc.
Community Psychiatric Centers of Idaho, Inc.
Community Psychiatric Centers of Indiana, Inc.
Community Psychiatric Centers of Kansas, Inc.
Community Psychiatric Centers of Mississippi, Inc.
Community Psychiatric Centers of Missouri, Inc.
Community Psychiatric Centers of North Carolina, Inc.
Community Psychiatric Centers of Oklahoma, Inc.
Community Psychiatric Centers of Utah, Inc.
Community Psychiatric Centers Properties Incorporated
Community Psychiatric Centers Properties of Oklahoma, Inc.
Community Psychiatric Centers Properties of Texas, Inc.
Community Psychiatric Centers Properties of Utah, Inc.
Courtland Gardens Health Center, Inc.
CPC Investment Corp.
CPC Managed Care Health Services, Inc.
CPC of Georgia, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
First Rehab, Inc.
Florida Hospital Properties, Inc.
Health Care Holdings, Inc.
Health Care Technology, Inc.
Helian ASC of Northridge, Inc.
Helian Health Group, Inc.
Helian Recovery Corporation
Homestead Health Center, Inc.
Horizon Healthcare Services, Inc.
Interamericana Health Care Group
S-1
<PAGE>
J.B. Thomas Hospital, Inc.
Lafayette Health Care Center, Inc.
MedEquities, Inc.
Medisave of Tennessee, Inc.
Medisave Pharmacies, Inc.
Old Orchard Hospital, Inc.
Palo Alto Surgecenter Corporation
Peachtree-Parkwood Hospital, Inc.
PersonaCare, Inc.
PersonaCare Living Center of Clearwater, Inc.
PersonaCare of Bradenton, Inc.
PersonaCare of Clearwater, Inc.
PersonaCare of Connecticut, Inc.
PersonaCare of Georgia, Inc.
PersonaCare of Huntsville, Inc.
PersonaCare of Little Rock, Inc.
PersonaCare of Ohio, Inc.
PersonaCare of Owensboro, Inc.
PersonaCare of Pennsylvania, Inc.
PersonaCare of Pompano East, Inc.
PersonaCare of Pompano West, Inc.
PersonaCare of Reading, Inc.
PersonaCare of San Antonio, Inc.
PersonaCare of San Pedro, Inc.
PersonaCare of Shreveport, Inc.
PersonaCare of St. Petersburg, Inc.
PersonaCare of Warner Robbins, Inc.
PersonaCare of Wisconsin, Inc.
PersonaCare Properties, Inc.
ProData Systems, Inc.
Recovery Inns of America, Inc.
Respiratory Care Services, Inc.
Stamford Health Facilities, Inc.
THC-Chicago, Inc.
THC-Hollywood, Inc.
THC-Houston, Inc.
THC-Minneapolis, Inc.
THC-North Shore, Inc.
THC-Orange County, Inc.
THC-San Diego, Inc.
THC-Seattle, Inc.
TheraTx Healthcare Management, Inc.
TheraTx Health Services, Inc.
TheraTx Management Services, Inc.
TheraTx Medical Supplies, Inc.
TheraTx Rehabilitation Services, Inc.
TheraTx Staffing, Inc.
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<PAGE>
Transitional Hospitals Corporation, a Delaware Corporation
Transitional Hospitals Corporation, a Nevada Corporation
Transitional Hospitals Corporation of Indiana, Inc.
Transitional Hospitals Corporation of Louisiana, Inc.
Transitional Hospitals Corporation of Michigan, Inc.
Transitional Hospitals Corporation of Nevada, Inc.
Transitional Hospitals Corporation of New Mexico, Inc.
Transitional Hospitals Corporation of Tampa, Inc.
Transitional Hospitals Corporation of Texas, Inc.
Transitional Hospitals Corporation of Wisconsin, Inc.
Tucker Nursing Center, Inc.
Tunstall Enterprises, Inc.
VC-OIA, Inc.
VC-TOHC, Inc.
VC-WM, Inc.
Vencare, Inc.
Vencare Rehab Services, Inc.
Vencor Facility Services, Inc.
Vencor Holdings, L.L.C.
Vencor Home Care Services, Inc.
Vencor Hospice, Inc.
Vencor Hospitals East, L.L.C.
Vencor Hospitals West, L.L.C.
Vencor, Inc.
Vencor Insurance Holdings, Inc.
Vencor Investment Company
Vencor Nevada, L.L.C.
Vencor Nursing Centers East, L.L.C.
Vencor Nursing Centers Central L.L.C.
Vencor Nursing Centers North, L.L.C.
Vencor Nursing Centers South, L.L.C.
Vencor Nursing Centers West, L.L.C.
Vencor Operating, Inc.
Vencor Pediatric Care, Inc.
Vencor Provider Network, Inc.
Ventech Systems, Inc.
By: Vencor Operating, Inc., as agent and attorney-in-
fact for each of the foregoing entities
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-3
<PAGE>
Stamford Health Associates, L.P.
By: Stamford Health Facilities, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
Vencor Home Care and Hospice Indiana Partnership
By: Vencor Home Care Services, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
By: Vencor Hospice, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
Vencor Hospitals Limited Partnership
By: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
By: Vencor Nursing Centers Limited Partnership,
Its General Partner
By: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-4
<PAGE>
Vencor Nursing Centers Central Limited
Partnership
By: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
By: Vencor Nursing Centers Limited Partnership,
Its General Partner
By: Vencor Operating, Inc., Its General
Partner
By:/s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
Vencor Nursing Centers Limited Partnership
By: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
By: Vencor Hospitals Limited Partnership, Its
General Partner
By: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Chief Financial Officer
S-5
<PAGE>
AGENTS AND LENDERS:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Arranger,
Collateral Agent and Administrative Agent and as a
Lender
By: /s/ Houston A. Stebbins
------------------------
Name: Houston A. Stebbins
Title: Vice President
S-6
<PAGE>
ABLECO FINANCE LLC, as a Lender
By:_____________________________________
Name:
Title:
S-7
<PAGE>
APPALOOSA INVESTMENT LIMITED
PARTNERSHIP I, as a Lender
By: /s/ Ronald Goldstein
--------------------
Name: Ronald Goldstein
Title: Chief Financial Officer
S-8
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By:_____________________________________
Name:
Title:
S-9
<PAGE>
CHASE SECURITIES INC, AS AGENT FOR THE
CHASE MANHATTAN BANK, as a Lender
By: /s/ Howard J. Golden
--------------------
Name: Howard J. Golden
Title: Authorized Signatory
S-10
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P., as a
Lender
By: /s/ Mark Denatale
-----------------
Name: Mark Denatale
Title: Authorized Signatory
S-11
<PAGE>
PARIBAS, as a Lender
By: /s/ Albert A. Young, Jr.
------------------------
Name: Albert A. Young, Jr.
Title: Director
By: /s/ Edward V. Canale
--------------------
Name: Edward V. Canale
Title: Managing Director
S-12
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST, as a
Lender
By: VAN KAMPEN INVESTMENT ADVISORY CORP.
By: /s/ Douglas J. Smith
--------------------
Name: Douglas J. Smith
Title: Vice President
S-13
<PAGE>
FRANKLIN MUTUAL ADVISERS LLC, as a Lender
By: /s/ Jeffrey A. Altman
---------------------
Name: Jeffrey A. Altman
Title: Senior Vice President
S-14
<PAGE>
FRANKLIN FLOATING RATE TRUST, as a Lender
By: /s/ Chauncey Lufkin
-------------------
Name: Chauncey Lufkin
Title: Vice President
<PAGE>
Exhibit 10.10
THIRD AMENDMENT TO
DEBTOR-IN-POSSESSION CREDIT AGREEMENT AND
LIMITED WAIVER AND CONSENT
December 23, 1999
Reference is made to that certain Debtor-In-Possession Credit
Agreement dated as of September 13, 1999 (as heretofore amended, supplemented or
otherwise modified, the "DIP Credit Agreement"), by and among Vencor, Inc., a
Delaware corporation ("Vencor"), and Vencor Operating, Inc., a Delaware
corporation ("Vencor Opco"), each as debtor and debtor-in-possession, and each
of Vencor's subsidiaries listed on the signature pages thereof, each as debtor
and debtor-in-possession (each such subsidiary, Vencor and Vencor Opco
individually referred to herein as a "Borrower" and, collectively, on a joint
and several basis, as the "Borrowers"); the Lenders listed on the signature
pages thereof; and Morgan Guaranty Trust Company of New York, as arranger,
collateral agent and administrative agent (in such capacity, "Administrative
Agent") for the Lenders, and as an issuing bank for Letters of Credit
thereunder. Capitalized terms used herein without definition herein shall have
the meanings assigned to such terms in the DIP Credit Agreement.
Borrowers have (i) advised Lenders that Borrowers plan to record a
significant charge to their December 1999 earnings to provide for additional bad
debt reserves, and that as a result, Borrowers may be unable to comply with
covenants in the DIP Credit Agreement requiring minimum Consolidated EBITDAR and
a minimum Net Amount of Eligible Accounts (it being understood that Borrowers
have not advised the Lenders that Borrowers will not be in compliance with such
covenants); (ii) requested certain amendments to the DIP Credit Agreement as
more fully set forth below; and (iii) submitted to Lenders a supplement to the
Cash Plan, attached hereto as Annex A (the "Cash Plan Supplement"), setting
-------
forth, for January 2000 and February 2000, a consolidated cash forecast for the
Borrowers. Accordingly:
1. The undersigned Lenders hereby waive, for the period from
December 1, 1999 through and including February 14, 2000, compliance with
the provisions of Sections 6.01 and 6.04 of the DIP Credit Agreement with
respect to all periods from December 1, 1999 through and including February
14, 2000; provided, that any breach of such provisions which would
--------
constitute an Event of Default but for the foregoing waiver shall be an
Event of Default on and after February 15, 2000 unless otherwise waived or
remedied prior to such date.
2. Borrowers and the undersigned Lenders hereby agree that:
(a) Section 1.01 of the DIP Credit Agreement is hereby amended by
inserting therein the following definitions, in alphabetical order:
<PAGE>
"Third Amendment" means that certain Third Amendment to
Debtor-In-Possession Credit Agreement and Limited Waiver and
Consent dated as of December 23, 1999, by and among the
Borrowers, the Collateral Agent, the Administrative Agent and the
Lenders party thereto.
"Third Amendment Effective Date" has the meaning assigned to
that term in the Third Amendment.
(b) Section 5.10 of the DIP Credit Agreement is hereby amended
by deleting the reference to "the date which is four months after the
Petition Date" contained therein and substituting therefor "March 12,
2000";
(c) Section 7.04 of the DIP Credit Agreement is hereby amended
by (i) deleting the "and" at the end of clause (b) thereof, (ii)
deleting the "." at the end of clause (c) thereof and substituting
therefor "; and", and (iii) adding at the end thereof the following
new clause (d):
"(d) Capital contributions to Cornerstone made after
December 25, 1999, in an aggregate amount not to exceed
$1,000,000; provided, that (i) no Default or Event of Default
--------
shall have occurred and be continuing or would result from such
contributions, (ii) such contributions shall not be in excess of
amounts requested to be so contributed by the applicable Cayman
Islands Governmental Authority, and (iii) such contributions are
approved by the Court to the extent such approval is required
pursuant to the Bankruptcy Code or an order of the Court."
(d) Section 7.05 of the DIP Credit Agreement is hereby amended
by adding immediately prior to the "." at the end thereof the
following proviso:
"; and provided, further, that the foregoing shall not prohibit,
-------- -------
after the Third Amendment Effective Date, the purchase of
vehicles and office furniture and equipment from Behavioral
Healthcare Corporation for aggregate cash consideration not to
exceed $20,000, so long as (1) no Default or Event of Default
shall have occurred and be continuing or would result therefrom,
(2) the consideration paid shall be no more than the fair market
value of the assets purchased, (3) such purchase is consummated
on terms and conditions at least as favorable to the relevant
Vencor Company as the terms and conditions which would apply in a
similar transaction with a Person not an Affiliate, and (4) such
purchase is approved by the Court to the extent such approval is
required pursuant to the Bankruptcy Code or an order of the
Court."
3. Each of the undersigned Lenders hereby (i) acknowledges that the
substance of the Cash Plan Supplement is satisfactory to such Lender and
(ii) consents to supplementing the Cash Plan with the forecast contained in
the Cash Plan Supplement.
On and after the Third Amendment Effective Date (as defined below),
each reference in the DIP Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or
2
<PAGE>
words of like import referring to the DIP Credit Agreement, and each reference
in the other Financing Documents to the "DIP Credit Agreement", "thereunder",
"thereof" or words of like import referring to the DIP Credit Agreement, shall
mean and be a reference to the DIP Credit Agreement as amended by this Third
Amendment to Debtor-In-Possession Credit Agreement and Limited Waiver and
Consent (this "Third Amendment"; the DIP Credit Agreement, as so amended, being
the "Amended Agreement").
Without limiting the generality of the provisions of Section 11.05 of
the DIP Credit Agreement, the waiver, the amendments and the consent set forth
in paragraphs 1, 2 and 3 above, respectively, shall be limited precisely as
written, and nothing in this Third Amendment shall be deemed to (a) constitute a
waiver of compliance by Borrowers with respect to (i) Section 6.01 of the DIP
Credit Agreement in any other instance or (ii) any other term, provision or
condition of the DIP Credit Agreement or any of such other Financing Documents,
(b) constitute a consent to any other supplement to the Cash Plan or any other
document, transaction, occurrence, event or condition under Section 5.01(m) of
the DIP Credit Agreement or any other term, provision or condition of the DIP
Credit Agreement or any of such other Financing Documents, or (c) prejudice any
right or remedy that the Administrative Agent or any Lender may now have or may
have in the future under or in connection with the DIP Credit Agreement or any
of such other Financing Documents. Except as specifically waived or amended by
this Third Amendment, the DIP Credit Agreement and such other Financing
Documents shall remain in full force and effect and are hereby ratified and
confirmed.
In order to induce Lenders to enter into this Third Amendment, each
Borrower, by its execution of a counterpart of this Third Amendment, represents
and warrants that (a) such Borrower has the corporate or other power and
authority and all material Governmental Approvals required to enter into this
Third Amendment and to carry out the transactions contemplated by, and perform
its obligations under, the Amended Agreement, (b) the execution and delivery of
this Third Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate or other action on the part of such
Borrower, (c) the execution and delivery by such Borrower of this Third
Amendment and the performance by such Borrower of the Amended Agreement do not
and will not contravene, or constitute a default under, any Applicable Laws
(including an applicable order of the Court) or any provision of its
Organizational Documents, or of any agreement or other instrument binding upon
it or result in or require the imposition of any Liens (other than the Liens
created by the Collateral Documents) on any of its assets, (d) the execution and
delivery by such Borrower of this Third Amendment and the performance by such
Borrower of the Amended Agreement do not and will not require any action by or
in respect of, or filing with, any governmental body, agency or official (except
for the Court and such as shall have been made at or before the time required
and shall be in full force and effect on and after the date when made), (e) this
Third Amendment and the Amended Agreement have been duly executed and delivered
by such Borrower and constitute the valid and binding obligations of such
Borrower, enforceable in accordance with their respective terms, except as may
be limited by general principles of equity, (f) for purposes of the Borrowing
Order (i) this Third Amendment constitutes a non-material modification of the
DIP Credit Agreement and the Financing Documents, and (ii) notice of this Third
Amendment has been given to and received by counsel to the Committee (as defined
in the Borrowing Order), and (g) after giving effect to this Third Amendment, no
event has occurred and is continuing or will result from the
3
<PAGE>
consummation of the transactions contemplated by this Third Amendment that would
constitute a Default or an Event of Default.
This Third Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Third Amendment
shall become effective (the date of such effectiveness being the "Third
Amendment Effective Date") upon the earliest date that the Borrowers and
Required Lenders shall have executed counterparts of this Third Amendment and
the Borrowers and the Administrative Agent shall have received written or
telephonic notification of such execution and authorization of delivery thereof;
provided, however, that it shall be a condition subsequent to the effectiveness
- -------- -------
hereof that the Administrative Agent shall have received, on or prior to January
15, 2000, from the Borrowers an amendment and waiver fee in the aggregate amount
of $200,000 for ratable distribution to each Lender that has executed and
delivered this Third Amendment on or prior to December 30, 1999 according to the
ratio of (x) the Commitment of such executing Lender to (y) the aggregate
Commitments of all such executing Lenders, and if Administrative Agent shall not
have received such fee by January 15, 2000, this Third Amendment and all
amendments and waivers effected hereby shall immediately be null and void, ab
initio, and of no force and effect whatsoever.
THIS THIRD AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
[Remainder of page intentionally left blank]
4
<PAGE>
BORROWERS:
Advanced Infusion Systems, Inc.
American X-Rays, Inc.
C.P.C. of Louisiana, Inc.
Community Behavioral Health System, Inc.
Community Psychiatric Centers of Arkansas, Inc.
Community Psychiatric Centers of California
Community Psychiatric Centers of Florida, Inc.
Community Psychiatric Centers of Idaho, Inc.
Community Psychiatric Centers of Indiana, Inc.
Community Psychiatric Centers of Kansas, Inc.
Community Psychiatric Centers of Mississippi, Inc.
Community Psychiatric Centers of Missouri, Inc.
Community Psychiatric Centers of North Carolina, Inc.
Community Psychiatric Centers of Oklahoma, Inc.
Community Psychiatric Centers of Utah, Inc.
Community Psychiatric Centers Properties Incorporated
Community Psychiatric Centers Properties of Oklahoma, Inc.
Community Psychiatric Centers Properties of Texas, Inc.
Community Psychiatric Centers Properties of Utah, Inc.
Courtland Gardens Health Center, Inc.
CPC Investment Corp.
CPC Managed Care Health Services, Inc.
CPC of Georgia, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
First Rehab, Inc.
Florida Hospital Properties, Inc.
Health Care Holdings, Inc.
Health Care Technology, Inc.
Helian ASC of Northridge, Inc.
Helian Health Group, Inc.
Helian Recovery Corporation
Homestead Health Center, Inc.
Horizon Healthcare Services, Inc.
Interamericana Health Care Group
S-1
<PAGE>
J.B. Thomas Hospital, Inc.
Lafayette Health Care Center, Inc.
MedEquities, Inc.
Medisave of Tennessee, Inc.
Medisave Pharmacies, Inc.
Old Orchard Hospital, Inc.
Palo Alto Surgecenter Corporation
Peachtree-Parkwood Hospital, Inc.
PersonaCare, Inc.
PersonaCare Living Center of Clearwater, Inc.
PersonaCare of Bradenton, Inc.
PersonaCare of Clearwater, Inc.
PersonaCare of Connecticut, Inc.
PersonaCare of Georgia, Inc.
PersonaCare of Huntsville, Inc.
PersonaCare of Little Rock, Inc.
PersonaCare of Ohio, Inc.
PersonaCare of Owensboro, Inc.
PersonaCare of Pennsylvania, Inc.
PersonaCare of Pompano East, Inc.
PersonaCare of Pompano West, Inc.
PersonaCare of Reading, Inc.
PersonaCare of San Antonio, Inc.
PersonaCare of San Pedro, Inc.
PersonaCare of Shreveport, Inc.
PersonaCare of St. Petersburg, Inc.
PersonaCare of Warner Robbins, Inc.
PersonaCare of Wisconsin, Inc.
PersonaCare Properties, Inc.
ProData Systems, Inc.
Recovery Inns of America, Inc.
Respiratory Care Services, Inc.
Stamford Health Facilities, Inc.
THC-Chicago, Inc.
THC-Hollywood, Inc.
THC-Houston, Inc.
THC-Minneapolis, Inc.
THC-North Shore, Inc.
THC-Orange County, Inc.
THC-San Diego, Inc.
THC-Seattle, Inc.
TheraTx Healthcare Management, Inc.
TheraTx Health Services, Inc.
TheraTx Management Services, Inc.
TheraTx Medical Supplies, Inc.
TheraTx Rehabilitation Services, Inc.
TheraTx Staffing, Inc.
S-2
<PAGE>
Transitional Hospitals Corporation, a Delaware Corporation
Transitional Hospitals Corporation, a Nevada Corporation
Transitional Hospitals Corporation of Indiana, Inc.
Transitional Hospitals Corporation of Louisiana, Inc.
Transitional Hospitals Corporation of Michigan, Inc.
Transitional Hospitals Corporation of Nevada, Inc.
Transitional Hospitals Corporation of New Mexico, Inc.
Transitional Hospitals Corporation of Tampa, Inc.
Transitional Hospitals Corporation of Texas, Inc.
Transitional Hospitals Corporation of Wisconsin, Inc.
Tucker Nursing Center, Inc.
Tunstall Enterprises, Inc.
VC-OIA, Inc.
VC-TOHC, Inc.
VC-WM, Inc.
Vencare, Inc.
Vencare Rehab Services, Inc.
Vencor Facility Services, Inc.
Vencor Holdings, L.L.C.
Vencor Home Care Services, Inc.
Vencor Hospice, Inc.
Vencor Hospitals East, L.L.C.
Vencor Hospitals West, L.L.C.
Vencor, Inc.
Vencor Insurance Holdings, Inc.
Vencor Investment Company
Vencor Nevada, L.L.C.
Vencor Nursing Centers East, L.L.C.
Vencor Nursing Centers Central L.L.C.
Vencor Nursing Centers North, L.L.C.
Vencor Nursing Centers South, L.L.C.
Vencor Nursing Centers West, L.L.C.
Vencor Operating, Inc.
Vencor Pediatric Care, Inc.
Vencor Provider Network, Inc.
Ventech Systems, Inc.
BY: Vencor Operating, Inc., as agent and attorney-in-fact
for each of the foregoing entities
By: /s/ Richard A. Schweinhart
---------------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
S-3
<PAGE>
Stamford Health Associates, L.P.
BY: Stamford Health Facilities, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
---------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
Vencor Home Care and Hospice Indiana Partnership
BY: Vencor Home Care Services, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
---------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
BY: Vencor Hospice, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
Vencor Hospitals Limited Partnership
BY: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
---------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
BY: Vencor Nursing Centers Limited Partnership,
Its General Partner
BY: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
S-4
<PAGE>
Vencor Nursing Centers Central Limited
Partnership,
BY: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
--------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
BY: Vencor Nursing Centers Limited Partnership,
Its General Partner
BY: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
S-5
<PAGE>
Vencor Nursing Centers Limited Partnership
BY: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
------------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
BY: Vencor Hospitals Limited Partnership, Its
General Partner
BY: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
--------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
S-6
<PAGE>
AGENTS AND LENDERS:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Arranger,
Collateral Agent and Administrative Agent and as a
Lender
By: /s/ Houston A. Stebbins
------------------------
Name: Houston A. Stebbins
Title: Vice President
S-7
<PAGE>
ABLECO FINANCE LLC, as a Lender
By: _________________________________________
Name:
Title:
S-8
<PAGE>
APPALOOSA INVESTMENT LIMITED PARTNERSHIP I,
as a Lender
By: /s/ James E. Bolin
-----------------------------------------
Name: James E. Bolin
Title: Vice President
S-9
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By: _________________________________________
Name:
Title:
S-10
<PAGE>
CHASE SECURITIES INC, AS AGENT FOR THE CHASE
MANHATTAN BANK, as a Lender
By: /s/ Howard J. Golden
-----------------------------------------
Name: Howard J. Golden
Title: Authorized Signatory
S-11
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P., as a
Lender
By: /s/ Mark Denatale
-----------------------------------------
Name: Mark Denatale
Title: Authorized Signatory
S-12
<PAGE>
PARIBAS, as a Lender
By: /s/ Albert A. Young, Jr.
-----------------------------------------
Name: Albert A. Young, Jr.
Title: Director
By: /s/ Amy Kirschner
-----------------------------------------
Name: Amy Kirschner
Title: Vice President
S-13
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST, as a
Lender
By: VAN KAMPEN INVESTMENT ADVISORY CORP.
By: /s/ Douglas J. Smith
------------------------------------
Name: Douglas J. Smith
Title: Vice President
S-14
<PAGE>
FRANKLIN MUTUAL ADVISERS LLC, as a Lender
By: /s/ Bradley Takahashi
-----------------------------------------
Name: Bradley Takahashi
Title: Assistant Vice President
S-15
<PAGE>
FRANKLIN FLOATING RATE TRUST, as a Lender
By: /s/ Chauncey Lufkin
-----------------------------------------
Name: Chauncey Lufkin
Title: Vice President
S-16
<PAGE>
ACKNOWLEDGEMENT AND CONSENT OF SUBSIDIARY GUARANTOR
By its execution of a counterpart of this Third Amendment, the
undersigned, as a Subsidiary Guarantor under that certain Guaranty Agreement
dated as of September 13, 1999 (the "Guaranty") for the benefit of Lenders, and
as an Original Lien Grantor under that certain Security Agreement dated as of
September 13, 1999 (the "Security Agreement") between the undersigned, the
Borrowers and Collateral Agent, as Secured Party, hereby acknowledges that it
has read this Third Amendment and consents to the terms thereof and further
hereby confirms and agrees that, notwithstanding the effectiveness of this Third
Amendment, the obligations of the undersigned under the Guaranty and the
Security Agreement shall not be impaired or affected and each of the Guaranty
and the Security Agreement is, and shall continue to be, in full force and
effect and is hereby confirmed and ratified in all respects.
CARIBBEAN BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/ Richard A. Schweinhart
------------------------------------
Name:
Title:
S-17
<PAGE>
Annex A
-------
Vencor, Inc.
Cash Plan
Period: Weeks Beginning January 3, 2000 to February 29, 2000
Prepared: December 22, 1999
(in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FORECAST: (Prepared by Company on December 15, 1999)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Week Beginning: 1/3/00 1/10/00 1/17/00 1/24/00 1/31/00 2/7/00 2/14/00 2/21/00 2/28/00
- -----------------------------------------------------------------------------------------------------------------------------------
Projected Receipts:
Facility Receipts $ 31.2 $ 32.5 $ 43.5 $ 34.0 $ 33.5 $ 35.0 $ 38.0 $ 30.4 $ 15.0
Agency Receipts 17.5 17.5 17.5 17.5 19.0 19.0 15.0 19.2 3.5
PIP Receipts 8.5 - 8.5 - 8.5 - 10.5 - -
Misc Receipts - - - - - - - - -
------- -------- -------- -------- -------- ------- -------- -------- --------
Subtotal Receipts $ 57.2 $ 50.0 $ 69.5 $ 51.5 $ 61.0 $ 54.0 $ 63.5 $ 49.6 $ 18.5
Projected Disbursements:
Accounts Payable $ (26.0) $ (26.0) $ (26.8) $ (24.9) $ (27.9) $ (27.9) $ (29.0) $ (15.6) $ (11.2)
Ventas (15.2) - - - (15.2) - - - -
Scheduled PIP Payments - (2.0) - - - (2.0) - - -
Payroll (21.8) (15.3) (18.2) (17.4) (21.1) (16.4) (19.6) (15.6) (5.6)
Taxes (5.5) (9.9) (6.0) (8.7) (6.0) (11.2) (6.7) (7.9) (0.4)
VEBA Funding (1.1) (1.1) (1.1) (1.1) (1.1) (1.0) (1.0) (1.0) (1.0)
Vendor Deposits (1.4) (1.4) (1.4) (1.4) (2.4) (2.4) (2.4) - (2.4)
Executive Retention - - - - - - - - -
Restructuring Costs - (1.1) - - - (1.1) - - -
------- -------- -------- -------- -------- ------- -------- -------- --------
Subtotal Uses of Cash $ (71.0) $ (56.8) $ (53.5) $ (53.5) $ (73.7) $ (62.0) $ (58.7) $ (40.1) $ (20.6)
------- -------- -------- -------- -------- ------- -------- -------- --------
Daily Cash Flow before Next Day
Funding Requirements $ (13.8) $ (6.8) $ 16.0 $ (2.0) $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (2.1)
Reduce (Borrow) Next Day Funding
Requirement - - - - - - - - -
------- -------- -------- -------- -------- ------- -------- -------- --------
Subtotal Net Sources (Uses) of
Cash $ (13.8) $ (6.8) $ 16.0 $ (2.0) $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (2.1)
------- -------- -------- -------- -------- ------- -------- -------- --------
Forecasted Revolver (Borrowing)
Repayment $ (13.8) $ (6.8) $ 16.0 $ (2.0) $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (2.1)
Beginning Revolver $ - $ - $ - $ - $ - $ - $ - $ - $ -
Activity - - - - - - - - -
------- -------- -------- -------- -------- ------- -------- -------- --------
Ending Revolver $ - $ - $ - $ - $ - $ - $ - $ - $ -
======= ======== ======== ======== ======== ======= ======== ======== ========
Beginning Cash $ 94.3 $ 80.5 $ 73.7 $ 89.7 $ 87.7 $ 75.0 $ 67.0 $ 71.8 $ 81.3
Net Change in Cash (13.8) (6.8) 16.0 (2.0) (12.7) (8.0) 4.8 9.5 (2.1)
------- -------- -------- -------- -------- ------- -------- -------- --------
Ending Cash $ 80.5 $ 73.7 $ 89.7 $ 87.7 $ 75.0 $ 67.0 $ 71.8 $ 81.3 $ 79.2
======= ======== ======== ======== ======== ======= ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
COVENANT COMPUTATION:
Cumulative Net Cash Flow $ (13.8) $ (20.6) $ (4.6) $ (6.6) $ (19.3) $ (27.3) $ (22.5) $ (13.0) $ (15.1)
Permitted Variance (1) (15.0) (15.0) (12.0) (12.0) (12.0) (10.0) (10.0) (10.0) (10.0)
------- -------- -------- -------- -------- ------- -------- -------- --------
Compliance with Cash Plan $ (28.8) $ (35.6) $ (16.6) $ (18.6) $ (31.3) $ (37.3) $ (32.5) $ (23.0) $ (25.1)
======= ======== ======== ======== ======== ======= ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Borrower is allowed to disburse up to $37,500,000 above the permitted
variance if, and only if, such disbursements are required to be made to
repay obligations owing to Medicare or its agents.
<PAGE>
Exhibit 10.11
FOURTH AMENDMENT TO
DEBTOR-IN-POSSESSION CREDIT AGREEMENT AND
LIMITED WAIVER AND CONSENT
February 9, 2000
Reference is made to that certain Debtor-In-Possession Credit
Agreement dated as of September 13, 1999 (as heretofore amended, supplemented or
otherwise modified, the "DIP Credit Agreement"), by and among Vencor, Inc., a
Delaware corporation ("Vencor"), and Vencor Operating, Inc., a Delaware
corporation ("Vencor Opco"), each as debtor and debtor-in-possession, and each
of Vencor's subsidiaries listed on the signature pages thereof, each as debtor
and debtor-in-possession (each such subsidiary, Vencor and Vencor Opco
individually referred to herein as a "Borrower" and, collectively, on a joint
and several basis, as the "Borrowers"); the Lenders listed on the signature
pages thereof; and Morgan Guaranty Trust Company of New York, as arranger,
collateral agent and administrative agent (in such capacity, "Administrative
Agent") for the Lenders, and as an issuing bank for Letters of Credit
thereunder. Capitalized terms used herein without definition herein shall have
the meanings assigned to such terms in the DIP Credit Agreement.
Borrowers have (i) advised Lenders that Borrowers plan to record a
significant charge to their December 1999 earnings to provide for additional bad
debt reserves, and that as a result, Borrowers may be unable to comply with
covenants in the DIP Credit Agreement requiring minimum Consolidated EBITDAR and
a minimum Net Amount of Eligible Accounts (it being understood that Borrowers
have not advised the Lenders that Borrowers will not be in compliance with such
covenants); (ii) requested certain amendments to the DIP Credit Agreement as
more fully set forth below; and (iii) submitted to Lenders an amendment and
supplement to the Cash Plan, attached hereto as Annex A (the "Cash Plan
-------
Supplement"), setting forth, for February 2000, March 2000 and April 2000, a
consolidated cash forecast for the Borrowers. Accordingly:
1. The undersigned Lenders hereby waive, for the period from December
1, 1999 through and including March 13, 2000, compliance with the
provisions of Sections 6.01 and 6.04 of the DIP Credit Agreement with
respect to all periods from December 1, 1999 through and including March
13, 2000; provided, that any breach of such provisions which would
--------
constitute an Event of Default but for the foregoing waiver shall be an
Event of Default on and after March 14, 2000 unless otherwise waived or
remedied prior to such date.
2. Each of the undersigned Lenders, pursuant to Section 7.03(b)(i) of
the DIP Credit Agreement, hereby consents to and approves the sale of
Borrowers' interest in their warehouse at 3320 Gilmore Industrial Park
Boulevard, Louisville, Kentucky on substantially the terms set forth in the
memorandum attached hereto as Annex B (the
-------
1
<PAGE>
"Louisville Asset Sale"); provided that (i) no Default shall have occurred
and be continuing at the time of such sale, (ii) such sale is approved by
the Court to the extent such approval is required pursuant to the
Bankruptcy Code or an order of the Court, and (iii) within five Business
Days of Borrowers' receipt of the Net Cash Proceeds of the Louisville Asset
Sale, said Net Cash Proceeds shall be applied to repay outstanding Loans,
if any, and to reduce the Commitments in accordance with Section 2.08 of
the DIP Credit Agreement.
3. Borrowers and the undersigned Lenders hereby agree that:
(i) the definition of "Borrowing Base" in Section 1.01 of the
DIP Credit Agreement is hereby amended by adding at the end of the
table contained therein an additional row as follows:
"March 2000 $75,000,000"
(ii) Section 6.03 of the DIP Credit Agreement is hereby amended
by adding at the end of the table contained therein an additional row
as follows:
"March 2000 2,650"
(iii) Section 6.06 of the DIP Credit Agreement is hereby amended
by adding at the end of the table contained therein an additional row
as follows:
"March 2000 $74,000,000"
4. Each of the undersigned Lenders hereby (i) acknowledges that the
substance of the Cash Plan Supplement is satisfactory to such Lender, (ii)
consents to replacing the portion of the Cash Plan relating to February
2000 with the forecast for February 2000 contained in the Cash Plan
Supplement, and (iii) consents to supplementing the Cash Plan with the
forecast for March 2000 and April 2000 contained in the Cash Plan
Supplement.
On and after the Fourth Amendment Effective Date (as defined below),
each reference in the DIP Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the DIP Credit
Agreement, and each reference in the other Financing Documents to the "DIP
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the DIP Credit Agreement, shall mean and be a reference to the DIP Credit
Agreement as amended by this Fourth Amendment to Debtor-In-Possession Credit
Agreement and Limited Waiver and Consent (this "Fourth Amendment"; the DIP
Credit Agreement, as so amended, being the "Amended Agreement").
Without limiting the generality of the provisions of Section 11.05 of
the DIP Credit Agreement, the waiver, the amendment and the consents set forth
in paragraphs 1, 2, 3 and 4 above shall be limited precisely as written, and
nothing in this Fourth Amendment shall be deemed to (a) constitute a waiver of
compliance by Borrowers with respect to (i) Section 6.01 or 6.04 of the DIP
Credit Agreement in any other instance or (ii) any other term, provision or
condition of the DIP Credit Agreement or any of such other Financing Documents,
(b) constitute
2
<PAGE>
a consent to any other supplement to the Cash Plan or any other document,
transaction, occurrence, event or condition under Section 5.01(m) or 7.03(b)(i)
of the DIP Credit Agreement or any other term, provision or condition of the DIP
Credit Agreement or any of such other Financing Documents, or (c) prejudice any
right or remedy that the Administrative Agent or any Lender may now have or may
have in the future under or in connection with the DIP Credit Agreement or any
of such other Financing Documents. Except as specifically waived or amended by
this Fourth Amendment, the DIP Credit Agreement and such other Financing
Documents shall remain in full force and effect and are hereby ratified and
confirmed. Without limiting the generality of the foregoing, nothing herein
shall constitute, and nothing herein shall be construed to create, an extension
of the Commitments or an obligation on the part of the Lenders to extend the
Commitments beyond the Commitment Termination Date.
In order to induce Lenders to enter into this Fourth Amendment, each
Borrower, by its execution of a counterpart of this Fourth Amendment, represents
and warrants that (a) such Borrower has the corporate or other power and
authority and all material Governmental Approvals required to enter into this
Fourth Amendment and to carry out the transactions contemplated by, and perform
its obligations under, the Amended Agreement, (b) the execution and delivery of
this Fourth Amendment and the performance of the Amended Agreement have been
duly authorized by all necessary corporate or other action on the part of such
Borrower, (c) the execution and delivery by such Borrower of this Fourth
Amendment and the performance by such Borrower of the Amended Agreement do not
and will not contravene, or constitute a default under, any Applicable Laws
(including an applicable order of the Court) or any provision of its
Organizational Documents, or of any agreement or other instrument binding upon
it or result in or require the imposition of any Liens (other than the Liens
created by the Collateral Documents) on any of its assets, (d) the execution and
delivery by such Borrower of this Fourth Amendment and the performance by such
Borrower of the Amended Agreement do not and will not require any action by or
in respect of, or filing with, any governmental body, agency or official (except
for the Court and such as shall have been made at or before the time required
and shall be in full force and effect on and after the date when made), (e) this
Fourth Amendment and the Amended Agreement have been duly executed and delivered
by such Borrower and constitute the valid and binding obligations of such
Borrower, enforceable in accordance with their respective terms, except as may
be limited by general principles of equity, (f) for purposes of the Borrowing
Order (i) this Fourth Amendment constitutes a non-material modification of the
DIP Credit Agreement and the Financing Documents, and (ii) notice of this Fourth
Amendment has been given to and received by counsel to the Committee (as defined
in the Borrowing Order), and (g) after giving effect to this Fourth Amendment,
no event has occurred and is continuing or will result from the consummation of
the transactions contemplated by this Fourth Amendment that would constitute a
Default.
This Fourth Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Fourth
Amendment shall become effective (the date of such effectiveness being the
"Fourth Amendment Effective Date") upon the earliest date that (a) the Borrowers
and Required Lenders shall have executed counterparts of this Fourth Amendment
and the Borrowers and the Administrative Agent shall have received written or
telephonic notification of such execution and authorization of delivery thereof;
and (b) the Administrative Agent shall have
3
<PAGE>
received evidence satisfactory to it that all outstanding statements of
O'Melveny & Myers LLP, Davis Polk & Wardwell and Policano & Manzo that are
received by Vencor prior to 12:00 Noon (New York City time) on February 10, 2000
have been paid in full; provided, however, that it shall be a condition
-------- -------
subsequent to the effectiveness hereof that the Administrative Agent shall have
received from the Borrowers an amendment and waiver fee in the aggregate amount
of $100,000 on or prior to the earlier of (1) the Commitment Termination Date
and (2) the date of payment of any fee to the Lenders (or, if earlier, the last
date on which payment of such fee is permitted) in connection with the first
amendment (if any) to the DIP Credit Agreement entered into after the date
hereof which extends the Stated Maturity Date (which $100,000 amendment and
waiver fee shall be in addition to any such fee payable in connection with such
amendment to the DIP Credit Agreement), for ratable distribution to each Lender
that has executed and delivered this Fourth Amendment on or prior to February
14, 2000 according to the ratio of (x) the Commitment of such executing Lender
to (y) the aggregate Commitments of all such executing Lenders, and if
Administrative Agent shall not have received such fee by such date, this Fourth
Amendment and all amendments, waivers and consents effected hereby shall
immediately be null and void, ab initio, and of no force and effect whatsoever.
THIS FOURTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
[Remainder of page intentionally left blank]
4
<PAGE>
BORROWERS:
Advanced Infusion Systems, Inc.
American X-Rays, Inc.
C.P.C. of Louisiana, Inc.
Community Behavioral Health System, Inc.
Community Psychiatric Centers of Arkansas, Inc.
Community Psychiatric Centers of California
Community Psychiatric Centers of Florida, Inc.
Community Psychiatric Centers of Idaho, Inc.
Community Psychiatric Centers of Indiana, Inc.
Community Psychiatric Centers of Kansas, Inc.
Community Psychiatric Centers of Mississippi, Inc.
Community Psychiatric Centers of Missouri, Inc.
Community Psychiatric Centers of North Carolina, Inc.
Community Psychiatric Centers of Oklahoma, Inc.
Community Psychiatric Centers of Utah, Inc.
Community Psychiatric Centers Properties Incorporated
Community Psychiatric Centers Properties of Oklahoma,
Inc.
Community Psychiatric Centers Properties of Texas, Inc.
Community Psychiatric Centers Properties of Utah, Inc.
Courtland Gardens Health Center, Inc.
CPC Investment Corp.
CPC Managed Care Health Services, Inc.
CPC of Georgia, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
First Rehab, Inc.
Florida Hospital Properties, Inc.
Health Care Holdings, Inc.
Health Care Technology, Inc.
Helian ASC of Northridge, Inc.
Helian Health Group, Inc.
Helian Recovery Corporation
Homestead Health Center, Inc.
Horizon Healthcare Services, Inc.
<PAGE>
Interamericana Health Care Group
J.B. Thomas Hospital, Inc.
Lafayette Health Care Center, Inc.
MedEquities, Inc.
Medisave of Tennessee, Inc.
Medisave Pharmacies, Inc.
Old Orchard Hospital, Inc.
Palo Alto Surgecenter Corporation
Peachtree-Parkwood Hospital, Inc.
PersonaCare, Inc.
PersonaCare Living Center of Clearwater, Inc.
PersonaCare of Bradenton, Inc.
PersonaCare of Clearwater, Inc.
PersonaCare of Connecticut, Inc.
PersonaCare of Georgia, Inc.
PersonaCare of Huntsville, Inc.
PersonaCare of Little Rock, Inc.
PersonaCare of Ohio, Inc.
PersonaCare of Owensboro, Inc.
PersonaCare of Pennsylvania, Inc.
PersonaCare of Pompano East, Inc.
PersonaCare of Pompano West, Inc.
PersonaCare of Reading, Inc.
PersonaCare of San Antonio, Inc.
PersonaCare of San Pedro, Inc.
PersonaCare of Shreveport, Inc.
PersonaCare of St. Petersburg, Inc.
PersonaCare of Warner Robbins, Inc.
PersonaCare of Wisconsin, Inc.
PersonaCare Properties, Inc.
ProData Systems, Inc.
Recovery Inns of America, Inc.
Respiratory Care Services, Inc.
Stamford Health Facilities, Inc.
THC-Chicago, Inc.
THC-Hollywood, Inc.
THC-Houston, Inc.
THC-Minneapolis, Inc.
THC-North Shore, Inc.
THC-Orange County, Inc.
THC-San Diego, Inc.
THC-Seattle, Inc.
TheraTx Healthcare Management, Inc.
TheraTx Health Services, Inc.
TheraTx Management Services, Inc.
TheraTx Medical Supplies, Inc.
<PAGE>
TheraTx Rehabilitation Services, Inc.
TheraTx Staffing, Inc.
Transitional Hospitals Corporation, a Delaware
Corporation
Transitional Hospitals Corporation, a Nevada
Corporation
Transitional Hospitals Corporation of Indiana, Inc.
Transitional Hospitals Corporation of Louisiana, Inc.
Transitional Hospitals Corporation of Michigan, Inc.
Transitional Hospitals Corporation of Nevada, Inc.
Transitional Hospitals Corporation of New Mexico, Inc.
Transitional Hospitals Corporation of Tampa, Inc.
Transitional Hospitals Corporation of Texas, Inc.
Transitional Hospitals Corporation of Wisconsin, Inc.
Tucker Nursing Center, Inc.
Tunstall Enterprises, Inc.
VC-OIA, Inc.
VC-TOHC, Inc.
VC-WM, Inc.
Vencare, Inc.
Vencare Rehab Services, Inc.
Vencor Facility Services, Inc.
Vencor Holdings, L.L.C.
Vencor Home Care Services, Inc.
Vencor Hospice, Inc.
Vencor Hospitals East, L.L.C.
Vencor Hospitals West, L.L.C.
Vencor, Inc.
Vencor Insurance Holdings, Inc.
Vencor Investment Company
Vencor Nevada, L.L.C.
Vencor Nursing Centers East, L.L.C.
Vencor Nursing Centers Central L.L.C.
Vencor Nursing Centers North, L.L.C.
Vencor Nursing Centers South, L.L.C.
Vencor Nursing Centers West, L.L.C.
Vencor Operating, Inc.
Vencor Pediatric Care, Inc.
Vencor Provider Network, Inc.
Ventech Systems, Inc.
<PAGE>
BY: VENCOR OPERATING, INC., as agent and attorney-in-
fact for each of the foregoing entities
By: /s/ Richard A. Schweinhart
--------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
STAMFORD HEALTH ASSOCIATES, L.P.
BY: STAMFORD HEALTH FACILITIES, INC., ITS GENERAL
PARTNER
By: /s/ Richard A. Schweinhart
--------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
VENCOR HOME CARE AND HOSPICE INDIANA PARTNERSHIP
BY: VENCOR HOME CARE SERVICES, INC., ITS GENERAL
PARTNER
By: /s/ Richard A. Schweinhart
--------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
BY: VENCOR HOSPICE, INC., ITS GENERAL PARTNER
By: /s/ Richard A. Schweinhart
--------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
VENCOR HOSPITALS LIMITED PARTNERSHIP
BY: VENCOR OPERATING, INC., ITS GENERAL PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
BY: VENCOR NURSING CENTERS LIMITED PARTNERSHIP, ITS
GENERAL PARTNER
BY: VENCOR OPERATING, INC., ITS GENERAL
PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
VENCOR NURSING CENTERS CENTRAL LIMITED PARTNERSHIP
BY: VENCOR OPERATING, INC., ITS GENERAL PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
BY: VENCOR NURSING CENTERS LIMITED PARTNERSHIP, ITS
GENERAL PARTNER
BY: VENCOR OPERATING, INC., ITS GENERAL
PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
VENCOR NURSING CENTERS LIMITED PARTNERSHIP
BY: VENCOR OPERATING, INC., ITS GENERAL PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
BY: VENCOR HOSPITALS LIMITED PARTNERSHIP, ITS
GENERAL PARTNER
BY: VENCOR OPERATING INC., ITS GENERAL
PARTNER
By: /s/ Richard A. Schweinhart
--------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
AGENTS AND LENDERS:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Arranger,
Collateral Agent and Administrative Agent and as a
Lender
By: /s/ Houston A. Stebbins
---------------------------
Name: Houston A. Stebbins
Title: Vice President
<PAGE>
ABLECO FINANCE LLC, as a Lender
By:
----------------------------
Name:
Title:
<PAGE>
APPALOOSA INVESTMENT LIMITED
PARTNERSHIP I, as a Lender
By: /s/ Ronald M. Goldstein
---------------------------
Name: Ronald M. Goldstein
Title: Chief Financial Officer
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By:
------------------------------
Name:
Title:
<PAGE>
CHASE SECURITIES INC, AS AGENT FOR THE
CHASE MANHATTAN BANK, as a Lender
By:
-------------------------------
Name:
Title:
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P., as a Lender
By: /s/ Mark Denatale
------------------------------
Name: Mark Denatale
Title: Authorized Signatory
<PAGE>
PARIBAS, as a Lender
By: /s/ Albert A. Young, Jr.
------------------------------
Name: Albert A. Young, Jr.
Title: Director
By: /s/ Edward V. Canale
------------------------------
Name: Edward V.Canale
Title: Managing Director
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST, as a Lender
By: VAN KAMPEN INVESTMENT ADVISORY CORP.
By: /s/ Douglas J. Smith
-------------------------
Name: Douglas J. Smith
Title: Vice President
<PAGE>
FRANKLIN MUTUAL ADVISERS LLC, as a Lender
By: /s/ Bradley Takahashi
-------------------------------
Name: Bradley Takahashi
Title: Assistant Vice President
<PAGE>
FRANKLIN FLOATING RATE TRUST, as a Lender
By: /s/ Chauncey Lufkin
-------------------------------
Name: Chauncey Lufkin
Title: Vice President
<PAGE>
ACKNOWLEDGEMENT AND CONSENT OF SUBSIDIARY GUARANTOR
By its execution of a counterpart of this Fourth Amendment, the
undersigned, as a Subsidiary Guarantor under that certain Guaranty Agreement
dated as of September 13, 1999 (the "Guaranty") for the benefit of Lenders, and
as an Original Lien Grantor under that certain Security Agreement dated as of
September 13, 1999 (the "Security Agreement") between the undersigned, the
Borrowers and Collateral Agent, as Secured Party, hereby acknowledges that it
has read this Fourth Amendment and consents to the terms thereof and further
hereby confirms and agrees that, notwithstanding the effectiveness of this
Fourth Amendment, the obligations of the undersigned under the Guaranty and the
Security Agreement shall not be impaired or affected and each of the Guaranty
and the Security Agreement is, and shall continue to be, in full force and
effect and is hereby confirmed and ratified in all respects.
CARIBBEAN BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
Annex A
-------
<TABLE>
<CAPTION>
Vencor, Inc.
Cash Plan
Period: Weeks Beginning January 31, 2000 to April 28, 2000
Prepared: February 10, 2000
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOW FORECAST: (Prepared by Company on February 4, 2000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Week Beginning: 1/31/00 2/7/00 2/14/00 2/21/00 2/28/00 3/6/00 3/13/00 3/20/00
Projected Receipts:
Facility Receipts $ 33.5 $ 35.0 $ 38.0 $ 30.4 $ 30.1 $ 27.2 $ 40.8 $ 38.0
Agency Receipts 19.0 19.0 15.0 19.2 12.5 13.5 20.2 19.5
PIP Receipts 8.5 - 10.5 - 8.9 - 10.0 -
Misc Receipts - - - - - - - -
-------- ------- -------- -------- -------- ------- -------- --------
Subtotal Receipts $ 61.0 $ 54.0 $ 63.5 $ 49.6 $ 51.5 $ 40.7 $ 71.0 $ 57.5
Projected Disbursements:
Accounts Payable $ (27.9) $ (27.9) $ (29.0) $ (15.6) $ (37.9) $ (26.7) $ (19.2) $ (19.2)
Ventas (15.2) - - - (15.2) - - -
Scheduled PIP Payments - (2.0) - - - - -
Payroll (21.1) (16.4) (19.6) (15.6) (18.9) (17.2) (17.2) (17.3)
Taxes (6.0) (11.2) (6.7) (7.9) (9.3) (6.7) (7.7) (4.3)
VEBA Funding (1.1) (1.0) (1.0) (1.0) (1.0) (1.5) (1.5) (1.5)
Vendor Deposits (2.4) (2.4) (2.4) - (2.4) (2.0) (2.0) (2.0)
Executive Retention - - - - - - - -
Restructuring Costs - (1.1) - - (1.0) - - -
-------- ------- -------- -------- -------- ------- -------- --------
Subtotal Uses of Cash $ (73.7) $ (62.0) $ (58.7) $ (40.1) $ (85.7) $ (54.1) $ (47.6) $ (44.3)
-------- ------- -------- -------- -------- ------- -------- --------
Daily Cash Flow before Next Day
Funding Requirements $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (34.2) $ (13.4) $ 23.4 $ 13.2
Reduce (Borrow) Next Day Funding - - - - - - - -
Requirement -------- ------- -------- -------- -------- ------- -------- --------
Subtotal Net Sources (Uses) of Cash $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (34.2) $ (13.4) $ 23.4 $ 13.2
-------- ------- -------- -------- -------- ------- -------- --------
Forecasted Revolver (Borrowing) $ (12.7) $ (8.0) $ 4.8 $ 9.5 $ (34.2) $ (13.4) $ 23.4 $ 13.2
Repayment
Beginning Revolver $ - $ - $ - $ - $ - $ - $ - $ -
Activity - - - - - - - -
-------- ------- -------- -------- -------- ------- -------- --------
Ending Revolver $ - $ - $ - $ - $ - $ - $ - $ -
======== ======= ======== ======== ======== ======= ======== ========
Beginning Cash $ 97.0 $ 84.3 $ 76.3 $ 81.1 $ 90.6 $ 56.4 $ 43.0 $ 66.4
Net Change in Cash (12.7) (8.0) 4.8 9.5 (34.2) (13.4) 23.4 13.2
-------- ------- -------- -------- -------- ------- -------- --------
Ending Cash $ 84.3 $ 76.3 $ 81.1 $ 90.6 $ 56.4 $ 43.0 $ 66.4 $ 79.6
======== ======= ======== ======== ======== ======= ======== ========
COVENANT COMPUTATION:
Cumulative Net Cash Flow $ (12.7) $ (20.7) $ (15.9) $ (6.4) $ (40.6) $ (54.0) $ (30.6) $ (17.4)
Permitted Variance (1) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0)
-------- ------- -------- -------- -------- ------- -------- --------
Compliance with Cash Plan $ (30.7) $ (38.7) $ (33.9) $ (24.4) $ (58.6) $ (72.0) $ (48.6) $ (35.4)
======== ======= ======== ======== ======== ======= ======== ========
Week Beginning: 3/27/00 4/3/00 4/10/00 4/17/00 4/24/00
Projected Receipts:
Facility Receipts $ 30.3 $ 20.6 $ 31.0 $ 50.2 $ 45.7
Agency Receipts 12.5 15.0 14.3 18.9 17.0
PIP Receipts 10.0 - 10.0 - 10.0
Misc Receipts - - - - -
-------- ------- -------- -------- --------
Subtotal Receipts $ 52.8 $ 35.6 $ 55.3 $ 69.1 $ 72.7
Projected Disbursements:
Accounts Payable $ (14.8) $ (32.5) $ (30.4) $ (22.8) $ (22.8)
Ventas - (15.2) - - -
Scheduled PIP Payments - - - - -
Payroll (13.2) (21.9) (18.9) (18.1) (19.7)
Taxes (4.5) (8.0) (8.0) (8.0) (8.0)
VEBA Funding (1.5) (1.3) (1.3) (1.3) (1.3)
Vendor Deposits (2.0) (2.0) (2.0) (2.0) (2.0)
Executive Retention - - - - -
Restructuring Costs (0.1) (1.0) - - (0.1)
-------- ------- -------- -------- --------
Subtotal Uses of Cash $ (36.1) $ (81.9) $ (60.6) $ (52.2) $ (53.9)
-------- ------- -------- -------- --------
Daily Cash Flow before Next Day
Funding Requirements $ 16.7 $ (46.3) $ (5.3) $ 16.9 $ 18.8
Reduce (Borrow) Next Day Funding - - - - -
Requirement -------- ------- -------- -------- --------
Subtotal Net Sources (Uses) of Cash $ 16.7 $ (46.3) $ (5.3) $ 16.9 $ 18.8
-------- ------- -------- -------- --------
Forecasted Revolver (Borrowing) $ 16.7 $ (46.3) $ (5.3) $ 16.9 $ 18.8
Repayment
Beginning Revolver $ - $ - $ - $ - $ -
Activity - - - - -
-------- ------- -------- -------- --------
Ending Revolver $ - $ - $ - $ - $ -
======== ======= ======== ======== ========
Beginning Cash $ 79.6 $ 96.3 $ 50.0 $ 44.7 $ 61.6
Net Change in Cash 16.7 (46.3) (5.3) 16.9 18.8
-------- ------- -------- -------- --------
Ending Cash $ 96.3 $ 50.0 $ 44.7 $ 61.6 $ 80.4
======== ======= ======== ======== ========
COVENANT COMPUTATION:
Cumulative Net Cash Flow $ (0.7) $ (47.0) $ (52.3) $ (35.4) $ (16.6)
Permitted Variance (1) (18.0) (18.0) (18.0) (18.0) (18.0)
-------- ------- -------- -------- --------
Compliance with Cash Plan $ (18.7) $ (65.0) $ (70.3) $ (53.4) $ (34.6)
======== ======= ======== ======== ========
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) The Borrower is allowed to disburse up to $52,500,000 above the permitted
variance if, and only if, such disbursements are required to be made to
repay obligations owing to Medicare or its agents.
<PAGE>
Annex B
-------
February 1, 2000
MEMORANDUM FOR VENCOR DIP LENDER GROUP
- --------------------------------------
Re: Request for Consent to Proposed Asset Sale
------------------------------------------
Below is outlined a proposed transaction in which the Debtors would
sell a warehouse in Louisville, Kentucky for gross proceeds of $750,000. The
warehouse is not scheduled as a Property Held for Sale under the Debtor-in-
Possession Credit Agreement dated as of September 13, 1999 (the "Agreement"
---------
capitalized terms in this memorandum to have the definitions given to them in
the Agreement), and accordingly the Debtors request the consent of Required
Lenders to the transaction pursuant to Section 7.03 of the Agreement. The Net
Cash Proceeds of the sale would be applied to repay outstanding loans, if any,
and to reduce the Commitments in accordance with Section 2.08 of the Agreement.
On February 26, 1998, Vencor, Inc. purchased a warehouse located at
3320 Gilmore Industrial Boulevard, Louisville, Kentucky (the "Property") for
--------
$740,000 which has been used to store many of the Debtors' records. In recent
months the Debtors determined it would be more efficient and less costly to
outsource the storage aspect of the Debtors' record retention program. It is
estimated that the outsourcing will result in an estimated annual savings of
$197,865 to the Debtors. Consequently, as of February 1, 2000, the Debtors are
discontinuing use of the warehouse. Until the Debtors are able to sell the
Property, they are responsible for security and maintenance costs on the
Property, which the Debtors estimate are $2,333 per month.
On or about October 6, 1999, the Debtors retained a broker to market
the Property. The broker has been involved with numerous sale and lease
transactions, including the ownership of eight buildings in the Gilmore
Industrial Park in which the Property is located. The Property was marketed by:
(a) placement in the Louisville Board of Realtors Multiple Listing Service for
exposure to 150 local commercial/industrial members, (b) mailing a brochure to
local distributors and light manufacturers, (c) advertisement in Business First,
--------------
a business publication for the Louisville metropolitan area, (d) inclusion in
the database at Greater Louisville, Inc. for distribution to business
development prospects, and (e) installation of a "For Sale" sign on the
Property. The marketing efforts produced fifteen showings of the Property which
resulted in two offers for the Property, one of which was considerably lower
than the proposed purchase price.
<PAGE>
The offer that the Debtors propose to accept is a $750,000 offer from
George Eric Johnson and Linda C. Johnson (the "Purchaser"). The Debtors propose
---------
to accept this offer based on the offer price, the favorable terms of the offer,
pursuant to which the Property will be sold on an "as is" basis, and the lack of
interest from other potential purchasers after thorough marketing efforts. The
Debtors believe that the sale of the Property is in the best interests of the
Debtors, their estates and their creditors, and is amply justified by several
factors. First, the Property does not make a positive contribution to the
Debtors' case flow. Indeed, the Debtors must make monthly security and
maintenance related payments of approximately $2,333 in order to maintain the
safety and marketability of the closed warehouse. Second, the purchase price,
based on the information available to the broker, is the highest amount paid per
square foot for a building of comparable size in the immediate area of the
Gilmore Industrial Park. As described above, the Debtors have marketed the
Property through an experienced broker knowledgeable about the local market
conditions. Despite diligent and extensive marketing, the Debtors received only
two offers for the Property, of which the Purchaser's was the highest and best.
The Purchaser has not objected to the thirty foot shared driveway and irregular
site configuration that have been objections raised by many of the other parties
that viewed the Property. If the Debtors are unable to sell the Property to the
Purchaser, the Debtors would lose their investment of time and expense in
marketing the Property.
The following is a summary of the pertinent provisions of the proposed
sale agreement: (i) the purchase price for the Property upon closing if
$750,000, including a deposit of $25,000, subject to transfer taxes and certain
adjustments for prorated taxes; (ii) the 425,000 deposit becomes non-refundable
45 days after the execution date of the sale agreement; (iii) upon closing and
pursuant to both the sale agreement and a separate agreement with the broker,
Vencor, Inc. will be required to pay three percent of the $750,000 purchase
price to the broker as a commission; (iv) the Property is being sold by Vencor,
Inc. on an "as is", "where is" and "with all faults" basis; and (v) the closing
is to take place on or before April 1, 2000.
* * *
Vencor will be pleased to provide further information with respect to
this transaction at your request. Please contact Franklin Parlamis at (212)
225-2246 or Cheryl Haas-Goldstein at (212) 225-2038 with any questions.
<PAGE>
Exhibit 10.12
FIFTH AMENDMENT TO
DEBTOR-IN-POSSESSION CREDIT AGREEMENT
February 23, 2000
Reference is made to that certain Debtor-In-Possession Credit Agreement
dated as of September 13, 1999 (as heretofore amended, supplemented or otherwise
modified, the "DIP Credit Agreement"), by and among Vencor, Inc., a Delaware
corporation ("Vencor"), and Vencor Operating, Inc., a Delaware corporation
("Vencor Opco"), each as debtor and debtor-in-possession, and each of Vencor's
subsidiaries listed on the signature pages thereof, each as debtor and
debtor-in-possession (each such subsidiary, Vencor and Vencor Opco individually
referred to herein as a "Borrower" and, collectively, on a joint and several
basis, as the "Borrowers"); the Lenders listed on the signature pages thereof;
and Morgan Guaranty Trust Company of New York, as arranger, collateral agent and
administrative agent (in such capacity, "Administrative Agent") for the Lenders,
and as an issuing bank for Letters of Credit thereunder. Capitalized terms used
herein without definition herein shall have the meanings assigned to such terms
in the DIP Credit Agreement.
Borrowers have requested that Lenders (i) extend the termination date
of the Commitments, (ii) extend the deadline for filing a plan of reorganization
acceptable to the Required Lenders in the Cases, (iii) amend certain financial
covenants, and (iv) make certain other amendments to the DIP Credit Agreement,
in each case as more fully set forth below. Accordingly, Borrowers and the
undersigned Lenders hereby agree as follows:
1. The definition of "Borrowing Base" in Section 1.01 of the DIP Credit
Agreement is hereby amended by deleting the final row of the table contained
therein and substituting therefor the following:
March 2000 $67,842,386
April 2000 $67,842,386
May 2000 $67,842,386
June 2000 $67,842,386
2. The definition of "Stated Maturity Date" in Section 1.01 of the DIP
Credit Agreement is hereby amended by deleting the reference to "March 13, 2000"
contained therein and substituting therefor "June 30, 2000".
3. Section 1.01 of the DIP Credit Agreement is hereby amended by
inserting therein the following definitions, in alphabetical order:
1
<PAGE>
"Eligible Receivables Report" means a report substantially in the
form of Exhibit L annexed hereto delivered by the Borrowers to the
---------
Administrative Agent pursuant to Section 5.01(r).
"Fifth Amendment" means that certain Fifth Amendment to Debtor-
In-Possession Credit Agreement dated as of February 23, 2000, by and
among the Borrowers, the Collateral Agent, the Administrative Agent
and the Lenders.
"Fifth Amendment Effective Date" has the meaning assigned to that
term in the Fifth Amendment.
4. Section 2.01(c) of the DIP Credit Agreement is hereby amended by
deleting clause (B) therefrom in its entirety and substituting therefor the
following:
"(B) in no event shall the Outstanding Tranche A Amount of all
Lenders exceed the lesser of (x) the Tranche A Commitments, (y) the
Borrowing Base, and (z) the "Effective Borrowing Base" as set forth
in the Eligible Receivables Report for the most recently ended month
delivered pursuant to Section 5.01(r), in each case as the foregoing
limits may be in effect from time to time;'
5. Section 2.05(a) of the DIP Credit Agreement is hereby amended by
deleting the reference to "January 13, 2000" contained therein and substituting
therefor "April 30, 2000".
6. Section 5.01(b) of the DIP Credit Agreement is hereby amended by
adding at the end of the table contained therein six additional rows as follows:
----------------------------------------------------
Fiscal Year ended
December 31, 1999 March 31, 2000
(final information)
----------------------------------------------------
January 2000 (final
information) March 31, 2000
----------------------------------------------------
February 2000 March 31, 2000
----------------------------------------------------
Fiscal Quarter ended
March 31, 2000 May 15, 2000
----------------------------------------------------
April 2000 May 31, 2000
----------------------------------------------------
May 2000 June 30, 2000
----------------------------------------------------
7. Section 5.01 of the DIP Credit Agreement is hereby amended by (i)
deleting the "and" at the end of clause (q) thereof, (ii) redesignating clause
(r) thereof as
2
<PAGE>
clause (t), and (iii) adding immediately after clause (q) thereof the following
new clauses (r) and (s):
"(r) together with each delivery after the Fifth Amendment Effective
Date of financial statements pursuant to Section 5.01(b), an Eligible
Receivables Report setting forth as of the end of the last month covered by
such financial statements the information required to be set forth in
Exhibit L hereto, accompanied by a certificate from the Financial Officer
stating that the information provided on such Eligible Receivables Report
accurately reflects the amounts required to be reported thereon;
(s) promptly after any Executive Officer or Financial Officer
becomes aware that a disbursement is required to be made to repay
obligations owing to Medicare or its agents (and in any event no later than
the making of such disbursement), a notice setting forth the amount of any
such disbursement, the date such disbursement will be made and an
explanation setting forth in reasonable detail the reasons such
disbursement is required; and"
8. Section 5.10 of the DIP Credit Agreement is hereby amended by
deleting the reference to "March 12, 2000" contained therein and substituting
therefor "May 1, 2000".
9. Section 6.01 of the DIP Credit Agreement is hereby amended by (a)
deleting the reference to "September 1, 1999" contained therein and substituting
therefor "March 1, 2000", and (b) deleting the table contained therein in its
entirety and substituting therefor the following table:
Month Amount
----- ------
March 2000 $ 25,000,000
April 2000 $ 55,000,000
May 2000 $ 89,000,000
June 2000 $119,000,000
10. Section 6.03 of the DIP Credit Agreement is hereby amended by
deleting the last row of the table contained therein (which sets forth a minimum
Hospital Daily Census amount for March 2000) and substituting therefor the
following four rows:
March 2000 2,830
April 2000 2,750
May 2000 2,650
June 2000 2,570
3
<PAGE>
11. Section 6.04 of the DIP Credit Agreement is hereby amended deleting
the reference to "$400,000,000" contained therein and substituting therefor
"$350,000,000".
12. Section 6.06 of the DIP Credit Agreement is hereby amended by (a)
deleting the reference to "September 1, 1999" contained therein and substituting
therefor "March 1, 2000", and (b) deleting the table contained therein in its
entirety and substituting therefor the following table:
Maximum Consolidated
--------------------
Capital Expenditures
--------------------
Month Amount
----- ------
March 2000 $10,000,000
April 2000 $17,000,000
May 2000 $24,000,000
June 2000 $31,000,000
13. Section 7.03(b) of the DIP Credit Agreement is hereby amended by
adding immediately prior to the "." at the end of the penultimate sentence
thereof the following proviso:
"; and provided, further, that the foregoing shall not prohibit, after
-------- -------
the Fifth Amendment Effective Date, (x) the sale at auction (or by any
other manner approved by the Court) of approximately 70 vehicles associated
with the Borrowers' Vencare business line and (y) the sale of two durable
medical equipment storefronts (and the assumption and assignment of the
related leases) previously associated with the Borrowers' Vencare business
line to any Person other than a Subsidiary or an Affiliate of any Borrower,
in each case so long as (1) at the time of such sale, no Default shall have
occurred and be continuing or would result therefrom, (2) the consideration
received by the Borrowers for such assets shall be in cash in an aggregate
amount no less than the aggregate fair market value thereof, (3) such sale
is approved by the Court to the extent such approvals are required pursuant
to the Bankruptcy Code or an order of the Court, and (4) within five
Business Days of Borrowers' receipt of the Net Cash Proceeds of such Asset
Sale, said Net Cash Proceeds shall be applied to repay outstanding Loans,
if any, and to reduce the Commitments in accordance with Section 2.08 of
the DIP Credit Agreement."
14. Section 7.04 of the DIP Credit Agreement is hereby amended by
deleting the proviso contained in clause (b) thereof in its entirety and
substituting therefor the following:
"provided that the aggregate unrecovered amount of all such Investments
made by the Borrowers and their Subsidiaries in any Vencor Company which is
not a
4
<PAGE>
Borrower or a Subsidiary Guarantor (x) after the Petition Date and prior to
the Fifth Amendment Effective Date shall not exceed $1,000,000, and (y) on
or after the Fifth Amendment Effective Date shall not exceed $1,000,000;"
15. Section 7.04 of the DIP Credit Agreement is hereby further amended by
(i) deleting the "and" at the end of clause (c) thereof, (ii) deleting the "."
at the end of clause (d) thereof and substituting therefor "; and", and (iii)
adding at the end thereof the following new clause (e):
"(e) Capital contributions to Cornerstone made after the Fifth
Amendment Effective Date, in an aggregate amount not to exceed
$2,000,000; provided, that (i) no Default shall have occurred and be
--------
continuing or would result from such contributions, (ii) such
contributions shall not be in excess of amounts requested to be so
contributed by the applicable Cayman Islands Governmental Authority,
and (iii) such contributions are approved by the Court to the extent
such approval is required pursuant to the Bankruptcy Code or an order
of the Court."
16. The DIP Credit Agreement is hereby amended by adding a new Exhibit L
---------
thereto in the form of Annex A attached hereto.
17. The Cash Plan for the 13-week period beginning January 31, 2000 is
hereby amended by deleting the reference to "$52,500,000" contained in footnote
(1) thereto and substituting therefor "$60,000,000".
On and after the Fifth Amendment Effective Date (as defined below), each
reference in the DIP Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the DIP Credit
Agreement, and each reference in the other Financing Documents to the "DIP
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the DIP Credit Agreement, shall mean and be a reference to the DIP Credit
Agreement as amended by this Fifth Amendment to Debtor-In-Possession Credit
Agreement (this "Fifth Amendment"; the DIP Credit Agreement, as so amended,
being the "Amended Agreement").
Without limiting the generality of the provisions of Section 11.05 of the
DIP Credit Agreement, the amendments set forth above shall be limited precisely
as written, and nothing in this Fifth Amendment shall be deemed to prejudice any
right or remedy that the Administrative Agent or any Lender may now have or may
have in the future under or in connection with the DIP Credit Agreement or any
other Financing Document. Except as specifically amended by this Fifth
Amendment, the DIP Credit Agreement and such other Financing Documents shall
remain in full force and effect and are hereby ratified and confirmed.
In order to induce Lenders to enter into this Fifth Amendment, each
Borrower, by its execution of a counterpart of this Fifth Amendment, represents
and warrants that (a) such Borrower has the corporate or other power and
authority and all material Governmental Approvals required to enter into this
Fifth Amendment and to carry out the transactions contemplated by, and perform
its obligations under, the Amended Agreement, (b) the execution
5
<PAGE>
and delivery of this Fifth Amendment and the performance of the Amended
Agreement have been duly authorized by all necessary corporate or other action
on the part of such Borrower, (c) the execution and delivery by such Borrower of
this Fifth Amendment and the performance by such Borrower of the Amended
Agreement do not and will not contravene, or constitute a default under, any
Applicable Laws (including an applicable order of the Court) or any provision of
its Organizational Documents, or of any agreement or other instrument binding
upon it or result in or require the imposition of any Liens (other than the
Liens created by the Collateral Documents) on any of its assets, (d) the
execution and delivery by such Borrower of this Fifth Amendment and the
performance by such Borrower of the Amended Agreement do not and will not
require any action by or in respect of, or filing with, any governmental body,
agency or official (except for the Court and such as shall have been made at or
before the time required and shall be in full force and effect on and after the
date when made), (e) this Fifth Amendment and the Amended Agreement have been
duly executed and delivered by such Borrower and constitute the valid and
binding obligations of such Borrower, enforceable in accordance with their
respective terms, except as may be limited by general principles of equity, (f)
for purposes of the Borrowing Order notice of this Fifth Amendment has been
given to and received by counsel to the Committee (as defined in the Borrowing
Order), and (g) after giving effect to this Fifth Amendment, no event has
occurred and is continuing or will result from the consummation of the
transactions contemplated by this Fifth Amendment that would constitute a
Default.
This Fifth Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Fifth Amendment
shall become effective (the date of such effectiveness being the "Fifth
Amendment Effective Date") upon the earliest date on or prior to March 13, 2000
that (a) the Borrowers and Lenders shall have executed counterparts of this
Fifth Amendment and the Borrowers and the Administrative Agent shall have
received written or telephonic notification of such execution and authorization
of delivery thereof; (b) the Administrative Agent shall have received evidence
satisfactory to it that all outstanding statements of O'Melveny & Myers LLP,
Davis Polk & Wardwell and Policano & Manzo that are received by Vencor prior to
12:00 Noon (New York City time) on March 8, 2000 have been paid in full; (c) the
Administrative Agent shall have received from the Borrowers an amendment fee in
the aggregate amount of $400,000 (which $400,000 amendment fee shall be
inclusive of the $100,000 amendment and waiver fee payable in connection with
the Fourth Amendment to Debtor-In-Possession Credit Agreement and Limited Waiver
and Consent dated February 9, 2000, which $100,000 fee shall be distributed in
accordance with the terms of such Fourth Amendment), $300,000 of which shall be
ratably distributed on the date of receipt thereof to each Lender according to
the ratio of (x) the Commitment of such Lender to (y) the aggregate Commitments
of all Lenders; and (d) the Court shall have approved both the terms of this
Fifth Amendment in their entirety and the payment of such $400,000 amendment
fee.
THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
6
<PAGE>
BORROWERS:
Advanced Infusion Systems, Inc.
American X-Rays, Inc.
C.P.C. of Louisiana, Inc.
Community Behavioral Health System, Inc.
Community Psychiatric Centers of Arkansas, Inc.
Community Psychiatric Centers of California
Community Psychiatric Centers of Florida, Inc.
Community Psychiatric Centers of Idaho, Inc.
Community Psychiatric Centers of Indiana, Inc.
Community Psychiatric Centers of Kansas, Inc.
Community Psychiatric Centers of Mississippi, Inc.
Community Psychiatric Centers of Missouri, Inc.
Community Psychiatric Centers of North Carolina, Inc.
Community Psychiatric Centers of Oklahoma, Inc.
Community Psychiatric Centers of Utah, Inc.
Community Psychiatric Centers Properties Incorporated
Community Psychiatric Centers Properties of Oklahoma,Inc.
Community Psychiatric Centers Properties of Texas, Inc.
Community Psychiatric Centers Properties of Utah, Inc.
Courtland Gardens Health Center, Inc.
CPC Investment Corp.
CPC Managed Care Health Services, Inc.
CPC of Georgia, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
First Rehab, Inc.
Florida Hospital Properties, Inc.
Health Care Holdings, Inc.
Health Care Technology, Inc.
Helian ASC of Northridge, Inc.
Helian Health Group, Inc.
Helian Recovery Corporation
Homestead Health Center, Inc.
Horizon Healthcare Services, Inc.
<PAGE>
Interamericana Health Care Group
J.B. Thomas Hospital, Inc.
Lafayette Health Care Center, Inc.
MedEquities, Inc.
Medisave of Tennessee, Inc.
Medisave Pharmacies, Inc.
Old Orchard Hospital, Inc.
Palo Alto Surgecenter Corporation
Peachtree-Parkwood Hospital, Inc.
PersonaCare, Inc.
PersonaCare Living Center of Clearwater, Inc.
PersonaCare of Bradenton, Inc.
PersonaCare of Clearwater, Inc.
PersonaCare of Connecticut, Inc.
PersonaCare of Georgia, Inc.
PersonaCare of Huntsville, Inc.
PersonaCare of Little Rock, Inc.
PersonaCare of Ohio, Inc.
PersonaCare of Owensboro, Inc.
PersonaCare of Pennsylvania, Inc.
PersonaCare of Pompano East, Inc.
PersonaCare of Pompano West, Inc.
PersonaCare of Reading, Inc.
PersonaCare of San Antonio, Inc.
PersonaCare of San Pedro, Inc.
PersonaCare of Shreveport, Inc.
PersonaCare of St. Petersburg, Inc.
PersonaCare of Warner Robbins, Inc.
PersonaCare of Wisconsin, Inc.
PersonaCare Properties, Inc.
ProData Systems, Inc.
Recovery Inns of America, Inc.
Respiratory Care Services, Inc.
Stamford Health Facilities, Inc.
THC-Chicago, Inc.
THC-Hollywood, Inc.
THC-Houston, Inc.
THC-Minneapolis, Inc.
THC-North Shore, Inc.
THC-Orange County, Inc.
THC-San Diego, Inc.
THC-Seattle, Inc.
TheraTx Healthcare Management, Inc.
TheraTx Health Services, Inc.
TheraTx Management Services, Inc.
TheraTx Medical Supplies, Inc.
<PAGE>
TheraTx Rehabilitation Services, Inc.
TheraTx Staffing, Inc.
Transitional Hospitals Corporation, a Delaware Corporation
Transitional Hospitals Corporation, a Nevada Corporation
Transitional Hospitals Corporation of Indiana, Inc.
Transitional Hospitals Corporation of Louisiana, Inc.
Transitional Hospitals Corporation of Michigan, Inc.
Transitional Hospitals Corporation of Nevada, Inc.
Transitional Hospitals Corporation of New Mexico, Inc.
Transitional Hospitals Corporation of Tampa, Inc.
Transitional Hospitals Corporation of Texas, Inc.
Transitional Hospitals Corporation of Wisconsin, Inc.
Tucker Nursing Center, Inc.
Tunstall Enterprises, Inc.
VC-OIA, Inc.
VC-TOHC, Inc.
VC-WM, Inc.
Vencare, Inc.
Vencare Rehab Services, Inc.
Vencor Facility Services, Inc.
Vencor Holdings, L.L.C.
Vencor Home Care Services, Inc.
Vencor Hospice, Inc.
Vencor Hospitals East, L.L.C.
Vencor Hospitals West, L.L.C.
Vencor, Inc.
Vencor Insurance Holdings, Inc.
Vencor Investment Company
Vencor Nevada, L.L.C.
Vencor Nursing Centers East, L.L.C.
Vencor Nursing Centers Central L.L.C.
Vencor Nursing Centers North, L.L.C.
Vencor Nursing Centers South, L.L.C.
Vencor Nursing Centers West, L.L.C.
Vencor Operating, Inc.
Vencor Pediatric Care, Inc.
Vencor Provider Network, Inc.
Ventech Systems, Inc.
<PAGE>
by: Vencor Operating, Inc., as agent and attorney-in-
fact for each of the foregoing entities
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
Stamford Health Associates, L.P.
by: Stamford Health Facilities, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
Vencor Home Care and Hospice Indiana Partnership
by: Vencor Home Care Services, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
by: Vencor Hospice, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
<PAGE>
Vencor Hospitals Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
by: Vencor Nursing Centers Limited Partnership,
Its General Partner
by: Vencor Operating, Inc., Its General
Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
Vencor Nursing Centers Central Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
by: Vencor Nursing Centers Limited Partnership,
Its General Partner
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
<PAGE>
Vencor Nursing Centers Limited Partnership
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
by: Vencor Hospitals Limited Partnership, Its
General Partner
by: Vencor Operating, Inc., Its General Partner
By: /s/ Richard A. Schweinhart
-------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
<PAGE>
AGENTS AND LENDERS:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Arranger,
Collateral Agent and Administrative Agent and as a
Lender
By: /s/ Colleen B. Galle
---------------------------------------------
Name: Colleen B. Galle
Title: Vice President
<PAGE>
ABLECO FINANCE LLC, as a Lender
By:
---------------------------------------------
Name:
Title
<PAGE>
APPALOOSA INVESTMENT LIMITED
PARTNERSHIP I, as a Lender
By: /s/ Ronald M. Goldstein
---------------------------------------------
Name: Ronald M. Goldstein
Title: Chief Financial Officer
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By:
---------------------------------------------
Name:
Title:
<PAGE>
CHASE SECURITIES INC, AS AGENT FOR THE
CHASE MANHATTAN BANK, as a Lender
By:
----------------------------------------------
Name:
Title:
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P., as a
Lender
By: /s/ Mark Denatale
----------------------------------------------
Name: Mark Denatale
Title: Authorized Signatory
<PAGE>
PARIBAS, as a Lender
By: /s/ Albert A. Young, Jr.
------------------------------------------------
Name: Albert A. Young, Jr.
Title: Director
By: /s/ Edward V. Canale
------------------------------------------------
Name: Edward V. Canale
Title: Managing Director
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST, as a
Lender
By: VAN KAMPEN INVESTMENT ADVISORY
CORP.
By: /s/ Douglas J. Smith
----------------------------
Name: Douglas J. Smith
Title: Vice President
<PAGE>
FRANKLIN MUTUAL ADVISERS LLC, as a Lender
By: /s/ Jeffrey A. Altman
-----------------------------------------
Name: Jeffrey A. Altman
Title: Senior Vice President
<PAGE>
FRANKLIN FLOATING RATE TRUST, as a Lender
By: /s/ Chauncey Lufkin
------------------------------------------
Name: Chauncey Lufkin
Title: Vice President
<PAGE>
ACKNOWLEDGEMENT AND CONSENT OF SUBSIDIARY GUARANTOR
By its execution of a counterpart of this Fifth Amendment, the
undersigned, as a Subsidiary Guarantor under that certain Guaranty Agreement
dated as of September 13, 1999 (the "Guaranty") for the benefit of Lenders, and
as an Original Lien Grantor under that certain Security Agreement dated as of
September 13, 1999 (the "Security Agreement") between the undersigned, the
Borrowers and Collateral Agent, as Secured Party, hereby acknowledges that it
has read this Fifth Amendment and consents to the terms thereof and further
hereby confirms and agrees that, notwithstanding the effectiveness of this Fifth
Amendment, the obligations of the undersigned under the Guaranty and the
Security Agreement shall not be impaired or affected and each of the Guaranty
and the Security Agreement is, and shall continue to be, in full force and
effect and is hereby confirmed and ratified in all respects.
CARIBBEAN BEHAVIORAL HEALTH
SYSTEMS, INC.
By: /s/ Richard A. Schweinhart
----------------------------------------
Name: Richard A. Schweinhart
Title: Senior Vice President and CFO
<PAGE>
Annex A
-------
Eligible Receivables Report
Hospital Accounts Receivable
Gross Hospital Accounts Receivable $XXX
Less:
All Medicare Receivables (XXX)
All Medicaid Receivables (XXX)
All Accounts in Collection (XXX)
All Other Accounts Over 120 Days (XXX)
50% of Other Unbilled Accounts (XXX)
-----
Eligible Gross Accounts Receivable(a) XXX
Gross Hospital A/R as of XX/XX/XX(b) XXX
Net Hospital A/R as of XX/XX/XX
Before Allow. for Doubtful Accounts
------
and Cost Report Reserves (c) XXX
---
Ratio (d)[c/b] XX%
---------
Eligible Net Hospital Accounts Receivable [a*d] XXX
Nursing Center (SNF) Accounts Receivable
Net SNF Accounts Receivable $XXX
Less:
All Medicare Receivables (XXX)
All Medicaid Receivables (XXX)
All Other Accounts Over 120 Days (XXX)
-----
Eligible Gross Accounts Receivable(a) XXX
Gross SNF A/R as of XX/XX/XX(b) XXX
Net SNF A/R as of XX/XX/XX
Before Allow. for Doubtful Accounts
------
and Cost Report Reserves (c) XXX
---
Ratio (d)[c/b] XX%
---------
Eligible Net Nursing Center Accounts Receivable [a*d] XXX
<PAGE>
Vencare Accounts Receivable
Net Vencare Accounts Receivable $XXX
Less:
Contractual Allowances (XXX)
Intercompany Receivables (XXX)
All Accounts Over 120 Days (XXX)
-----
Eligible Vencare Accounts Receivable XXX
-----
Eligible Accounts Receivable as of XX/XX/XX
Hospital Division XXX
Nursing Center Division XXX
Vencare XXX
-----
Total Net Eligible Accounts Receivable (a) XXX
======
Advance Rate (b) 80%
======
Borrowing Base before Required Coverage Ratio (c) [a*b] XXX
======
Divided by Coverage Ratio (d) 130%
======
Effective Borrowing Base [c/d] XXX
======
<PAGE>
Exhibit 10.17
AMENDMENT NO. 4 TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 4 to the Vencor Retirement Savings Plan (the "Plan")
as amended and restated as of January 1, 1997, which Amendment shall be
effective as of May 1, 1998.
Recitals
A. Pursuant to a Distribution Agreement dated as of April 30, 1998 between
Vencor, Inc. (as in existence on April 30, 1998) ("Old Vencor") and Vencor
Healthcare, Inc., a wholly-owned subsidiary of Old Vencor ("Healthcare
Company"), Old Vencor contributed substantially all of its assets other than its
real estate holdings to Healthcare Company and then distributed (the
"Distribution") as a dividend to the holders of the issued and outstanding
common shares of Old Vencor all of the issued and outstanding common shares of
Healthcare Company on the basis of one share of Healthcare Company common stock
for each share of Old Vencor common stock.
B. Immediately prior to the Distribution, Old Vencor changed its name to
Ventas, Inc. ("Ventas") and Healthcare Company changed its name to Vencor, Inc.
("New Vencor").
C. Pursuant to the Employee Benefits Agreement dated as of April 30, 1998
between Old Vencor and Healthcare Company, Old Vencor and Healthcare Company
have taken such actions as required to authorize the substitution of New Vencor
as plan sponsor, the Retirement Committee of New Vencor as plan administrator,
and the amendment of the Plan to provide for the holding by the Plan of Ventas,
Inc. common stock and Vencor, Inc. common stock following the Distribution.
Amendments
1. The Introduction to the Plan is hereby amended by adding the following
sentence immediately preceding the last paragraph thereof:
In connection with the spin-off by Vencor, Inc. of Vencor Healthcare, Inc.
(a wholly-owned subsidiary of Vencor, Inc. to which Vencor, Inc.
contributed substantially all of its assets other than real estate
holdings) effected by means of a distribution by Vencor, Inc. as a dividend
to the holders of the issued and outstanding common shares of Vencor, Inc.
all of the issued and outstanding common shares of Vencor Healthcare, Inc.
on the basis of one share of Vencor Healthcare, Inc. common stock for each
share of Vencor, Inc. common stock (the "Distribution"), Vencor Inc.
changed its name to Ventas, Inc. and Vencor Healthcare, Inc. changed its
name to Vencor, Inc. and assumed the role of
<PAGE>
Sponsoring Employer under the Plan. Effective May 1, 1998, all references
to "Vencor, Inc." and "Sponsoring Employer" refer to Vencor, Inc. (the
entity formerly named Vencor Healthcare, Inc.).
2. The first sentence of Section 1.16 is hereby amended so that as amended
it shall read in its entirety as follows:
Employer means (i) Vencor, Inc. (provided that effective May 1, 1998,
Employer means Vencor, Inc. (formerly Vencor Healthcare, Inc.); and (ii)
each of the legal entities, or any successor thereto, which is a part of
the Company as of January 1, 1997, with the exception of [the following
entity] which is instead a participating employer in the Retirement Savings
Plan for Certain Employees of Vencor and its Affiliates (RSP), also
maintained by the Company: San Marcos Nursing Home Partnership.
3. Section 4.2(a)(5) is hereby amended so that as amended it shall read in
its entirety as follows:
Company Stock Fund - a fund consisting primarily of shares of common stock
of the Sponsoring Employer and dividends and distributions attributable to
said common stock, plus temporary investments held pending purchase of
additional shares of common stock of the Sponsoring Employer. Effective May
1, 1998, as a result of the Distribution, the Company Stock Fund shall also
hold shares of Ventas, Inc. common stock and dividends and distributions
attributable to said common stock (which shall be reinvested in additional
shares of said common stock).
4. The first sentence of Section 4.2(b) is hereby amended so that as
amended it shall read in its entirety as follows:
Each Participant shall have the right to direct the Committee to invest the
cumulative balance in his Individual Account attributable to Salary
Redirection, Prior Plan Salary Redirection Contributions, Prior Plan
Employer Contributions, Employer Contributions (but in respect of such
Employer Contributions only with respect to the portion of such
Participant's Individual Account allocable to the Company Stock Fund that
is attributable to shares of Ventas, Inc. common stock and dividends and
distributions received on said common stock) and current Salary Redirection
in increments of 10% (25% if elections made prior to January 1, 1997, in
which case they continue until a change is made by the Participant) in the
Investment Funds provided in Section 4.2(a).
5. Clause (i) of Section 4.3(e) is hereby amended to add the phrase "or
Ventas, Inc. common stock, respectively" immediately following the phrase
"Sponsoring Employer common stock."
6. Section 5.7(a) is hereby amended to add the phrase "or Ventas, Inc.
common
<PAGE>
stock, respectively" immediately following the phrase "Sponsoring Employer
common stock" wherever it appears
IN WITNESS WHEREOF, the Sponsoring Employer has caused this Amendment No. 4
to be executed on the date set forth below.
Vencor, Inc.
By: /s/ Cecelia A. Hagan
-------------------------------------
Title: Vice President of Human Resources
-----------------------------------
Date: 10/30/98
------------------------------------
<PAGE>
Exhibit 10.18
AMENDMENT NO. 5 TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 5 to the Vencor Retirement Savings Plan (the "Plan")
as amended and restated as of January 1, 1997.
Recital
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion and the Company now wishes to amend the Plan to add a provision
whereby a participant will be deemed to have revoked his salary redirection
election in the event the Company inadvertently ceases to withhold salary
redirection amounts from a participant's pay and the participant does not notify
the Company within 30 days of the first payroll date on which the salary
redirection amount was not withheld from pay that the error occurred.
Amendment
Section 3.1 of the Plan is hereby amended effective as of the date of
adoption of this Amendment by the addition of a new subparagraph (d) to read in
its entirety as follows:
(d) In the event the Employer fails to withhold Participant Salary
Redirection Contributions pursuant to a Salary Redirection election in
effect for a Participant for a payroll period, the Participant shall be
considered to have revoked his Salary Redirection election on the 30th day
after the pay date on which the Salary Redirection election was first not
honored. Such revocation shall not be considered to be retroactive. The
Company shall take such steps as it deems advisable to correct the failure
to withhold and make Salary Redirection contributions for a Participant for
the period prior to the effective date of the revocation.
IN WITNESS WHEREOF, this Amendment No. 5 is hereby adopted this 9/th/ day
of December, 1998.
By: /s/ Cecelia A. Hagan
------------------------------------
Title: Vice President of Human Resources
---------------------------------
<PAGE>
Exhibit 10.19
AMENDMENT NO. 6
TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 6 to the Vencor Retirement Savings Plan (the "Plan")
as amended and restated as of January 1, 1997.
Recital
Vencor, Inc. (the "Company") maintains the Plan and has reserved the right
in Section 9.1 of the Plan to amend the Plan from time to time in its discretion
and the Company now wishes to amend the Plan to count past service with Pro Data
Systems, Inc. for purposes of vesting under the Plan effective as of January 1,
1999.
Amendment
1. This Amendment shall be effective as of January 1, 1999.
2. All Terms used in this Amendment and not otherwise defined herein shall
have the meanings given in the Plan.
3. Appendix "A" to the Plan is hereby amended to add to the end of the
Appendix ProData Systems, Inc., so that past service with that company shall be
counted for purposes of vesting service under the Plan.
IN WITNESS WHEREOF, the company has caused this Amendment No. 6 to be
executed this 2nd day of November, 1998, but effective as of January 1, 1999.
VENCOR, INC.
By: /s/ Cecelia A. Hagan
------------------------------------
Title: Vice President of Human Resources
---------------------------------
<PAGE>
Exhibit 10.20
AMENDMENT NO. 7 TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 7 to the Vencor Retirement Savings Plan (the "Plan")
as amended and restated as of January 1, 1997.
RECITAL
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion. The Company now wishes to amend the Plan to bring Plan's definition
of Compensation into compliance with Section 401(a)(17) of the Code as revised
by the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"); and to amend the
Plan's Code Section 415 provisions to bring them into compliance with the
requirements of the General Agreement of Tariffs and Trade ("GATT").
AMENDMENTS
1. Section 1.10 of the Plan shall be amended by adding the following
sentence at the end of the paragraph, to read as follows:
For Plan Years beginning on or after January 1, 1994,
Compensation shall be limited to $150,000, or such higher amount
determined by the Commissioner of Internal Revenue pursuant to
Section 401(a)(17) of the Code.
2. Notwithstanding any provision of the Plan to the contrary, the
following shall apply:
Limitation on Benefits. Effective for Plan Years beginning after
----------------------
December 31, 1994, notwithstanding any other provisions of the
Plan, contributions and other additions with respect to a
Participant exceed the limitation of Section 415(c) of the Code
if, when expressed as an annual addition (within the meaning of
Section 415(c)(2) of the Code to the Participant's Account, such
annual addition is greater than the lesser of:
(A) $30,000; or
(B) 25% of the Participant's compensation (as defined in Section
415(c)(3) of the Code).
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 7 is hereby adopted this 9th day of
December, 1998.
By: /s/ Cecelia A. Hagan
--------------------
Title: Vice President of Human Resources
---------------------------------
<PAGE>
Exhibit 10.21
AMENDMENT NO. 8 TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 8 to the Vencor Retirement Savings Plan (the "plan") as
amended and restated as of January 1, 1997.
RECITAL
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved the
right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion. The Company now wishes to amend the Plan to clarify the elimination
of the option of receiving a distribution upon the attainment of age 70 l/2
while still employed.
AMENDMENTS
Section 5.6(c) of the Plan is hereby amended, effective as of December 31,
1998, so that as amended it shall read in its entirety as follows:
Notwithstanding any other provisions of the Plan, the payment of
a Participant's benefits hereunder shall begin by payment of a
lump sum of the entire Accounts of the Participant no later than
the April l following the calendar year in which the Participant
has both attained age 70 1/2 and has retired, provided that for
5% owners as defined in Section 416 of the Code, distribution
must begin by April 1 following the calendar year in which the
Participant attains age 70 1/2, regardless of whether the
Participant has retired; and further provided that a Participant
who had attained age 70 1/2 on or before December 31, 1998 shall
have the option to take a lump sum distribution even while
employed, at the April 1 following attainment of age 70 l/2, if
the Participant so elects in writing, and, if so elected, shall
receive a distribution on or before December 31 of the year after
attainment of age 70 l/2, and again each year thereafter while
still employed, shall receive a similar distribution of all
amounts accrued in Accounts of the Participant since the last
such distribution.
IN WITNESS WHEREOF, this Amendment No. 8 is hereby adopted this 22nd day of
December, 1998.
By: /s/ Cecelia A. Hagan
--------------------
Title: Vice President of Human Resources
---------------------------------
<PAGE>
Exhibit 10.22
AMENDMENT NO. 9 TO THE
VENCOR RETIREMENT SAVINGS PLAN
This is Amendment No. 9 to the Vencor Retirement Savings Plan (the "Plan")
as amended and restated as of January 1, 1997, which Amendment shall be
effective as of the dates set forth below.
RECITAL
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion. The Company now wishes to amend the Plan to change how Plan assets
are invested as among the Investment Funds, and to allow a cashout of benefits
of $5,000 or less, rather than $3,500.
AMENDMENT
1. Section 4.2(b) of the Plan is hereby amended so that as amended it
shall read in its entirety as follows, effective as of the date set forth
therein:
(b) Each Participant shall have the right to direct the
Committee to invest the cumulative balance in his
Individual Account attributable to Salary Redirection,
Prior Plan Salary Redirection Contributions, Prior Plan
Employer Contributions and current Salary Redirection
in increments of 10% (25% if elections made prior to
January 1, 1997, in which case they continue until a
change is made by the Participant) in the Investment
Funds provided in Section 4.2(a); provided, however,
that effective April 1, 1999, no portion of an
Individual Account may be transferred to the Company
Stock Fund, and no contributions to Individual Accounts
made to the Plan with respect to payroll dates on or
after that date may be directed for investment to the
Company Stock Fund. All investment directions shall be
effected as soon as practicable after the end of the
month, provided the Participant gives the direction by
identity-secured telephonic instructions (or in writing
if telephonic instructions are impracticable) no later
than the 15th day of the month. Neither the Trustee nor
any other Fiduciary shall be responsible for investment
losses resulting from a Participant's exercise of
investment discretion, in accordance with ERISA Section
404(c).
2. Section 4.2(d) of the Plan is hereby amended so that as amended it
shall read in its entirety as follows, effective for Matching Contributions that
relate to Salary Redirection Contributions for pay dates on or after April 1,
1999:
<PAGE>
(d) All cumulative and current contributions attributable
to Employer Contributions (other than contributions in
a Prior Plan Employer Contribution Account) and the
Profit Sharing Contribution Account shall be made in
cash which is invested in the Interest Income Fund.
3. All references to "$3,500 or less" or "exceeds $3,500" in Sections
5.7(a), 5.11(b)(4), and 10.5(b) of the Plan are hereby amended to refer to
$5,000 in the place of $3,500, effective September 1, 1999.
IN WITNESS WHEREOF, this Amendment No. 9 is hereby adopted this _________
day of ___________ 1999.
By /s/ Cecelia A. Hagan
---------------------------------------
Title: Vice President of Human Resources
-----------------------------------
<PAGE>
Exhibit 10.27
AMENDMENT NO. 1 TO THE
RETIREMENT SAVINGS PLAN FOR CERTAIN EMPLOYEES OF
VENCOR AND ITS AFFILIATES
This is Amendment No. 1 to the Retirement Savings Plan For Certain
Employees Of Vencor And Its Affiliates (the "Plan") as amended and restated as
of January 1, 1997, which Amendment shall be effective as of May 1, 1998.
Recitals
A. Pursuant to a Distribution Agreement dated as of April 30, 1998
between Vencor, Inc. (as in existence on April 30, 1998) ("Old Vencor") and
Vencor Healthcare, Inc., a wholly-owned subsidiary of Old Vencor ("Healthcare
Company"), Old Vencor contributed substantially all of its assets other than its
real estate holdings to Healthcare Company and then distributed (the
"Distribution") as a dividend to the holders of the issued and outstanding
common shares of Old Vencor all of the issued and outstanding common shares of
Healthcare Company on the basis of one share of Healthcare Company common stock
for each share of Old Vencor common stock.
B. Immediately prior to the Distribution, Old Vencor changed its name to
Ventas, Inc. ("Ventas") and Healthcare Company changed its name to Vencor, Inc.
("New Vencor").
C. Pursuant to the Employee Benefits Agreement dated as of April 30, 1998
between Old Vencor and Healthcare Company, Old Vencor and Healthcare Company
have taken such actions as required to authorize the substitution of New Vencor
as plan sponsor, the Retirement Committee of New Vencor as plan administrator,
and Ventas as a participating employer under the Plan, and New Vencor now wishes
to formally document those Plan amendments.
Amendments
1. The Introduction to the Plan is hereby amended by adding the following
sentence immediately preceding the last paragraph thereof:
In connection with the spin-off by Vencor, Inc. of Vencor Healthcare, Inc.
(a wholly-owned subsidiary of Vencor, Inc. to which Vencor, Inc.
contributed substantially all of its assets other than real estate
holdings) effected by means of a distribution by Vencor, Inc. as a dividend
to the holders of the issued and outstanding common shares of Vencor, Inc.,
all of the issued and outstanding common shares of Vencor Healthcare, Inc.
on the basis of one share of Vencor Healthcare, Inc. common stock for each
share of Vencor, Inc. common stock (the "Distribution"), Vencor Inc.
changed its name to Ventas, Inc. and Vencor Healthcare, Inc. changed its
name to Vencor, Inc. and assumed the role of
<PAGE>
Sponsoring Employer under the Plan. Effective May 1, 1998, all references
to "Vencor, Inc." and "Sponsoring Employer" refer to Vencor, Inc. (the
entity formerly named Vencor Healthcare, Inc.), and Ventas, Inc. became a
Participating Employer under the Plan.
2. The first sentence of Section 1.15 is hereby amended so that as
amended it shall read in its entirety as follows:
Employer means (i) Vencor, Inc. (provided that effective May 1, 1998,
Employer means Vencor, Inc. (formerly Vencor Healthcare, Inc.); and (ii)
each of the legal entities, or any successor thereto, which participates in
the VRSP as of January 1, 1997 or which thereafter is a part of the Company
and adopts the VRSP for its eligible Employees with the consent of the
Sponsoring Employer; and (iii) any entity that is managed by the Company
pursuant to a management agreement, provided that the entity which provides
management services has adopted this Plan for the benefit of its employees
( as evidenced as of January 1, 1997 by their name being listed on Appendix
A); and (iv) Atria Communities, Inc. and Ventas, Inc.; and (v) each legal
entity, or any successor thereto, which would be part of the Company if
Atria Communities, Inc. or Ventas, Inc. were substituted for Vencor , Inc.
in the definition of "Company" herein, and which has adopted the Plan for
its eligible Employees with the consent of the Sponsoring Employer (as
evidenced as of January 1, 1997 by their name being listed on Appendix A);
and (vi) the partnerships listed on Appendix A hereto or which hereafter
become participating employers pursuant to the procedure in Article 12
hereof.
IN WITNESS WHEREOF, the Sponsoring Employer has caused this Amendment No. 1
to be executed on the date set forth below.
VENCOR, INC.
By: /s/ Cecelia A. Hagan
------------------------------------
Title: Vice President of Human Resources
---------------------------------
Date:___________________________________
<PAGE>
Exhibit 10.28
AMENDMENT NO. 2 TO THE
RETIREMENT SAVINGS PLAN FOR CERTAIN EMPLOYEES OF
VENCOR AND ITS AFFILIATES
This is Amendment No. 2 to the Retirement Savings Plan for Certain
Employees of Vencor and Its Affiliates (the "Plan") as amended and restated as
of January 1, 1997.
Recital
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion and the Company now wishes to amend the Plan to add a provision
whereby a participant will be deemed to have revoked his salary redirection
election in the event the Company inadvertently ceases to withhold salary
redirection amounts from a participant's pay and the participant does not notify
the Company within 30 days of the first payroll date on which the salary
redirection amount was not withheld from pay that the error occurred, and to
amend the Plan to allow the Committee to make amendments regarding eligibility,
vesting and service crediting provisions with respect to participating
employers.
Amendment
1. Section 3.1 of the Plan is hereby amended effective as of the date of
adoption of this Amendment by the addition of a new subparagraph (d) to read in
its entirety as follows:
(d) In the event the Employer fails to withhold Participant
Salary Redirection Contributions pursuant to a Salary
Redirection election in effect for a Participant for a
payroll period, the Participant shall be considered to have
revoked his Salary Redirection election on the 30th day
after the pay date on which the Salary Redirection election
was first not honored. Such revocation shall not be
considered to be retroactive. The Company shall take such
steps as it deems advisable to correct the failure to
withhold and make Salary Redirection contributions for a
Participant for the period prior to the effective date of
the revocation.
2. Section 9.1 of the Plan is hereby amended so that as amended it shall
read in its entirety as follows:
Section 9.1 Amendment of the Plan
The Sponsoring Employer shall have the right at any time by
action of the Board (or, in the case of amendments to the
eligibility, vesting and service-counting provisions of the
Plan with respect to Participating Employers, the Board or
the Committee) to modify, alter or amend the
<PAGE>
Plan in whole or in part; provided, however, that the
duties, powers and liability of the Trustee hereunder shall
not be increased without its written consent; and provided,
further, that the amount of benefits which, at the time of
any such modification, alteration or amendment, shall have
accrued for any Participant, Former Participant or
Beneficiary hereunder shall not be adversely affected
thereby; and provided, further, that no such amendments
shall have the effect of reverting to the Employer any part
of the principal or income of the Trust Fund. No amendment
to the Plan shall decrease the balance of a Participant's
Individual Account or eliminate an optional form of
distribution.
IN WITNESS WHEREOF, this Amendment No. 2 is hereby adopted this 9th day of
December, 1998.
By: /s/ Cecelia A. Hagan
--------------------------------------
Title: Vice President of Human Resources
-----------------------------------
<PAGE>
Exhibit 10.29
AMENDMENT NO. 3 TO THE
RETIREMENT SAVINGS PLAN FOR CERTAIN EMPLOYEES OF
VENCOR AND ITS AFFILIATES
This is Amendment No. 3 to the Retirement Savings Plan For Certain
Employees Of Vencor And Its Affiliates (the "Plan") as amended and restated as
of January 1, 1997.
RECITAL
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion. The Company now wishes to amend the Plan to bring Plan's definition
of Compensation into compliance with Section 401 (a)(17) of the Code as revised
by the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"); and to amend the
Plan's Code Section 415 provisions to bring them into compliance with the
requirements of the General Agreement of Tariffs and Trade ("GATT").
AMENDMENTS
1. Section 1.9 of the Plan shall be amended by adding the following
sentence at the end of the paragraph, to read as follows:
For Plan Years beginning on or after January 1, 1994,
Compensation shall be limited to $150,000, or such higher amount
determined by the Commissioner of Internal Revenue pursuant to
Section 401(a)(17) of the Code.
2. Notwithstanding any provision of the Plan to the contrary, the
following shall apply:
Limitation on Benefits. Effective for Plan Years beginning after
----------------------
December 31, 1994, notwithstanding any other provisions of the
Plan, contributions and other additions with respect to a
Participant exceed the limitation of Section 415(c) of the Code
if, when expressed as an annual addition (within the meaning of
Section 415(c)(2) of the Code to the Participant's Account, such
annual addition is greater than the lesser of:
(A) $30,000; or
(B) 25% of the Participant's compensation (as defined in Section
415(c)(3) of the Code).
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 3 is hereby adopted this 9th day of
December, 1998.
BY: /s/ Cecelia A. Hagan
--------------------------------------
Title: Vice President of Human Resources
-----------------------------------
<PAGE>
Exhibit 10.30
AMENDMENT NO. 4 TO THE
RETIREMENT SAVINGS PLAN FOR CERTAIN EMPLOYEES OF
VENCOR AND ITS AFFILIATES
This is Amendment No. 4 to the Retirement Savings Plan For Certain
Employees Of Vencor And Its Affiliates (the "Plan") as amended and restated as
of January 1, 1997.
RECITAL
WHEREAS, Vencor, Inc. (the "Company") maintains the Plan and has reserved
the right in Section 9.1 of the Plan to amend the Plan from time to time in its
discretion. The Company now wishes to amend the Plan to reflect that Ventas,
Inc. will no longer be a participating employer effective January 1, 1999 and to
clarify the elimination of the option of receiving a distribution upon the
attainment of age 70 1/2 while still employed.
AMENDMENT
The Plan is hereby amended as follows:
1. The first sentence of Section of 1.15 of the Plan is hereby amended
effective as of January 1, 1999, so as amended it shall read in its entirety as
follows:
Employer means (i) Vencor, Inc. (provided that effective May 1,
1998, Employer means Vencor , Inc. (formerly Vencor Healthcare,
Inc.); and (ii) each of the legal entities, or any successor
thereto, which participates in the VRSP as of January 1, 1997 or
which thereafter is a part of the Company and adopts the VRSP for
its eligible Employees with the consent of the Sponsoring
Employer; and (iii) any entity that is managed by the Company
pursuant to a management agreement, provided that the entity
which provides management services has adopted this Plan for the
benefit of its employees (as evidenced as of January 1, 1997 by
their name being listed on Appendix A); and (iv) Atria
Communities, Inc.; and (v) each legal entity, or any successor
thereto, which would be part of the Company if Atria Communities,
Inc. were substituted for Vencor , Inc. in the definition of
"Company" herein, and which has adopted the Plan for its eligible
Employees with the consent of the Sponsoring Employer (as
evidenced as of January 1, 1997 by their name being listed on
Appendix A); and (vi) the partnerships listed on Appendix A
hereto or which hereafter become participating employers pursuant
to the procedure in Article 12 hereof
2. Section 5.6(c) of the Plan is hereby amended, effective as of December
31, 1998, so that as amended it shall read in its entirety as follows:
<PAGE>
Notwithstanding any other provisions of the Plan, the payment of
a Participant's benefits hereunder shall begin by payment of a
lump sum of the entire Accounts of the Participant no later than
the April 1 following the calendar year in which the Participant
has both attained age 70 1/2 and has retired, provided that for
5% owners as defined in Section 416 of the Code, distribution
must begin by April 1 following the calendar year in which the
Participant attains age 70 1/2, regardless of whether the
Participant has retired; and further provided that a Participant
who had attained age 70 1/2 on or before December 31, 1998 shall
have the option to take a lump sum distribution even while
employed, at the April 1 following attainment of age 70 1/2, if
the Participant so elects in writing, and, if so elected, shall
receive a distribution on or before December 31 of the year after
attainment of age 70 1/2, and again each year thereafter while
still employed, shall receive a similar distribution of all
amounts accrued in Accounts of the Participant since the last
such distribution.
IN WITNESS WHEREOF, this Amendment No. 4 is hereby adopted this 22nd day of
December, 1998.
By: /s/ Cecelia A. Hagan
--------------------------------------
Title: Vice President of Human Resources
-----------------------------------
<PAGE>
Exhibit 10.48
AMENDMENT NO. TWO TO
--------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
THIS AMENDMENT NO. TWO ("Amendment") to the Vencor, Inc. Supplemental
Executive Retirement Plan is entered into as of the 15th day of January, 1999.
Reason for Amendment. This Amendment is intended to enable the Vencor, Inc.
--------------------
Supplemental Executive Retirement Plan ("SERP Plan") to provide for the purchase
of deferred annuities and the extinguishment of corresponding liabilities
accrued under the Plan.
Amendment. The SERP Plan shall be amended by inserting a new Section 4.3
---------
that reads as follows:
Section 4.3 Deferred Annuities. The Committee, in its sole discretion, may
------------------
cause all or a portion of the benefits which would otherwise be
payable under this Plan to instead be provided by the purchase of
a deferred annuity owned by the Participant. The annuity shall
provide payments substantially equal to the after-tax value of
the Participant's vested benefit under the Plan as of a specified
date, as determined by an actuary. If an annuity is purchased for
a Participant, the benefits otherwise payable under this Plan
shall be reduced by an amount equal to the pre-tax value of the
annuity.
At the same time a deferred annuity is purchased by the Company
for a Participant, the employer shall pay withholding tax on
behalf of a Participant. The payment shall approximate the amount
necessary to compensate the Participant for the net increase in
state, local, federal income and employment taxes resulting from
the recognition of taxable income due to purchasing the annuity.
The amount of the withholding tax payment shall equal:
Annuity Premium x Participant's tax rate
-----------------------
(1 - Participant's tax rate)
IN WITNESS WHEREOF, Vencor, Inc. has executed this instrument as of the
date first above written.
VENCOR, INC.
By: /s/ Jill L. Force
--------------------------------------
Jill L. Force, Senior Vice President
and General Counsel
<PAGE>
Exhibit 10.49
AMENDMENT NO. THREE TO
----------------------
SUPPLEMENT EXECUTIVE RETIREMENT PLAN
------------------------------------
THIS AMENDMENT NO. THREE ("Amendment") to the Vencor, Inc. Supplemental
Executive Retirement Plan is adopted on the 31/st/ day of December, 1999.
------
Reason for Amendment. This Amendment is intended to suspend indefinitely
--------------------
the accrual of future benefits under the Vencor, Inc. Supplemental Executive
Retirement Plan (as amended by Amendments Nos. 1 and 2 thereto, the "SERP Plan")
for all participants therein, effective as of December 31, 1999. This Amendment
is also intended to provide for the deferral of the distribution of
participants' benefits under the SERP Plan until the earlier of (i) the
attainment of age 65 and (ii) death.
Amendments.
----------
1. The SERP Plan is hereby amended, as of December 31, 1999, by adding a
new Section 3.7 to read in its entirety as follows:
Section 3. 7 Suspension of Benefit Accruals. Notwithstanding any
------------------------------
other provision of the Plan (other than Section 3.6 hereof),
effective as of December 31, 1999, all accrual of benefits under
the Plan are suspended indefinitely with respect to all
Participants in the Plan as of such date. Accordingly, from and
after December 31, 1999, the Normal Retirement Benefit or Early
Retirement Benefit payable to any Participant under the Plan and
such Participant's Vested Percentage in such benefit shall be
calculated and determined solely on the basis of the
Participant's Participant Category (within the meaning of Section
3.1(a) hereof as of December 31, 1999, the Years of Service
completed by the Participant as of December 31, 1999 and the
Participant's Compensation as of December 31, 1999. The
provisions of this Section 3.7 shall apply to all Participants
and in all events, including in calculating the benefits, if any,
payable under the Plan in the event of a Participant's
Disability, Termination of Employment, Normal Retirement or Early
Retirement.
2. The SERP Plan is hereby amended, as of December 31, 1999, by amending
Section 4.1 thereof to read in its entirety as follows:
Section 4.1 Commencement of Payments. Notwithstanding any other
------------------------
provision of the Plan (other than Section 3.6 hereof), all
payments under the Plan with respect to benefits that have
accrued as of December 31, 1999, to the extent not
<PAGE>
paid on or prior to such date, shall begin to be made not earlier
than the earlier of (i) the first day of the calendar month
immediately following the calendar month in which the Participant
attains age 65 and (ii) the first day of the calendar month
immediately following the calendar month in which the Participant
dies. To the extent that a payment is required to begin, pursuant
to this Section 4.1, on a date later than the date that it would
otherwise have begun to be paid pursuant to any other provisions
of this Plan, the amount of the benefit that shall be paid shall
be the actuarial equivalent of the benefit that would have been
payable without regard to this Section 4.1. For this purpose,
actuarial equivalence shall be determined using the factors set
forth in Section 3.5 hereof.
3. The SERP is hereby amended by amending the words "in Sections 3.1,
3.2, 3.3 and 4.1" in the first sentence of Section 3.6 thereof to read
"in Sections 3.1, 3.2, 3.3, 3.7 and 4.1".
IN WITNESS WHEREOF, Vencor, Inc. has executed this instrument on the date
first above written.
VENCOR, INC.
By: /s/ Owen E. Dorsey
---------------------------------
Chief Administrative Officer
<PAGE>
Exhibit 10.55
AGREEMENT
---------
This Separation Agreement and Release of Claims ("Agreement") is entered
into by Frank W. Anastasio and all of his agents, successors and assigns
("Employee"), and Vencor, Inc. ("Vencor") and all companies related to Vencor
and all of its affiliates, subsidiaries or related companies, past and present
(collectively, the "Company").
WHEREAS, Employee and Company hereby desire to settle all disputes and
issues related to the resignation of Employee from his services to the Company.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
1. Resignation. Employee hereby resigns from all capacities and
-----------
positions with the Company effective October 30, 1999 ("Date of Termination").
2. Obligations of the Company. Following the execution of this
--------------------------
Agreement, the Company shall pay Employee his base salary through the Date of
Termination and any amounts owed to Employee pursuant to the Company's standard
reimbursement procedures. In addition, subject to the terms and conditions of
this Agreement (including Section 13), Employee shall be entitled to the
following additional payments and benefits:
(a) $64,500 representing the prorated portion of the Employee's
target bonus for 1999 less amounts previously distributed.
(b) $322,500 representing an amount equal to 1.5 times the
Employee's base salary for 1999.
(c) $193,500 representing an amount equal to 1.5 times the
Employee's target bonus for 1999.
(d) For a period of eighteen months following the Date of
Termination, the Employee shall be treated as if he had continued to be an
executive for all purposes under the Vencor Health Insurance Plan and Dental
Insurance Plan, provided, however, that such benefits shall be provided only as
long as similar benefits are provided to employees of the Company. Following
this continuation period, the Employee shall be entitled to receive
-1-
<PAGE>
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.
(e) For a period of eighteen 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, provided, however, that such benefits shall
be provided only as long as similar benefits are provided to employees of the
Company.
(f) For a period of eighteen 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, provided, however, that such
benefits shall be provided only as long as similar benefits are provided to
employees of the Company. Should Employee become disabled during such period,
Employee shall be entitled to receive such benefits, and for such duration, as
the applicable plan provides.
(g) 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.
(h) The Company shall adopt such amendments to its employee
benefit plans, if any, as are necessary to effectuate the provisions of this
Agreement.
(i) 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 $360,000 (the
"Preferred Stock Loan") to be amended to provide that (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 receipt of a written notice by the Company
after the expiration of the fifth anniversary of the Date of Termination, the
Employee shall have the right to put the preferred stock underlying the
Preferred Stock Loan to the Company at a price of $1,000 per share.
Notwithstanding the above, nothing in this Agreement shall be deemed to affect
the Employee's rights under that certain Agreement between the Employee and
Vencor, Inc. dated as of August 17, 1999 (the "Preferred Stock Agreement").
-2-
<PAGE>
(j) Employee shall be credited with an additional eighteen months
of vesting for purposes of all outstanding stock option awards to purchase
Vencor common stock and Employee will have an additional eighteen months in
which to exercise such stock options.
(k) Employee shall be awarded $14,400 in exchange for all stock
awards that employee may otherwise be entitled to receive. In addition,
Employee shall be entitled to retain the computer he is currently using.
(l) All commitments made to Employee under paragraphs (a) through
(c) and paragraph (k) above shall be paid or issued upon the later of 14 days
from the Date of Termination or the expiration of the seven day period
referenced in Section 16 or as otherwise provided by Section 24 of this
Agreement.
3. Death after Resignation. In the event of the death of Employee
-----------------------
during the period Employee is receiving payments pursuant to this Agreement,
Employee's designated beneficiary shall be entitled to receive the balance of
the payments; or in the event of no designated beneficiary, the remaining
payments shall be made to Employee's estate.
4. Employee Acknowledgment and Release. Employee expressly
-----------------------------------
acknowledges that the above payments include consideration for the settlement,
waiver, release and discharge of any and all claims or actions arising from
Employee's employment, the terms and conditions of Employee's employment, or
Employee's termination of employment with the Company, including claims of
employment discrimination, wrongful termination, unemployment compensation or
any claim arising under law or equity, express or implied contract, tort, public
policy, common law or any federal, state or local statute, ordinance, regulation
or constitutional provision.
(a) The claims released and discharged by Employee include, but
are not limited to, claims arising under Title VII of the Civil Rights Act of
1964, as amended; the Civil Rights Act of 1991; The Older Workers Benefit
Protection Act ("OWBPA"); the Age Discrimination in Employment Act of 1967
("ADEA"), as amended; the Americans with Disabilities Act ("ADA"); the Fair
Labor Standards Act; the Employee Retirement Income and Security Act of 1974, as
amended; the National Labor Relations Act; the Labor Management Relations Act;
the Equal Pay Act of 1963; the Pregnancy Discrimination Act of 1978; the
Rehabilitation Act of 1973; workers' compensation laws; Kentucky Wage and Hours
Laws, claims before the Kentucky Commission for Human Rights and Kentucky
Revised Statutes sections 341 et seq.
(b) Employee recognizes that by signing this Agreement, he may be
giving up some claim, demand or cause of action which he now has or may have,
but which is unknown to him. Employee also acknowledges that he is giving up
any right to seek future
-3-
<PAGE>
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 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 the terms or amount of settlement to third parties. The only exception
is that Employee may reveal the terms of this Agreement to his spouse, attorney,
tax preparer or as otherwise required by law. The Company may reveal the terms
of this Agreement to its attorneys, accountants, financial advisors, managerial
employees, and any disclosure required by law or business necessity. Employee
and the Company agree that in the event the terms of this Agreement are
disclosed to the third parties as allowed or required herein, the third parties
will be advised of the obligation to keep the terms of this Agreement
confidential, and will obtain the third party's agreement to abide by the terms
of the confidentiality provisions set forth in this Agreement. In the event
that Employee breaches the confidentiality of this Agreement, Employee
understands that the Company shall have the right to pursue all appropriate
legal relief, including, but not limited 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
-4-
<PAGE>
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 that the Company has advised
him and encouraged him to consult with an attorney, and he has consulted with an
attorney regarding this Agreement prior to signing below, and that he has been
given a period of at least twenty one (21) days within which to consider this
Agreement, including waiver of any ADEA and OWBPA age claims before voluntarily
signing this Agreement.
(b) Employee agrees and understands that he may revoke this
Agreement within seven (7) days after signing the Agreement, and that the
Agreement shall not become effective or enforceable until the revocation period
has expired or as otherwise provided by Section 24.
(c) Any revocation of this Agreement must be made in writing and
delivered by hand or certified mail to Joseph L. Landenwich, Vencor, Inc., One
Vencor Place, 680 South Fourth Avenue, Louisville, Kentucky 40202, before the
expiration of the revocation period.
8. Confidential Information. At no time shall Employee divulge,
------------------------
furnish, or make accessible to anyone any confidential knowledge or information
about the Company's businesses or operations (except as required by law or order
of court or other governmental agency) or any of the clients, patients,
customers or suppliers of the Company or with respect to any other confidential
aspect of the businesses of the Company. Employee understands and agrees that
any violation of this provision will cause the Company irreparable harm which
cannot adequately be compensated by an award of money damages. As a result,
Employee agrees that, in addition to any other remedy the Company may have, a
violation of this Agreement may be restrained by issuance of an injunction by
any court of competent jurisdiction. Employee further agrees to accept service
of process by first class or certified United States mail.
9. Cooperation. Employee agrees that should the Company request
-----------
Employee's cooperation in connection with litigation, government investigations
or other administrative or legal proceeding, Employee shall cooperate fully with
the Company or its designated agents. Employee further agrees to cooperate
fully in disclosing to the Company or its designated agents, any information
which Employee obtained during the course and scope of his employment with the
Company, and to which other employees of the Company were not privy.
-5-
<PAGE>
10. Disputes. Any dispute or controversy arising under, out of, or
--------
in connection with this Agreement shall, at the election and upon written demand
of either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. Each party shall pay
their costs of the arbitration and all reasonable attorneys' and accountants'
fees incurred in connection therewith, including any litigation to enforce any
arbitration award.
11. Successors. This Agreement is personal to Employee and without
----------
the prior written consent of the Company shall not be assignable by Employee
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Employee's legal
representatives. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
12. Other Severance Benefits. Except as specifically 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 as amended,
September 28, 1998, and the Change in Control Severance Agreement between the
Employee and Vencor Operating, Inc. This Agreement does not affect the
Employee's rights under the Preferred Stock Agreement or the Employee's rights
to receive the benefits accruing to the Employee under the Vencor, Inc.
Supplemental Executive Retirement Plan effective January 1, 1998 as amended
February 20, 1998 (the "SERP") as of the Date of Termination. Notwithstanding
the above, this Agreement shall not be deemed to constitute either an assumption
or rejection of the Preferred Stock Agreement or the SERP under 11 U.S.C.
Section 365.
13. Withholding. All payments and stock issuances to be made to
-----------
Employee hereunder will be subject to all applicable required withholding of
taxes.
14. No Mitigation. Employee shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Employee actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation.
15. Execution by Employee. Employee will execute this Agreement and
---------------------
deliver the executed Agreement to Joseph L. Landenwich, Vencor, Inc., One Vencor
Place, 680 South Fourth Avenue, Louisville, Kentucky 40202.
-6-
<PAGE>
16. Termination of Waiting Period. After receipt of the executed
-----------------------------
Agreement by Employee, and after the expiration of the seven (7) day waiting
period referenced in Section 7(b) of this Agreement, the Company will execute
the Agreement subject to the conditions set forth in Section 24.
17. Voluntary Action. Employee acknowledges that he has read and
----------------
fully understands all of the provisions of this Agreement and that he is
entering into this Agreement freely and voluntarily.
18. Notices. Except as expressly provided herein, 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 of receipt, addressed as follows:
If to Employee:
--------------
Frank W. Anastasio
10523 Black Iron Road
Louisville, KY 40291
If to Company:
-------------
Vencor Operating, Inc.
One Vencor Place
680 South Fourth Avenue
Louisville, KY 40202
Attn: Legal Department
19. Governing Law. This Agreement shall be governed by the laws of
-------------
the Commonwealth of Kentucky.
20. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
21. Entire Agreement; Amendment. This Agreement contains the
---------------------------
entire agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Employee and a designated officer of
the Company.
-7-
<PAGE>
22. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
23. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
24. Bankruptcy Court Approval. As a condition to the effectiveness
-------------------------
of this Agreement, this Agreement, and the Company's entry into this Agreement,
must be authorized by the United States Bankruptcy Court for the District of
Delaware, by an order that has not been stayed, amended or revoked, unless the
Company receives advice of counsel that such an order is not necessary. The
Company agrees to take reasonable efforts to obtain any such approval.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR, INC.
By: /s/ Owen E. Dorsey
---------------------------------
Title: Chief Administrative Officer
-------------------------------------
EMPLOYEE
/s/ Frank W. Anastasio
-------------------------------------
Frank W. Anastasio
-9-
<PAGE>
Exhibit 10.57
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28/th/ day of September,
1998 (the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Richard A. Schweinhart (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 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 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 in an executive
------
capacity.
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
Thousand Dollars ($200,000.00) per year payable in equal installments in
accordance with the
<PAGE>
Company's normal payroll procedures. Executive may receive increases in his
Base Salary from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may 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.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit, welfare benefit (including, without limitation,
medical, dental, disability and group life insurance coverages) and fringe
benefit plans from time to time in effect for Executives of the Company and
its affiliates following the Company's standard waiting periods.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacations in a
reasonable manner. The Executive may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
2
<PAGE>
(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 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
--------
3
<PAGE>
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 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
4
<PAGE>
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 1.5 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 18 months 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 18 months 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.
5
<PAGE>
(4) For a period of 18 months 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 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.
(7) Executive shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months 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.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction
6
<PAGE>
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 September 28, 1998 (the "Severance Agreement"); provided
--------
that any payments payable to Executive hereunder shall be offset by any payments
payable under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
7
<PAGE>
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:
---------------
Richard A. Schweinhart
___________________
___________________
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, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
/s/ Richard A. Schweinhart
----------------------------------------
RICHARD A. SCHWEINHART
9
<PAGE>
Exhibit 10.58
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Richard E. Chapman (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 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 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 in an executive
------
capacity.
-1-
<PAGE>
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 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 $260,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or 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.
-2-
<PAGE>
(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.
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
-3-
<PAGE>
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 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
-4-
<PAGE>
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 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:
-5-
<PAGE>
(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.
-6-
<PAGE>
(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 1.5 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") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 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 (including
assumed awards granted under the 1987 Program and the 1997 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 18 months 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
-7-
<PAGE>
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 18 months 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 18 months 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 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.
(7) The Company shall take such action as is required to cause
the promissory note (the "Tax Loan") entered into in respect of the
loan to Executive, dated June 15, 1998 in an original principal amount
of $15,800 (the "Tax Loan") to be amended to provide that the Tax Loan
and any payments scheduled to be made in respect thereof shall not be
due and payable prior to the fifth anniversary of the Date of
Termination, or, at the option of the company cause to be forgiven 50%
of the outstanding
-8-
<PAGE>
principal balance (and any accrued interest with respect thereto) of
the Tax Loan; provided, that any such forgiveness under this paragraph
--------
(7) shall offset the amount of any payments otherwise payable under
paragraph (1) of this Section 7(b).
(8) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $324,000 (the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than $8.00, such interest payment shall be forgiven and
(z) during the five-day period following the expiration of the fifth
anniversary of the Date of Termination, the Executive shall have the
right to put the preferred stock underlying the Preferred Stock Loan
to the Company at par.
(9) Executive shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
(10) Following the Executive's Date of Termination, the
Executive shall receive the computer which Executive is utilizing as
of the 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
-9-
<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
-10-
<PAGE>
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 May 1, 1998 (the "Severance Agreement"); provided that any payments payable
--------
to Executive hereunder shall be offset by any payments payable under the
Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
If to Executive:
---------------
Richard E. Chapman
3166 Running Deer Circle
Louisville, KY 40241
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: General Counsel
-11-
<PAGE>
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
RICHARD E. CHAPMAN
/s/ Richard E. Chapman
----------------------------------------
-13-
<PAGE>
Exhibit 10.60
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of the 5th day of November, 1999, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and DONALD D. FINNEY (the "Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of January 4, 1999, between the Company and
Executive (the "Employment Agreement") pursuant to the terms of this Amendment;
and
WHEREAS, the Company and Executive agree and acknowledge that this
Amendment is made in consideration of Executive forfeiting certain rights in
exchange for a certain retention bonus and other consideration provided herein;
and
WHEREAS, the Executive and the Company agree that the terms and
provisions of the Employment Agreement shall continue except as specifically
amended herein.
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. Amendment to Section 7(b).
-------------------------
Section 7(b) of the Employment Agreement shall be revised in its
entirety as follows:
(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 1.5 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").
<PAGE>
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 stock-based 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 18 months 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 18 months 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 18 months 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 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 may 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 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
<PAGE>
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination.
2. Restatement of Other Terms and Conditions; Subject to Rejection.
---------------------------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein. Notwithstanding
anything herein to the contrary, Executive hereby agrees and acknowledges that
nothing herein shall constitute either an assumption or rejection of the
Employment Agreement and any amendments thereto pursuant to 11 U.S.C. Section
365.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
-----------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
VENCOR, INC.
By: /s/ Edward L. Kuntz
-----------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
/s/ Donald D. Finney
---------------------------------------
DONALD D. FINNEY
<PAGE>
Exhibit 10.62
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of the 5th day of November, 1999, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and OWEN E. DORSEY (the "Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of April 19, 1999, between the Company and
Executive (the "Employment Agreement") pursuant to the terms of this Amendment;
and
WHEREAS, the Company and Executive agree and acknowledge that this
Amendment is made in consideration of Executive forfeiting certain rights in
exchange for a certain retention bonus and other consideration provided herein;
and
WHEREAS, the Executive and the Company agree that the terms and
provisions of the Employment Agreement shall continue except as specifically
amended herein.
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. Amendment to Section 7(b).
-------------------------
Section 7(b) of the Employment Agreement shall be revised in its
entirety as follows:
(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 1.5 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").
<PAGE>
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 stock-based 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 18 months 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 18 months 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 18 months 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 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 may 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 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
<PAGE>
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination.
2. Restatement of Other Terms and Conditions; Subject to Rejection.
---------------------------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein. Notwithstanding
anything herein to the contrary, Executive hereby agrees and acknowledges that
nothing herein shall constitute either an assumption or rejection of the
Employment Agreement and any amendments thereto pursuant to 11 U.S.C. Section
365.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
-------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
VENCOR, INC.
By: /s/ Edward L. Kuntz
-------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
/s/ Owen E. Dorsey
----------------------------------------
OWEN E. DORSEY
<PAGE>
Exhibit 10.63
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Frank J. Battafarano (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 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 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 in an executive
------
capacity.
-1-
<PAGE>
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 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 $180,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or 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.
-2-
<PAGE>
(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.
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
-3-
<PAGE>
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
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); or
(iv) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 9(c).
-4-
<PAGE>
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
-5-
<PAGE>
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:
-6-
<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 1.5 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") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 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 (including
assumed awards granted under the 1987 Program and the 1997 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 or she had continued to be an
Executive for all purposes under the Parent's
-7-
<PAGE>
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 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 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 neces-
-8-
<PAGE>
sary to effectuate the provisions of this Agreement.
(7) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $297,000 the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than $8.00, such interest payment shall be forgiven and
(z) during the five-day period following the expiration of the fifth
anniversary of the Date of Termination, the Executive shall have the
right to put the preferred stock underlying the Preferred Stock Loan
to the Company at par.
(8) Executive shall be credited 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
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
-9-
<PAGE>
receive the balance of the payments; or in the event of no designated
beneficiary, the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or
--------
in connection with this Agreement shall, at the election and upon written demand
of either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
(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
-10-
<PAGE>
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 May 1, 1998 (the "Severance Agreement"); provided that any
--------
payments payable to Executive hereunder shall be offset by any payments payable
under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
-11-
<PAGE>
If to Executive:
---------------
Frank J. Battafarano
1492 Sable Wing Circle
Louisville, KY 40223
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, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
-12-
<PAGE>
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/ W. Bruce Lunsford
---------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By:/s/ W. Bruce Lunsford
---------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
FRANK J. BATTAFARANO
By:/s/Frank J. Battafarano
-----------------------
-13-
<PAGE>
Exhibit 10.64
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as of
the 28/th/ day of September, 1998, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and FRANK J. BATTAFARANO (the
"Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of the 28/th/ day of July, 1998, between the
Company and Executive (the "Employment Agreement") pursuant to the terms of this
Amendment; and
WHEREAS, the Executive and the Company agree that the terms and
provisions of the Employment Agreement shall continue except as specifically
amended herein.
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. Amendment to Section 5.
----------------------
Section 5 of the Employment Agreement shall be revised to insert the
following paragraph as Section 5(e).
(e) The Company shall take such action as is required to cause the
promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive,
dated April 30, 1998, in the original principal amount of
$297,000 (the "Preferred Stock Loan") to be amended (x) to
provide that the maturity date shall be extended to 10 years from
the date of its original issuance and (y) to delete the provision
requiring that the Preferred Stock Loan be due and payable upon
90 days following termination of employment of Executive.
2. Amendment to Section 7(b)(1).
----------------------------
The first paragraph of Section 7(b)(1) shall be revised in its
entirety as follows:
(1) Within 14 days of Executive's Date of Termination, the Company
shall pay to Executive (i) the pro rata 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")
(including assumed awards granted under the Vencor, Inc. 1987
Incentive Compensation Program (the "1987 Program") and
<PAGE>
the Vencor, Inc. 1997 Incentive Compensation Plan (the "1997
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").
3. Reaffirmation of Other Terms and Conditions.
-------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
----------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose of Section 7(b)(i)
VENCOR, INC.
By: /s/ W. Bruce Lunsford
----------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
/s/ Frank J. Battafarano
------------------------
FRANK J. BATTAFARANO
<PAGE>
Exhibit 10.65
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of the 5th day of November, 1999, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and FRANK J. BATTAFARANO (the
"Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of July 28, 1998, as amended September 28, 1998,
between the Company and Executive (the "Employment Agreement") pursuant to the
terms of this Amendment; and
WHEREAS, the Company and Executive agree and acknowledge that this
Amendment is made in consideration of Executive forfeiting certain rights in
exchange for a certain retention bonus and other consideration provided herein;
and
WHEREAS, the Executive and the Company agree that the terms and
provisions of the Employment Agreement shall continue except as specifically
amended herein.
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. Amendment to Section 7(b).
-------------------------
Section 7(b) of the Employment Agreement shall be revised in its
entirety as follows:
(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 1.5 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").
<PAGE>
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 stock-based 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 18 months 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 18 months 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 18 months 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 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 may 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 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
<PAGE>
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination.
2. Restatement of Other Terms and Conditions; Subject to Rejection.
---------------------------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein. Notwithstanding anything
herein to the contrary, Executive hereby agrees and acknowledges that nothing
herein shall constitute either an assumption or rejection of the Employment
Agreement and any amendments thereto pursuant to 11 U.S.C. Section 365.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
--------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
VENCOR, INC.
By: /s/ Edward L. Kuntz
--------------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
/s/ Frank J. Battafarano
-----------------------------------------
FRANK J. BATTAFARANO
<PAGE>
Exhibit 10.66
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and James H. Gillenwater, Jr. (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 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 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
-1-
<PAGE>
Agreement shall terminate on the first anniversary of the effective date of such
election notice.
2. Duties. Executive is engaged by the Company in an executive
------
capacity.
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 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 $146,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or 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
-2-
<PAGE>
(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 may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided
-3-
<PAGE>
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;
-4-
<PAGE>
(ii) an adverse change in Executive's status or position as an
executive officer of the Company, including, without limitation, an
adverse change in Executive's status or position as a result of a
diminution in Executive's duties and responsibilities (other than any
such change directly attributable to the fact that the Company is no
longer publicly owned);
(iii) the Company shall (A) materially reduce the Base Salary or
bonus opportunity of Executive, or (B) materially reduce his benefits
and perquisites (other than pursuant to a uniform reduction applicable
to all similarly situated executives of the Company);
(iv) the Company shall require Executive to relocate Executive's
principal business office more than 30 miles from its location on the
Effective Date; or
(v) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 9(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is
-5-
<PAGE>
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 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
-6-
<PAGE>
(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
-7-
<PAGE>
in which the Date of Termination occurs, and (ii) an amount equal to
1.5 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") (including assumed
awards granted under the Vencor, Inc. 1987 Incentive Compensation
Program (the "1987 Program") and the Vencor, Inc. 1997 Incentive
Compensation Plan (the "1997 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 (including
assumed awards granted under the 1987 Program and the 1997 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 18 months 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
-8-
<PAGE>
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 18 months 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 18 months 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 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
-9-
<PAGE>
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) The Company shall take such action as is required to cause
the promissory note (the "Tax Loan") entered into in respect of the
loan to Executive, dated June 15, 1998 in an original principal amount
of $9,500 (the "Tax Loan") to be amended to provide that the Tax Loan
and any payments scheduled to be made in respect thereof shall not be
due and payable prior to the fifth anniversary of the Date of
Termination or, at the option of the company cause to be forgiven 50%
of the outstanding principal balance (and any accrued interest with
respect thereto) of the Tax Loan; provided, that any such forgiveness
--------
under this paragraph (7) shall offset the amount of any payments
otherwise payable under paragraph (1) of this Section 7(b).
(8) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $459,000 (the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior
-10-
<PAGE>
to any interest payment date is less than $8.00, such interest payment
shall be forgiven and (z) during the five-day period following the
expiration of the fifth anniversary of the Date of Termination, the
Executive shall have the right to put the preferred stock underlying
the Preferred Stock Loan to the Company at par.
(9) Executive shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
(10) Following the Executive's Date of Termination, the
Executive shall receive the computer which Executive is utilizing as
of the 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 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,
-11-
<PAGE>
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
-12-
<PAGE>
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 May 1, 1998 (the "Severance Agreement"); provided that any
--------
payments payable to Executive hereunder shall be offset by any payments payable
under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
-13-
<PAGE>
If to Executive:
---------------
James H. Gillenwater, Jr.
1201 Falls Creek Landing
New Albany, IN 47150
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, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
-14-
<PAGE>
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.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
---------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ W. Bruce Lunsford
---------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
JAMES H. GILLENWATER, JR.
/s/ James H. Gillenwater, Jr.
-----------------------------
-16-
<PAGE>
Exhibit 10.67
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998 (the
"Effective Date"), by and between Vencor Operating, Inc., a Delaware corporation
(the "Company"), and M. Suzanne Riedman (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 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 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 in an executive
------
capacity.
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 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.
-1-
<PAGE>
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than $154,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or 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 may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt,
-2-
<PAGE>
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
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); or
(iv) 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
-3-
<PAGE>
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 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:
-4-
<PAGE>
(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 1.5 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") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 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 (including
assumed awards granted under the 1987 Program and the 1997 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 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
-5-
<PAGE>
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 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 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.
(7) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $283,500 the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than $8.00, such interest payment shall be forgiven and
(z) during the five-day period following the expiration of the fifth
anniversary of the Date of Termination, the Executive shall have the
right to put the preferred stock underlying the Preferred Stock Loan
to the Company at par.
-6-
<PAGE>
(8) Executive shall be credited 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
in which to exercise such stock options.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or
--------
in connection with this Agreement shall, at the election and upon written demand
of either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
(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,
-7-
<PAGE>
"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 May 1, 1998 (the "Severance Agreement"); provided that any
--------
payments payable to Executive hereunder shall be offset by any payments payable
under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
If to Executive:
---------------
M. Suzanne Riedman
6401 Orchid Hill Place
Louisville, KY 40207
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: General Counsel
-8-
<PAGE>
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
----------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ W. Bruce Lunsford
----------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President and
Chief Executive Officer
M. SUZANNE RIEDMAN
By: /s/ M. Suzanne Riedman
----------------------------------------
-10-
<PAGE>
Exhibit 10.68
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as of
the 28th day of September, 1998, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and M. SUZANNE RIEDMAN (the "Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of the 28th day of July, 1998, between the Company
and Executive (the "Employment Agreement") pursuant to the terms of this
Amendment; and
WHEREAS, the Executive and the Company agree that the terms and
provisions of the Employment Agreement shall continue except as specifically
amended herein.
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. Amendment to Section 5.
----------------------
Section 5 of the Employment Agreement shall be revised to insert the
following paragraph as Section 5(e).
(e) The Company shall take such action as is required to cause the
promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive,
dated April 30, 1998, in the original principal amount of
$283,500 (the "Preferred Stock Loan") to be amended (x) to
provide that the maturity date shall be extended to 10 years from
the date of its original issuance and (y) to delete the provision
requiring that the Preferred Stock Loan be due and payable upon
90 days following termination of employment of Executive.
2. Amendment to Section 7(b)(1).
----------------------------
The first paragraph of Section 7(b)(1) shall be revised in its
entirety as follows:
(1) Within 14 days of Executive's Date of Termination, the Company
shall pay to Executive (i) the pro rata 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")
(including assumed awards granted under the Vencor, Inc. 1987
Incentive Compensation Program (the "1987 Program") and
<PAGE>
the Vencor, Inc. 1997 Incentive Compensation Plan (the "1997
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").
3. Reaffirmation of Other Terms and Conditions.
-------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose of Section 7(b)(i)
VENCOR, INC.
By: /s/ W. Bruce Lunsford
-------------------------------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
/s/ M. Suzanne Riedman
----------------------------------------------
M. SUZANNE RIEDMAN
<PAGE>
Exhibit 10.69
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of the 5th day of November, 1999, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and M. SUZANNE RIEDMAN (the "Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of the July 28, 1998, as amended September 28,
1998, between the Company and Executive (the "Employment Agreement") pursuant to
the terms of this Amendment; and
WHEREAS, the Company and Executive agree and acknowledge that this
Amendment is made in consideration of Executive forfeiting certain rights in
exchange for a certain retention bonus and other consideration provided herein;
and
WHEREAS, the Executive and the Company agree that the terms and provisions
of the Employment Agreement shall continue except as specifically amended
herein.
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. Amendment to Section 7(b).
-------------------------
Section 7(b) of the Employment Agreement shall be revised in its
entirety as follows:
(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 her 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 1.5 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
<PAGE>
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 stock-based 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 18 months following the Date of Termination,
the Executive shall be treated as if 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 18 months 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 18 months 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 she 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 may 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 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
<PAGE>
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination.
2. Restatement of Other Terms and Conditions; Subject to Rejection.
---------------------------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein. Notwithstanding
anything herein to the contrary, Executive hereby agrees and acknowledges that
nothing herein shall constitute either an assumption or rejection of the
Employment Agreement and any amendments thereto pursuant to 11 U.S.C. Section
365.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
----------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
VENCOR, INC.
By: /s/ Edward L. Kuntz
----------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
/s/ M. Suzanne Riedman
--------------------------------------
M. SUZANNE RIEDMAN
<PAGE>
Exhibit 10.70
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and Richard A. Lechleiter (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 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 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 in an executive
------
capacity.
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<PAGE>
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 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 $140,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or 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
-2-
<PAGE>
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.
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
-3-
<PAGE>
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
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); or
(iv) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 9(c).
-4-
<PAGE>
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,
-5-
<PAGE>
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:
-6-
<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 1.5 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") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 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 (including
assumed awards granted under the 1987 Program and the 1997 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 or she had continued to be an
Executive for all purposes under the Parent's
-7-
<PAGE>
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 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 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
-8-
<PAGE>
necessary to effectuate the provisions of this Agreement.
(7) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $315,000 the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than $8.00, such interest payment shall be forgiven and
(z) during the five-day period following the expiration of the fifth
anniversary of the Date of Termination, the Executive shall have the
right to put the preferred stock underlying the Preferred Stock Loan
to the Company at par.
(8) Executive shall be credited 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
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,
-9-
<PAGE>
Executive's designated beneficiary shall be entitled to receive the balance
of the payments; or in the event of no designated beneficiary, the
remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
(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
-10-
<PAGE>
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 May 1, 1998 (the "Severance Agreement"); provided that any
--------
payments payable to Executive hereunder shall be offset by any payments payable
under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
-11-
<PAGE>
If to Executive:
---------------
Richard A. Lechleiter
601 Club Lane
Louisville, KY 40207
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, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
-12-
<PAGE>
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.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
----------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose
of Section 7
VENCOR, INC.
By: /s/ W. Bruce Lunsford
----------------------
Name: W. Bruce Lunsford
Title: Chairman of the Board, President
and Chief Executive Officer
RICHARD A. LECHLEITER
/s/ Richard A. Lechleiter
-------------------------
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<PAGE>
Exhibit 10.71
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as of the
28/th/ day of September, 1998, by and between VENCOR OPERATING, INC., a Delaware
corporation (the "Company"), and RICHARD A. LECHLEITER (the "Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of the 28/th/ day of July, 1998, between the
Company and Executive (the "Employment Agreement") pursuant to the terms of this
Amendment; and
WHEREAS, the Executive and the Company agree that the terms and provisions
of the Employment Agreement shall continue except as specifically amended
herein.
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. Amendment to Section 5.
----------------------
Section 5 of the Employment Agreement shall be revised to insert the
following paragraph as Section 5(e).
(e) The Company shall take such action as is required to cause the
promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive,
dated April 30, 1998, in the original principal amount of
$315,000 (the "Preferred Stock Loan") to be amended (x) to
provide that the maturity date shall be extended to 10 years from
the date of its original issuance and (y) to delete the provision
requiring that the Preferred Stock Loan be due and payable upon
90 days following termination of employment of Executive.
2. Amendment to Section 7(b)(1).
----------------------------
The first paragraph of Section 7(b)(1) shall be revised in its
entirety as follows :
(1) Within 14 days of Executive's Date of Termination, the Company
shall pay to Executive (i) the pro rata 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")
(including assumed awards granted under the Vencor, Inc. 1987
Incentive Compensation Program (the "1987 Program") and
<PAGE>
the Vencor, Inc. 1997 Incentive Compensation Plan (the "1997
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").
3. Reaffirmation of Other Terms and Conditions.
-------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ W. Bruce Lunsford
---------------------------------
W. Bruce Lunsford
Chairman of the Board, President
and Chief Executive Officer
Solely for the purpose of Section 7(b)(i)
VENCOR, INC.
By: /s/ W. Bruce Lunsford
---------------------------------
W. Bruce Lunsford
Chairman of the Board, President
and Chief Executive Officer
/s/ Richard A. Lechleiter
------------------------------------
RICHARD A. LECHLEITER
<PAGE>
Exhibit 10.72
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of the 5th day of November, 1999, by and between VENCOR OPERATING, INC., a
Delaware corporation (the "Company"), and RICHARD A. LECHLEITER (the
"Executive").
WHEREAS, the Company and Executive desire to amend the terms of the
Employment Agreement made as of the July 28, 1998, as amended September 28,
1998, between the Company and Executive (the "Employment Agreement") pursuant to
the terms of this Amendment; and
WHEREAS, the Company and Executive agree and acknowledge that this
Amendment is made in consideration of Executive forfeiting certain rights in
exchange for a certain retention bonus and other consideration provided herein;
and
WHEREAS, the Executive and the Company agree that the terms and provisions
of the Employment Agreement shall continue except as specifically amended
herein.
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. Amendment to Section 7(b).
-------------------------
Section 7(b) of the Employment Agreement shall be revised in its
entirety as follows:
(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 1.5 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
<PAGE>
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 stock-based 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 18 months 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 18 months 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 18 months 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 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 may 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 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
<PAGE>
(8) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the Date
of Termination.
2. Restatement of Other Terms and Conditions; Subject to Rejection.
---------------------------------------------------------------
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect,
unmodified and unrevoked, and the same are hereby reaffirmed and ratified by the
Executive and the Company as if fully set forth herein. Notwithstanding anything
herein to the contrary, Executive hereby agrees and acknowledges that nothing
herein shall constitute either an assumption or rejection of the Employment
Agreement and any amendments thereto pursuant to 11 U.S.C. Section 365.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
VENCOR OPERATING, INC.
By: /s/ Edward L. Kuntz
--------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
VENCOR, INC.
By: /s/ Edward L. Kuntz
--------------------------------
Edward L. Kuntz
Chairman of the Board, Chief
Executive Officer and President
/s/ Richard A. Lechleiter
-------------------------
RICHARD A. LECHLEITER
<PAGE>
Exhibit 21
REGISTRANT'S SUBSIDIARIES
Corporations and Limited Liability Companies
- --------------------------------------------
Cornerstone Insurance Company, a Cayman Islands corporation
Vencor Operating, Inc., a Delaware corporation
Vencor Hospitals East, L.L.C., a Delaware limited liability company
Vencor Hospitals West, L.L.C., a Delaware limited liability company
Vencor Nursing Centers East, L.L.C., a Delaware limited liability company
Vencor Nursing Centers West, L.L.C., a Delaware limited liability company
Vencor Nursing Centers South,L.L.C., a Delaware limited liability company
Vencor Nursing Centers North, L.L.C., a Delaware limited liability company
Vencor Nevada, L.L.C., a Delaware limited liability company
Vencor Holdings, L.L.C., a Delaware limited liability company
Vencor Investment Company, a Delaware corporation
Ventech Systems, Inc., a Delaware corporation
Vencare, Inc., a Delaware corporation
Vencor Hospice, Inc., a Kentucky corporation
Vencor Facility Services, Inc., a Delaware corporation
Vencor Insurance Holdings, Inc., a Delaware corporation
Vencor Provider Network, Inc., a Delaware corporation
Vencor Pediatric Care, Inc., a Delaware corporation
Vencor Home Care Services, Inc., a Delaware corporation
Ledgewood Health Care Corporation, a Massachusetts corporation (1)
Medisave Pharmacies, Inc., a Delaware corporation
Medisave of Tennessee, Inc., a Delaware corporation
American X-Rays, Inc., a Louisiana corporation
First Rehab, Inc., a Delaware corporation
Advanced Infusion Systems, Inc., a California corporation
<PAGE>
Vencare Rehab Services, Inc., a Delaware corporation
Health Care Holdings, Inc., a Delaware corporation
Health Care Technology, Inc., a Delaware corporation
Helian Health Group, Inc., a Delaware corporation
Helian ASC of Northridge, Inc., a California corporation
MedEquities, Inc., a California corporation
Helian Recovery Corporation, a California corporation
Recovery Inns of America, Inc., a California corporation
VC - OIA, Inc., an Arizona corporation
Palo Alto Surgecenter Corporation, a California corporation
VC - TOCH, Inc., an Arizona corporation
Horizon Healthcare Services, Inc., a Georgia corporation
Tunstall Enterprises, Inc., a Georgia corporation
PersonaCare, Inc., a Delaware corporation
Lafayette Health Care Center, Inc., a Georgia corporation
PersonaCare Living Center of Clearwater, Inc., a Delaware corporation
PersonaCare of Bradenton, Inc., a Delaware corporation
PersonaCare of Clearwater, Inc., a Delaware corporation
PersonaCare of Connecticut, Inc., a Connecticut corporation
Courtland Gardens Health Center, Inc., a Connecticut corporation
Homestead Health Center, Inc., a Connecticut corporation
Stamford Health Facilities, Inc., a Connecticut corporation
PersonaCare of Georgia, Inc., a Delaware corporation
PersonaCare of Huntsville, Inc., a Delaware corporation
PersonaCare of Little Rock, Inc., a Delaware corporation
PersonaCare of Ohio, Inc., a Delaware corporation
PersonaCare of Owensboro, Inc., a Delaware corporation
2
<PAGE>
PersonaCare of Pennsylvania, Inc., a Delaware corporation
PersonaCare of Pompano East, Inc., a Delaware corporation
PersonaCare of Pompano West, Inc., a Delaware corporation
PersonaCare of Reading, Inc., a Delaware corporation
PersonaCare of San Antonio, Inc., a Delaware corporation
PersonaCare of San Pedro, Inc., a Delaware corporation
PersonaCare of Shreveport, Inc., a Delaware corporation
PersonaCare of St. Petersburg, Inc., a Delaware corporation.
PersonaCare of Warner Robbins, Inc., a Delaware corporation
PersonaCare of Wisconsin, Inc., a Delaware corporation
PersonaCare Properties, Inc., a Georgia corporation
Tucker Nursing Center, Inc., a Georgia corporation
Respiratory Care Services, Inc., a Delaware corporation
TheraTx Health Services, Inc., a Delaware corporation
TheraTx Rehabilitation Services, Inc., a Delaware corporation
TheraTx Healthcare Management, Inc., a Delaware corporation
TheraTx Management Services, Inc., a California corporation
TheraTx Medical Supplies, Inc., a Delaware corporation
TheraTx Staffing, Inc., an Illinois corporation
VC - WM, Inc., a Florida corporation
Transitional Hospitals Corporation, a Nevada corporation
Community Psychiatric Centers of Oklahoma, Inc., an Oklahoma corporation
Community Psychiatric Centers Properties of Oklahoma, Inc., an Oklahoma
corporation
CPC of Georgia, Inc., a Georgia corporation
Peachtree - Parkwood Hospital, Inc., a Georgia corporation
Interamericana Health Care Group, a Nevada corporation
Caribbean Behavioral Health Systems, Inc., a Nevada corporation
Transitional Hospitals Corporation, a Delaware corporation
3
<PAGE>
JB Thomas Hospital, Inc., a Massachusetts corporation
THC - Chicago, Inc., an Illinois corporation
THC - North Shore, Inc., an Illinois corporation
THC - Hollywood, Inc., a Florida corporation
THC - Houston, Inc., a Texas corporation
THC - Minneapolis, Inc., a Minnesota corporation
THC - Orange County, Inc., a California corporation
THC - San Diego, Inc., a California corporation
THC - Seattle, Inc., a Washington corporation
Transitional Hospitals Corporation of Indiana, Inc., an Indiana
corporation
Transitional Hospitals Corporation of Louisiana, Inc., a Louisiana
corporation
Transitional Hospitals Corporation of New Mexico, Inc., a New Mexico
corporation
Transitional Hospitals Corporation of Nevada, Inc., a Nevada
corporation
Transitional Hospitals Corporation of Tampa, Inc., a Florida
corporation
Transitional Hospitals Corporation of Texas, Inc., a Texas corporation
Transitional Hospitals Corporation of Wisconsin, Inc., a Wisconsin
corporation
Transitional Hospitals Corporation of Michigan, Inc., a Michigan
corporation
Community Psychiatric Centers of Arkansas, Inc., an Arkansas corporation
Community Psychiatric Centers of California, a California corporation
Community Psychiatric Centers Properties Incorporated, a California
corporation
CPC Investment Corp., a California corporation
CPC Properties of Illinois, Inc., an Illinois corporation
CPC Properties of Missouri, Inc., a Missouri corporation
Community Psychiatric Centers of Florida, Inc., a Florida corporation
Community Psychiatric Centers of Idaho, Inc., an Idaho corporation
Community Psychiatric Centers of Indiana, Inc., an Indiana corporation
Community Psychiatric Centers of Kansas, Inc., a Kansas corporation
4
<PAGE>
Community Psychiatric Centers of Mississippi, Inc., a Mississippi
corporation
Community Psychiatric Centers of Missouri, Inc., a Missouri corporation
Community Psychiatric Centers of North Carolina, Inc., a North Carolina
corporation
Community Psychiatric Centers of Utah, Inc., a Utah corporation
Community Psychiatric Centers Properties of Texas, Inc., a Texas
corporation
Community Psychiatric Centers Properties of Utah, Inc., a Utah corporation
C.P.C. of Louisiana, Inc., a Louisiana corporation
CPC Managed Care Health Services, Inc., a Delaware corporation
Community Behavioral Health System, Inc., a Louisiana corporation
CPC Properties of Arkansas, Inc., an Arkansas corporation
CPC Properties of Indiana, Inc., an Indiana corporation
CPC Properties of Kansas, Inc., a Kansas corporation
CPC Properties of Louisiana, Inc., a Louisiana corporation
CPC Properties of Mississippi, Inc., a Mississippi corporation
CPC Properties of North Carolina, Inc., a North Carolina corporation
Florida Hospital Properties, a Florida corporation
Old Orchard Hospital, Inc., an Illinois corporation
Partnerships
- ------------
Vencor Hospitals Limited Partnership, a Delaware limited partnership
Vencor Nursing Centers Limited Partnership, a Delaware limited partnership
Vencor Nursing Centers Central Limited Partnership, a Delaware limited
partnership
Vencor Home Care and Hospice Indiana Partnership, an Indiana general partnership
ProData Systems, Inc., an Alabama corporation
Stamford Health Associates, L.P., a Connecticut limited partnership
Foothill Nursing Company Partnership, a California general partnership (1)
Fox Hill Village Partnership, a Massachusetts general partnership (1)
Starr Farm Partnership, a Vermont general partnership (1)
Hillhaven-MSC Partnership, a California general partnership (1)
Visiting Nurse Advanced Infusion Systems - Anaheim, a California general
partnership (1)
5
<PAGE>
Pharmaceutical Infusion Therapy, a California general partnership (2)
California Respiratory Care Partnership, a California general partnership (2)
Visiting Nurse Advanced Infusion Systems - Colton, a California general
partnership (2)
Visiting Nurse Advanced Infusion Systems - Newbury Park, a California general
partnership (2)
Northridge Surgery Center, Ltd., a California limited partnership (2)
VNA/CPS Pharmaceutical Services, a California general partnership (3)
Northridge Surgery Center Development Ltd., a California limited partnership (4)
Recovery Inn of Menlo Park, L.P., a California limited partnership (5)
(1) Only fifty percent (50%) is owned by one of the Registrant's subsidiaries
(2) Only fifty-one percent (51%) is owned by one or more of the Registrant's
subsidiaries
(3) Only forty-six percent (46%) is owned by one of the Registrant's
subsidiaries
(4) Only forty-three percent (43%) is owned by one of the Registrant's
subsidiaries
(5) Only fifty-eight percent (58%) is owned by one the Registrant's
subsidiaries
6
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-51363) pertaining to the Vencor, Inc. 1998
Incentive Compensation Plan; in the Registration Statement on Form S-8 (No. 333-
51361) pertaining to the Vencor, Inc. 1998 Non-Employee Directors Stock Option
Plan; in the Registration Statement on Form S-8 (No. 333-51359) pertaining to
the Vencor Retirement Savings Plan; in the Registration Statement on Form S-8
(No. 333-64897) pertaining to the Vencor Retirement Savings Plan - additional
shares; in the Registration Statement on Form S-8 (No. 333-61387) pertaining to
the TheraTx Retirement Savings Plan; in the Registration Statement on Form S-8
(No. 333-61385) pertaining to the THC Retirement Savings Plan, of our report
dated March 30, 2000 relating to the consolidated financial statements and
financial statement schedule of Vencor, Inc., which appears in Vencor, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
March 30, 2000
<PAGE>
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-51363) pertaining to the Vencor, Inc. 1998 Incentive
Compensation Plan; in the Registration Statement on Form S-8 (No. 333-51361)
pertaining to the Vencor, Inc. 1998 Non-Employee Directors Stock Option Plan; in
the Registration Statement on Form S-8 (No. 333-51359) pertaining to the Vencor
Retirement Savings Plan; in the Registration Statement on Form S-8 (No. 333-
64897) pertaining to the Vencor Retirement Savings Plan - additional shares; in
the Registration Statement on Form S-8 (No. 333-61387) pertaining to the TheraTx
Retirement Savings Plan; in the Registration Statement Form S-8 (No. 333-61385)
pertaining to the THC Retirement Savings Plan, of our report dated April 13,
1999, with respect to the Balance Sheet at December 31, 1998 and Statements of
Operations, Shareholders' Equity and Cash Flows for the years ended December 31,
1998 and 1997 and corresponding financial statement schedules of Vencor, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 148,350
<SECURITIES> 0
<RECEIVABLES> 324,135
<ALLOWANCES> (180,055)
<INVENTORY> 28,956
<CURRENT-ASSETS> 591,884
<PP&E> 615,160
<DEPRECIATION> (243,526)
<TOTAL-ASSETS> 1,235,974
<CURRENT-LIABILITIES> 396,873
<BONDS> 0
1,743
0
<COMMON> 17,570
<OTHER-SE> (395,879)
<TOTAL-LIABILITY-AND-EQUITY> 1,235,974
<SALES> 0
<TOTAL-REVENUES> 2,665,641
<CGS> 0
<TOTAL-COSTS> 2,219,136
<OTHER-EXPENSES> 827,620
<LOSS-PROVISION> 114,578
<INTEREST-EXPENSE> 80,442
<INCOME-PRETAX> (682,749)
<INCOME-TAX> 500
<INCOME-CONTINUING> (683,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,923)
<NET-INCOME> (692,172)
<EPS-BASIC> (9.85)
<EPS-DILUTED> (9.85)
</TABLE>
