<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ________TO ________.
Commission file number: 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 61-1055020
(State or other jurisdiction) (I.R.S. Employer Identification Number)
</TABLE>
<TABLE>
<S> <C>
4360 Brownsboro Road Suite 115 40207-1642
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
</TABLE>
(502) 357-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class of Common Stock Outstanding at May 11, 1999
Common stock, $.25 par value 67,962,424 shares
</TABLE>
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<PAGE>
VENTAS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION......................................... 3
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of December 31,1998
and March 31, 1999............................................ 3
Condensed Consolidated Statement of Income for the three
months ended March 31, 1999................................... 4
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1999................................... 5
Condensed Consolidated Statement of Stockholders' Equity...... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 19
PART II. OTHER INFORMATION............................................. 20
Item 1. Legal Proceedings............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
</TABLE>
2
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Real estate investments:
Land................................................ $ 120,928 $ 120,928
Building and improvements........................... 1,065,037 1,065,037
---------- ----------
1,185,965 1,185,965
Accumulated depreciation............................ (257,453) (246,509)
---------- ----------
Total real estate investments..................... 928,512 939,456
Cash and equivalents.................................. 58,497 338
Deferred financing costs, net......................... 7,598 8,816
Due from Vencor, Inc.................................. -- 6,967
Notes receivable from employees....................... 4,027 4,027
Other................................................. 864 102
---------- ----------
Total assets...................................... $ 999,498 $ 959,706
========== ==========
Liabilities and stockholders' equity
Liabilities:
Bank credit facility and other debt................. $ 976,889 $ 931,127
Accrued salaries, wages and other compensation...... 1,920 552
Accrued interest.................................... 2,035 3,556
Other accrued liabilities........................... 2,656 2,974
Deferred income taxes............................... 30,506 30,506
---------- ----------
Total liabilities................................. 1,014,006 968,715
Commitments and contingencies
Stockholders' equity (deficit):
Common stock........................................ 18,402 18,402
Capital in excess of par value...................... 140,173 140,103
Unearned compensation on restricted stock........... (3,154) (1,962)
Accumulated deficit................................. (15,788) (9,637)
---------- ----------
139,633 146,906
Treasury stock...................................... (154,141) (155,915)
---------- ----------
Total stockholders' equity (deficit).............. (14,508) (9,009)
---------- ----------
Total liabilities and stockholders' equity
(deficit)........................................ $ 999,498 $ 959,706
========== ==========
</TABLE>
Note--The balance sheet at December 31, 1998, has been derived from audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE>
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the three months ended March 31, 1999
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
Revenues
<S> <C>
Rental income $56,436
Interest and other income 197
-------
Total revenues 56,633
Expenses
General and administrative 2,551
Non-recurring employee severance costs 1,272
Depreciation on real estate investments 10,944
Interest on bank credit facility and other debt 18,065
Net payments on interest rate swap agreement 1,593
Amortization of restricted stock grants 652
Amortization of deferred financing costs 1,218
-------
Total expenses 36,295
-------
Net Income $20,338
=======
Net income per common share:
Basic $ 0.30
Diluted $ 0.30
Shares used in computing earnings per common share:
Basic 67,691
Diluted 67,956
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 1999
(Unaudited)
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 20,338
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 10,945
Amortization of deferred financing fees 1,218
Amortization of restricted stock grants 652
Increase in other assets (641)
Decrease in accounts payable and accrued liabilities (471)
Decrease in amount due from Vencor, Inc. 6,967
---------
Net cash provided by operating activities 39,008
Cash flows from investing activities:
Purchase of furniture and equipment (122)
---------
Net cash used in investing activities (122)
Cash flows from financing activities:
Net change in borrowings under revolving line of credit 173,143
Repayment of other bank credit facility and other debt (127,381)
Cash distributions to shareholders (26,489)
---------
Net cash provided by financing activities 19,273
---------
Increase in cash and equivalents 58,159
Cash and equivalents at beginning of period 338
---------
Cash and cash equivalents at end of period $ 58,497
=========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Capital Unearned
in Compensation
Common Excess on
Stock of Par Restricted Accumulated Treasury
Par Value Value Stock Deficit Stock Total
--------- -------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998 $18,402 $140,103 $(1,962) $ (9,637) $ (155,915) $ (9,009)
Net Income 20,338 20,338
Proceeds from issuance
of shares for stock
incentive plans --
Award and amortization
of restricted stock
grants, net of
forfeitures 70 (1,192) 1,774 652
Cash dividends paid (26,489) (26,489)
------- -------- ------- -------- ---------- --------
Balance at March 31,
1999 $18,402 $140,173 $(3,154) $(15,788) $ (154,141) $(14,508)
======= ======== ======= ======== ========== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Ventas, Inc. (the "Company"), formerly named Vencor, Inc., is a real estate
company that owns or leases 45 hospitals, 219 nursing centers and eight
personal care facilities in 36 states as of March 31, 1999. The Company
conducts all of its business through a wholly owned operating partnership,
Ventas Realty, Limited Partnership ("Ventas Realty"). The Company anticipates
that it will meet the requirements to qualify as a real estate investment
trust ("REIT") for federal income tax purposes for the tax year beginning
January 1, 1999. Accordingly, no provision for income taxes has been made for
the three months ended March 31, 1999, in the accompanying condensed
consolidated financial statements. The Company operates in one segment which
consists of owning and leasing healthcare facilities to third parties.
On April 30, 1998, the Company changed its name to Ventas, Inc. and on May
1, 1998, refinanced substantially all of its long-term debt in connection with
the spin off of its healthcare operations through the distribution of the
common stock of a new entity (which assumed the Company's former name, Vencor,
Inc. ("Vencor")) to stockholders of the Company of record as of April 27, 1998
(the "Reorganization"). The distribution was effected on May 1, 1998 (the
"Distribution Date"). For financial reporting periods subsequent to the
Distribution Date, the historical financial statements of the Company were
assumed by Vencor and the Company is deemed to have commenced operations on
May 1, 1998. Accordingly, the Company does not have comparable financial
results for prior periods. In addition, for certain reporting purposes under
this Form 10-Q and other filings, the Securities and Exchange Commission
treats the Company as having commenced operations on May 1, 1998.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered for a fair presentation
have been included. Operating results for the three months ended March 31,
1999 are not necessarily an indication of the results that may be expected for
the year ending December 31, 1999. These financial statements and related
notes should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
Beginning in May 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which established new rules for the reporting of comprehensive income
and its components. SFAS 130 requires, among other things, unrealized gains or
losses on available-for-sale securities to be disclosed as other comprehensive
income. The adoption of SFAS 130 had no impact on the Company's net income or
stockholders' equity for the three months ended March 31, 1999.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which became effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
report certain information about operating segments, products and services,
the geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has determined that the Company operates in a single
business segment. Accordingly, the adoption of SFAS 131 will have no effect on
the consolidated financial statement disclosures.
7
<PAGE>
In June 1998, FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 1999. SFAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company expects to adopt SFAS 133 effective January 1, 2000. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be recognized immediately in earnings. Based on the
Company's derivative positions and their related fair values at March 31,
1999, the Company estimates that upon adoption it will report a reduction of
$9.3 million in other comprehensive income (assuming the Company has qualified
as a REIT for federal income tax purposes). The Company was not required to
report this $9.3 million unrealized loss for the three months ended March 31,
1999.
NOTE 3--CONCENTRATION OF CREDIT RISK AND GOING CONCERN
The Company leases substantially all of its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to satisfy its rent obligations under certain
master lease agreements (the "Master Leases") and certain other agreements
will impact the Company's revenues and its ability to service its indebtedness
and to make distributions to its stockholders. Because the operations of
Vencor have been negatively impacted by changes in reimbursement rates, by its
current level of indebtedness and by certain other factors, and because of the
potential effect of such events on Vencor's ability to meet its rent
obligations to the Company, the Company's auditors have included an
explanatory paragraph in its report to the Company's consolidated financial
statements for the year ended December 31, 1998 that expresses substantial
doubt as to the Company's ability to continue as a going concern. The
existence of the explanatory paragraph may have a material adverse effect on
the Company's relationships with its creditors and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management has taken certain initiatives to address the issues noted above.
The Company has retained Merrill Lynch & Co. ("Merrill Lynch"), as financial
advisor, to assist in its review of Vencor's financial condition. Merrill
Lynch is advising the Company in its ongoing discussions with Vencor regarding
its recent results of operations and Vencor's need to amend or restructure its
existing capital structure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments." Merrill
Lynch is also advising the Company in its review of alternatives to repay the
$275 million portion of its credit facility that matures on October 30, 1999,
and to assess other strategic alternatives for the Company.
As of May 11, 1999, the Company had cash and cash equivalents totaling $70.6
million.
In connection with the discussions between the Company and Vencor regarding
Vencor's recent results of operations and Vencor's need to amend or
restructure its existing capital structure, the Company and Vencor have
entered into certain agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments."
NOTE 4--BANK CREDIT FACILITY AND OTHER DEBT
On April 30, 1998, the Company, through Ventas Realty, consummated a $1.2
billion bank credit agreement (the "Bank Credit Agreement") and retained
approximately $6.0 million of prior debt obligations. The Bank Credit
Agreement is comprised of (i) a three year $250 million revolving credit
facility (the "Revolving Credit Facility") priced at the London Interbank
Offered Rate ("LIBOR") plus 2 1/4 to 2 1/2%, (ii) a $200 million Term A Loan
(the "Term A Loan") payable in various installments over three years priced at
LIBOR plus 2 1/4 to 2 1/2%, (iii) a $350 million Term B Loan (the "Term B
Loan") payable in various installments over five years priced at LIBOR plus 2
3/4 to 3%, and (iv) a $400 million loan due October 30, 1999 and priced at
LIBOR plus 2 3/4 to 3% (the "Bridge Facility Loan"). The Bank Credit Agreement
is secured by a pledge of the Company's general partnership interest in Ventas
Realty and contains various covenants and restrictions.
8
<PAGE>
The following is a summary of long-term borrowings at March 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit, bearing interest at a base rate of
LIBOR plus 2.25% (7.19% at March 31, 1999), due April 30, 2001.. $202,743
Bridge Facility Loan, bearing interest at a base rate of LIBOR
plus 2.75% (7.69% at March 31, 1999), due October 30, 1999...... 275,000
Term A Loan, bearing interest at a base rate of LIBOR plus 2.25%
(7.19% at March 31, 1999),
due April 30, 2001.............................................. 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus 2.75%
(7.69% at March 31, 1999), due in quarterly installments of $875
with the balance due April 30, 2003............................. 317,307
Other............................................................ 21
--------
$976,889
========
</TABLE>
In connection with the Reorganization and the consummation of the Bank
Credit Agreement, the Company entered into an interest rate swap agreement
($900 million outstanding at March 31, 1999) to eliminate the impact of
changes in interest rates on the Company's floating rate debt. The agreement
expires in varying amounts through December 2006 and provides for the Company
to pay a fixed rate at 5.985% and receive LIBOR (floating rate). The fair
value of the swap agreement is not recognized in the condensed consolidated
financial statements (See Note 2--Basis of Presentation). The terms of the
swap agreement require that the Company make a cash payment or otherwise post
collateral, such as a letter of credit from one of the banks identified in the
Bank Credit Agreement (which limits the aggregate amount of any such letters
of credit to $25 million), to the counterparty if the market value loss to the
Company exceeds certain levels. The threshold levels vary based on the
relationship between the Company's debt obligations and the tangible fair
market value of its assets as defined in the Bank Credit Agreement. As of
March 31, 1999, no collateral was required to be posted under the interest
rate swap agreement.
NOTE 5--LITIGATION
The following litigation and other matters arose from the Company's
operations prior to the Reorganization. In connection with the Reorganization,
Vencor agreed to assume the defense, on behalf of the Company, of any claims
that were pending at the time of the Reorganization and which arose out of the
ownership or operation of the healthcare operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the Reorganization
which arose out of the ownership and operation of the healthcare operations.
However, there can be no assurance that Vencor will continue to defend the
Company in such proceedings and actions or that Vencor will have sufficient
assets, income and access to financing to enable it to satisfy such
obligations or its obligations incurred in connection with the Reorganization.
In addition, the following descriptions are based on information included in
Vencor's public filings and information provided to the Company by Vencor.
Because Vencor is defending the Company in each of these proceedings or
actions, the Company has not conducted an independent investigation to verify
the facts surrounding these proceedings or actions.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially inflated. In particular, the
complaint alleges that the Company issued false and misleading financial
statements
9
<PAGE>
during the first, second and third calendar quarters of 1997 which
misrepresented and understated the impact that changes in Medicare
reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful
integration of its recent acquisitions and prospective earnings per share for
1997 and 1998 which the Company knew lacked any reasonable basis and were not
being achieved. The suit seeks damages in an amount to be proven at trial,
pre-judgment and post-judgment interest, reasonable attorneys' fees, expert
witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted the Company's
motion to dismiss the case. The plaintiff has appealed the dismissal to the
United States Court of Appeals for the Sixth Circuit. Vencor, on behalf of the
Company, is defending this action vigorously.
A stockholder 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 Vencor and the Company against certain current and
former executive officers and directors of Vencor and the Company. The
complaint alleges that the defendants damaged Vencor and the Company by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of Vencor and the
Company. 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 plaintiff has an effective remedy. Vencor and the
Company each believe that the allegations in the complaint are without merit
and Vencor, for and on behalf of the Company, intends to defend this action
vigorously.
As set forth in the Company's Form 10-K for the year ended December 31,
1998, Vencor has been informed by the Department of Justice that it is the
subject of ongoing investigations into various aspects of its claims for
reimbursement from government payors, billing practices and various quality of
care issues in the hospitals and nursing centers operated by Vencor. These
investigations also include the Company's healthcare operations prior to the
date of the Reorganization. Thus, the Department of Justice has informed the
Company that for the period prior to the date of the Reorganization, if any
liability exists in connection with such investigations, the Company may be
liable for such liability. However, the Company believes that under agreements
entered into at the time of the Reorganization, Vencor is obligated to assume
the defense of, and to indemnify the Company for any liabilities that arise
out of, any claims that may result from the investigations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy these obligations. Vencor is in discussions
with the Department of Justice concerning the nature of the issues under
investigation and the possible settlement of some or all of the claims. Vencor
is cooperating fully in the investigations.
Unasserted Claim--Potential Liabilities Due to Fraudulent Transfer
Considerations
Transfers made and obligations incurred in the Reorganization and the
simultaneous distribution of the Vencor common stock to the Company's
stockholders (the "Distribution") are subject to review under state fraudulent
conveyance laws, and in the event of a bankruptcy proceeding, federal
fraudulent conveyance laws. Under these laws a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee or debtor-in-
possession in bankruptcy) could avoid the transfer if it determined that, as
of the time of the Reorganization, the party making the transfer or incurring
the obligation did not receive fair consideration or reasonably equivalent
value and, at the time of the Reorganization, the party making the transfer or
incurring the obligation (i) was insolvent or was rendered insolvent, (ii) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage, or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay such debts as they
would mature. Although Vencor has not formally asserted a claim, Vencor's
legal counsel has raised questions relating to potential fraudulent conveyance
or obligation issues relating to the Reorganization. At the time of the
Reorganization, the Company obtained an opinion from an independent third
party that addressed issues of solvency and adequate capitalization.
10
<PAGE>
Nevertheless, if a fraudulent conveyance or obligation claim is ultimately
asserted by Vencor, creditors, or others, the ultimate outcome of such a claim
cannot presently be determined. The Company intends to defend these claims
vigorously if they are asserted in a legal proceeding or mediation.
The Company and Vencor have entered into certain tolling agreements related
to claims which may arise in a bankruptcy proceeding, as discussed below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments." During the Company's discussions with Vencor
discussed below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments," Vencor has asserted
various potential claims against the Company arising out of the
Reorganization. The Company intends to defend these claims vigorously if they
are asserted in a legal or mediation proceeding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background Information
The Company has announced its intention to operate and be treated as a self-
administered, self-managed real estate investment trust ("REIT") for federal
income tax purposes beginning January 1, 1999. The Company is a real estate
company that owns or leases 45 hospitals (comprised of two acute care
hospitals and 43 long-term care hospitals), 219 nursing centers and eight
personal care facilities as of March 31, 1999. The Company's portfolio of
properties are located in 36 states and are leased and operated primarily by
Vencor or its subsidiaries. The Company conducts all of its business through a
wholly owned operating partnership, Ventas Realty, Limited Partnership.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987 and changed its name to Vencor, Incorporated in 1989 and to Vencor, Inc.
in 1993. On September 28, 1995, The Hillhaven Corporation merged with and into
the Company. On March 21, 1997, the Company acquired TheraTx, Incorporated, a
provider of subacute rehabilitation and respiratory therapy program management
services to nursing centers and an operator of 26 nursing centers. On June 24,
1997, the Company acquired Transitional Hospitals Corporation, an operator of
16 long-term acute care hospitals and three satellite facilities located in 13
states.
On May 1, 1998, the Company effected the Reorganization pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently renamed Vencor, Inc., was formed to operate the
hospital, nursing center and ancillary services businesses. Pursuant to the
terms of the Reorganization, the Company distributed the common stock of
Vencor to stockholders of record of the Company as of April 27, 1998. The
Company, through its subsidiaries, continued to hold title to substantially
all of the real property and to lease such real property to Vencor. At such
time, the Company also changed its name to Ventas, Inc. and refinanced
substantially all of its long-term debt. For financial reporting periods
subsequent to the Reorganization, the historical financial statements of the
Company were assumed by Vencor, and the Company is deemed to have commenced
operations on May 1, 1998. Accordingly, the Company does not have comparable
financial results for prior periods. In addition, for certain reporting
purposes under this Form 10-Q and other filings, the Securities and Exchange
Commission (the "Commission") treats the Company as having commenced
operations on May 1, 1998.
The Company's principal objectives are to maximize funds from operations for
distribution to stockholders, to enhance capital growth through the
appreciation of the residual value of its portfolio of properties, and to
preserve and maintain the stockholders' capital.
Recent Developments
As is discussed in the Company's Form 10-K for the year ended December 31,
1998, the Company and Vencor had discussions regarding Vencor's recent results
of operations. In those discussions, Vencor requested interim rent concessions
under the Master Leases and the Company rejected that request. In connection
with
11
<PAGE>
those discussions, the Company entered into an agreement (the "Original
Standstill Agreement") with Vencor whereby the Company agreed not to exercise
remedies for non-payment of rent due from Vencor on April 1, 1999 for a period
ending April 12, 1999.
On April 12, 1999, the Company entered into an agreement (the "Second
Standstill Agreement") with Vencor which provided that if Vencor paid the full
amount of April 1999 rent pursuant to a specified schedule, the Company would
not exercise its remedies under its lease agreements with Vencor. These
payments, totaling $18.5 million, represented the full amount of rent that was
due for April under the lease agreements between the companies. Vencor made
all rent payments required by the Second Standstill Agreement with respect to
April rent.
Pursuant to the Second Standstill Agreement, each of the Company and Vencor
also agreed not to pursue any claims against the other or any third party
relating to the Reorganization as long as Vencor made the full lease payments
for April and May 1999 under the specified schedule. The Second Standstill
Agreement provided that it would terminate on the earliest to occur of May 5,
1999, any date that a voluntary or involuntary bankruptcy proceeding was
commenced by or against Vencor or Vencor's failure to pay rent in accordance
with the specified schedule.
The Company and Vencor also entered into an agreement (the "Tolling
Agreement") pursuant to which they agreed that any statutes of limitations or
other time constraints in a bankruptcy proceeding that might be asserted by
one party against the other would be extended or tolled from April 12, 1999
until May 5, 1999 or until the Second Standstill Agreement terminated due to
Vencor's failure to make the contemplated lease payments.
On April 12, 1999, the Company and Vencor also agreed to amend each of the
lease agreements between the companies, effective as of their date of original
execution, to delete a provision that permitted the Company to require Vencor
to purchase a facility upon the occurrence of certain events of default by
Vencor.
On April 15, 1999, Vencor filed its Annual Report on Form 10-K for the year
ended December 31, 1998 with the Commission. Vencor's auditors included an
explanatory statement in its report to Vencor's financial statements for the
year ended December 31, 1998 that expresses substantial doubt as to Vencor's
ability to continue as a going concern. On April 15, 1999, Vencor announced
that it had reported a net loss of $605.9 million for the fourth quarter of
1998 and $572.9 million for the year ended December 31, 1998. Vencor also
announced that its results for the fourth quarter of 1998 included pretax
charges of $411.9 million related to certain unusual transactions and $78.9 in
pretax charges recorded in connection with recurring year-end accounting
adjustments.
On April 21, 1999, Vencor announced that it reached an agreement with the
Health Care Financing Administration to extend its repayment of approximately
$90 million of Medicare reimbursement overpayments over 60 months.
On May 3, 1999, Vencor announced that it had elected not to make the
interest payment of approximately $14.8 million due on May 3, 1999 on its $300
million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "Notes").
Vencor also announced that if the interest is not paid within a 30 day grace
period, and subject to providing notice to Vencor's senior bank lenders, the
Notes may be declared immediately due and payable.
On May 5, 1999, the Company and Vencor agreed to extend the term of the
Second Standstill Agreement through the earlier of May 7, 1999 or any date
that a voluntary or involuntary bankruptcy proceeding is commenced by or
against Vencor. As a result of this extension, neither Vencor nor the Company
could exercise remedies against the other during this period, including any
remedies for the failure of Vencor to pay the $18.5 million of May rent due to
the Company.
Vencor did not pay the May rent on May 7, 1999, and, as a result, the
Company served Vencor with a notice of non-payment of rent under each of the
lease agreements between the companies. If the May rent is not paid by June
11, 1999, the Company will be entitled to exercise remedies for non-payment of
rent under each of the lease agreements between the companies.
12
<PAGE>
On May 8, 1999, the Company and Vencor agreed to extend the term of the
Second Standstill Agreement through the earlier of June 6, 1999 or any date
that a voluntary or involuntary bankruptcy proceeding is commenced by or
against Vencor. The Company and Vencor also agreed to extend the term of the
Tolling Agreement until June 6, 1999.
On May 14, 1999, the Company announced that in order to preserve its current
cash position, it will not declare or pay a dividend at this time. The Company
expects that it will once again pay a dividend when Vencor resolves the
financial difficulties contributing to the uncertainties about Vencor's
continuing ability to make rent payments to the Company. However, there can be
no assurances that Vencor will resolve its financial difficulties and pay the
rent due the Company. The Company still intends to qualify as a REIT for the
year ending December 31, 1999. The Company is not required to distribute its
taxable income in quarterly installments in order to qualify as a REIT. The
Company will continue to evaluate its dividend policy in light of future
developments in Vencor's financial performance and ongoing discussions
regarding a global restructuring of Vencor's capital structure.
The Company believes that the best outcome for the Company, Vencor and their
respective banks and other creditors is a consensual, global restructuring of
Vencor's financial obligations. The Company has offered to make meaningful
rental concessions to Vencor in the context of such a restructuring. The
Company will consider appropriate action to take in response to any further
proposals by Vencor as may be in the best interests of the Company. There can
be no assurance that any such agreement regarding a restructuring of Vencor's
financial obligations will be reached. During the Company's discussions with
Vencor, Vencor has asserted various potential claims against the Company
arising out of the Reorganization. See Note 5 to Condensed Consolidated
Financial Statements. The Company intends to defend these claims vigorously if
they are asserted in a legal or mediation proceeding.
As a result of the developments related to Vencor and other healthcare
industry factors, the Company has suspended the implementation of its original
business strategy. Instead, management is reviewing the possible financial
impact on the Company of the recent announcements by Vencor. In particular,
the Company is reviewing Vencor's financial condition and Vencor's need to
amend or restructure its existing capital structure. The Company has retained
Merrill Lynch, as financial advisor, to assist it in this review. In addition,
the Company, together with Merrill Lynch, is reviewing alternatives to repay
the $275 million portion of its credit facility that matures on October 30,
1999. These alternatives include obtaining the necessary proceeds to pay down
or refinance the $275 million loan through cash flows from operations,
available borrowings under the Company's credit facility, the issuance of
public or private debt or equity and asset sales, or a combination of the
foregoing.
Vencor is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Vencor provided in this Form 10-Q is
derived from filings made with the Commission or other publicly available
information. The Company is providing this data for informational purposes
only, and the reader of this Form 10-Q is encouraged to obtain Vencor's
publicly available filings from the Commission. The Company has no reason to
believe that the information is inaccurate in any material respects, but the
Company has not independently verified such information and there can be no
assurances that all such information is accurate.
Results of Operations
Rental income for the quarter ended March 31, 1999 was $56.4 million, of
which $55.5 million resulted from leases with Vencor. Net income was $20.3
million, or $0.30 per diluted share. The Company anticipates that it will meet
the requirements to qualify as a REIT for federal income tax purposes for the
tax year beginning January 1, 1999. Accordingly, no provision for income taxes
has been made for the three months ended March 31, 1999 in the accompanying
condensed consolidated financial statements.
13
<PAGE>
Funds from operations ("FFO") for the three months ended March 31, 1999
totaled $31.3 million. In calculating net income and FFO, the Company included
in its expenses (and thus reduced net income and FFO) non-recurring employee
severance costs of $1.3 million and unusual legal and financial advisory
expenses associated with evaluating the current situation with Vencor,
including all agreements related thereto, and addressing alternatives related
to the $275 million loan due October 30, 1999. Substantial legal and financial
advisory expenses will continue to be incurred by the Company until a
resolution of these matters is reached, although there can be no assurance that
such a resolution will be reached. FFO for the quarter ended March 31, 1999 is
summarized in the following table:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Net Income.................................................... $20,338
Depreciation on real estate investments....................... 10,944
-------
Funds from operations....................................... $31,282
=======
</TABLE>
The Company considers FFO an appropriate measure of performance of an equity
REIT and the Company uses the National Association of Real Estate Investment
Trusts ("NAREIT") definition of FFO. NAREIT defines FFO as net income (computed
in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO presented herein is not necessarily
comparable to FFO presented by other real estate companies due to the fact that
not all real estate companies use the same definition. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indicator of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it necessarily indicative of sufficient cash flow
to fund all of the Company's needs. The Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be examined in conjunction with net income
as presented in the condensed consolidated financial statements and data
included elsewhere in this Form 10-Q.
Liquidity and Capital Resources
Cash provided by operations totaled $39.0 million for the three months ended
March 31, 1999. Net cash flows used in investing activities were $122,000. Net
cash provided by financing activities totaled $19.3 million. The Company paid a
cash dividend on its common stock of $26.5 million, or $.39 per common share,
on February 17, 1999 to shareholders of record as of January 29, 1999.
At March 31, 1999, available borrowings under the Revolving Credit Facility
approximated $47.3 million, subject to certain restrictions under the Bank
Credit Agreement. The Company intends to pay down or refinance the remaining
$275 million principal balance of the original $400 million bridge loan due
October 30, 1999, on or prior to its maturity. The Company expects to obtain
the necessary proceeds to pay down or refinance the remaining $275 million
principal balance of the bridge loan due October 30, 1999 and to meet other
liquidity requirements through cash flows from operations, available borrowings
under the Revolving Credit Facility, the issuance of public or private debt or
equity and asset sales, or a combination of the foregoing. However, there can
be no assurance that the Company will be successful in its efforts to pay down
or refinance the remaining $275 million principal balance of the bridge loan
and to meet its other liquidity requirements. The Company had cash and cash
equivalents of $58.5 million and outstanding debt aggregated $976.9 million at
March 31, 1999, of which $277.6 million is payable within the next twelve
months. As of May 11, 1999, the Company had cash and cash equivalents of $70.6
million and outstanding debt aggregated $976.0 million.
The Company leases substantially all of its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to satisfy its rent obligations under the
Master Leases will impact the Company's revenues and its ability to service its
indebtedness and to make distributions to its stockholders. Because the
operations of Vencor have been negatively impacted by changes in
14
<PAGE>
the reimbursement rates, by its current level of indebtedness and by certain
other factors, and because of the potential effect of such events on Vencor's
ability to meet its rent obligations to the Company, the Company's auditors
have included an explanatory paragraph in its report to the Company's
consolidated financial statements for the year ended December 31, 1998 that
expresses substantial doubt as to the Company's ability to continue as a going
concern. The existence of the explanatory paragraph may have a material
adverse effect on the Company's relationships with its creditors and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Management has taken certain initiatives to address the issues noted above.
The Company has retained Merrill Lynch, as financial advisor, to assist in its
review of Vencor's financial condition. Merrill Lynch is advising the Company
in its ongoing discussions with Vencor regarding its recent results of
operations and Vencor's need to amend or restructure its existing capital
structure. See "--Recent Developments." Merrill Lynch is also advising the
Company in its review of alternatives to repay the $275 million portion of its
credit facility that matures on October 30, 1999, and to assess other
strategic alternatives for the Company.
In order to qualify as a REIT, the Company must make annual distributions to
its stockholders of at least 95% of its taxable income. Under certain
circumstances, the Company may be required to make distributions in excess of
FFO in order to meet such distribution requirements. In such event, the
Company presently would expect to borrow funds, or to sell assets for cash, to
the extent necessary to obtain cash sufficient to make the distributions
required for it to qualify as a REIT for federal income tax purposes. Although
the Company currently expects to qualify as a REIT as of January 1, 1999, it
is possible that future economic, market, legal, tax or other considerations
may cause the Company to fail to qualify as a REIT.
In order to preserve its current cash position, the Company announced on May
14, 1999 that it will not declare or pay a dividend at this time. The Company
expects that it will once again pay a dividend when Vencor resolves the
financial difficulties contributing to the uncertainties about Vencor's
continuing ability to make rent payments to the Company. However, there can be
no assurances that Vencor will resolve its financial difficulties and pay the
rent due the Company. The Company still intends to qualify as a REIT for the
year ending December 31, 1999. The Company is not required to distribute its
taxable income in quarterly installments in order to qualify as a REIT. The
Company will continue to evaluate its dividend policy in light of future
developments in Vencor's financial performance and ongoing discussions
regarding a global restructuring of Vencor's capital structure.
Capital expenditures to maintain and improve the leased properties generally
will be incurred by the tenants. Accordingly, the Company does not believe
that it will incur any major expenditures in connection with the leased
properties. After the terms of the leases expire, or in the event that the
tenants are unable to meet their obligations under the leases, the Company
anticipates that any expenditures for which it may become responsible to
maintain the leased properties will be funded by cash flows from operations
and, in the case of major expenditures, through additional borrowings or
issuances of equity. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's liquidity may be affected
adversely.
Available sources of capital to finance any future growth will include cash
flows from operations, available borrowings under the Revolving Credit
Facility, the issuance of public or private debt or equity, and asset sales.
Availability and terms of any such issuance will depend upon the market for
such securities and other conditions at such time. There can be no assurance
that such additional financing, capital or asset disposition transaction will
be available on terms acceptable to the Company. The Company may, under
certain circumstances, borrow additional amounts in connection with the
acquisition of additional properties, and as necessary, to meet certain
distribution requirements imposed on REITs under the Internal Revenue Code of
1986, as amended. To the extent the Company uses equity as consideration for
future acquisitions, the Company will not require additional liquidity to
finance such acquisitions. The Company does not currently intend to acquire
any additional properties in 1999.
15
<PAGE>
Year 2000 Compliance
Year 2000 Readiness Disclosure--The Company
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the
applicable year. Without corrective action, computer programs and embedded
chips potentially could recognize the date ending in "00" as the year 1900 (or
some other year) rather than 2000, causing many computer applications to fail
or to create erroneous results. The Company's information technology systems
("IT") and non-IT systems such as building infrastructure components (e.g.,
elevators, alarm systems, electrical systems and other systems) are affected by
the Y2K issue.
During 1998, the Company outsourced all of its information systems support to
Vencor under a transition services agreement, which terminated on December 31,
1998. After December 31, 1998, Vencor continued to provide the Company with
certain administrative and support services (primarily computer systems,
telephone networks, mail delivery and other office services). Effective March
15, 1999, the Company moved to new office space and those services are no
longer provided by Vencor.
In January 1999, the Company purchased a new file server and converted to a
new financial information system platform that is Y2K compliant. That
conversion was completed during the first quarter of 1999 with the exception of
the fixed asset system, which should be completed in the second quarter of
1999. The Company has received certification from all of its significant
software and operating systems vendors that the versions of their products
currently being installed are Y2K compliant. The Company has not and does not
anticipate independently verifying such compliance. The Company estimates that
the total cost it will incur to install a new server, financial system platform
and update its computer hardware is less than $100,000.
The Company also has Y2K exposure in non-IT applications with respect to its
real estate properties. Computer technology employed in elevators, alarm
systems, electrical systems, built-in healthcare systems and similar
applications involved in the operations of the Company's properties may cause
interruptions of service with respect to those properties. Under the terms of
its lease agreements with Vencor, Vencor is responsible for upgrading all
building infrastructure components to be Y2K compliant. Vencor has advised the
Company that it has tested and verified as Y2K compliant approximately 70% of
the facility components as of March 31, 1999. Vencor has indicated to the
Company that it does not expect any material Y2K issues with respect to the
Company's facility components. Consequently, the Company does not expect that
its costs for Y2K remediation of its building infrastructure components will be
material. However, there can be no assurance that Vencor's estimate with
respect to estimated costs of remediation is accurate. In addition, there can
be no assurance that Vencor will continue to honor its obligations under the
lease agreements to upgrade all building components to be Y2K compliant or that
Vencor will have sufficient assets, income and access to financing to enable it
to satisfy such obligations.
The most reasonably likely worse case scenario for the Company associated
with the Y2K issue is the risk of significant disruptions of Vencor's business
resulting from either (i) Vencor's failure to upgrade all building
infrastructure components to be Y2K compliant or (ii) the failure of Vencor's
significant third party payors, business partners, suppliers and vendors to be
fully Y2K compliant. Failures of critical utility systems could also lead to
significant business disruptions for Vencor. These occurrences could negatively
impact Vencor's ability to operate the Company's properties and/or make rental
payments under the lease agreements thereby negatively impacting the Company's
liquidity and results of operations. The Y2K issues facing Vencor and Vencor's
Y2K compliance program are discussed below under "--Year 2000 Readiness
Disclosure--Vencor."
To date, the Company has not established any contingency plan for the Y2K
issue. Because the Company's most significant risks associated with the Y2K
issue relate to significant disruptions of Vencor's business, the Company
anticipates developing contingency plans during 1999, as is appropriate, based
upon its continuing assessment of Vencor's progress in implementing its Y2K
compliance program and developing its own contingency plans.
16
<PAGE>
The Company's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or
timely assessed all Y2K issues or that the estimated costs to remediate the
Y2K issues will not be exceeded. While the Company believes it has
substantially completed its assessment of all Y2K issues, its estimate of the
costs to address such issues may change as it proceeds with the remediation
and implementation of its new financial systems. The Company's ability to
identify and remediate critical Y2K issues and the availability and cost of
external resources will impact the Company's total Y2K costs and the impact of
Y2K on the Company's results of operations.
Year 2000 Readiness Disclosure--Vencor
As a result of the Company's dependence upon Vencor as its primary tenant,
the Company may also be impacted negatively by Y2K issues facing Vencor. If
Vencor is unable to meet its Y2K compliance schedules or incurs costs
substantially higher than its current expectations, Vencor's ability to
operate the properties and/or make rental payments under the lease agreements
could be impaired thereby impacting negatively the Company's liquidity and
results of operations. The following discussion briefly describes the Y2K
program instituted by Vencor. The information contained in this section was
derived from Vencor's public filings and from disclosures made by Vencor to
the Company. The Company is not the source of this information and has not
verified independently the truth or accuracy thereof or the activities of
Vencor. There can be no assurance that Vencor has provided the Company
complete and accurate information in all instances
In response to the Y2K issue, Vencor established five teams to address Y2K
issues in the following specific areas: (i) IT software and hardware; (ii)
third party relationships; (iii) facility components; (iv) medical equipment;
and (v) telephone systems. Each team is responsible for all phases of Vencor's
Y2K compliance program for both IT and non-IT systems in its designated area.
Vencor's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business
assessment phase identified potential Y2K issues confronting Vencor. The
inventory and assessment phase consisted of a company-wide assessment of all
facility systems and components, medical devices, and IT software and
hardware. During the remediation and testing phase, Vencor is repairing,
upgrading or replacing any non-compliant IT and non-IT systems. Additionally,
Vencor is performing verification and validation testing of IT and non-IT
systems that have been remediated and those Vencor believes are Y2K compliant.
For IT and non-IT systems that are developed internally, Vencor verifies
compliance status directly with the development staff and performs validation
testing to confirm its status. For IT and non-IT systems that are purchased
from outside vendors, Vencor is requesting written assurances of compliance
directly from the vendors. When non-compliant systems are identified, Vencor
will either replace, upgrade or remediate the system. The implementation and
rollout phase involves the installation of the new financial information and
patient accounting systems and any IT or non-IT systems that have been
remediated and tested to Vencor's corporate office and its facilities. The
final phase, post-implementation, involves finalizing the documentation of the
Y2K program and any corrective efforts surrounding date issues associated with
the year 2000 being a leap year. Vencor has indicated that it has employed and
will continue to employ external consultants to assist it through each of the
phases.
Vencor derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Vencor relies on these entities for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
Vencor has indicated that it believes that while many commercial insurance
carriers will be Y2K compliant, federal and state agencies are more likely to
have system failures caused by Y2K issues. Vencor is contacting all of its
significant reimbursement sources to determine their Y2K compliance status in
order to make a determination of this potential risk. Vencor has not received
assurance that systems used by Medicare and Medicaid will be Y2K compliant.
The failure of information systems of federal and state governmental agencies
17
<PAGE>
and other third party payors could have a material adverse effect on Vencor's
liquidity and financial condition, which in turn could have a material adverse
effect on the Company's liquidity and financial condition.
Vencor also has initiated communications with its critical suppliers and
vendors. Vencor is evaluating information provided by third party vendors and
is conducting limited independent testing of critical systems and applications.
In most cases, Vencor is relying on information being provided to it by such
third parties. While Vencor is attempting to evaluate the information provided,
there can be no assurance that in all instances accurate information is being
provided. If third party suppliers and vendors fail to respond to Vencor's
request for information, Vencor may seek to procure other sources of supplies.
Although Vencor is assessing the readiness of the Medicare and Medicaid
programs and other third party payers and preparing contingency plans, there
can be no guarantee that the failure of these third parties to remediate their
systems to be Y2K compliant will not have a material adverse effect on Vencor,
which in turn could have a material adverse effect on the Company.
Other Information
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
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, funds from operations,
dividends and dividend plans, financing plans, business strategy, budgets,
projected costs, capital expenditures, competitive positions, growth
opportunities, expected lease income, ability to qualify as a real estate
investment trust, plans and objectives of management for future operations and
statements that include words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions are forward-
looking statements. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ from the
Company's expectations. Forward-looking statements made in this Form 10-Q
relating to the operations of a partnership or limited liability company,
including the Company's realty partnership, are not forward-looking statements
within the meaning of Section 27A of the Securities Act or Section 21E of the
Exchange Act.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this Form 10-Q and elsewhere in
the Company's filings with the Securities and Exchange Commission (the
"Commission"). Factors that may affect the plans or results of the Company
include, without limitation, (i) the ability of the Company's operators to
maintain the financial strength and liquidity necessary to satisfy their
obligations and duties under leases and other agreements with the Company, (ii)
success in implementing its business strategy, (iii) the nature and extent of
future competition, (iv) the extent of future healthcare reform and regulation,
including cost containment measures and changes in reimbursement policies and
procedures, (v) increases in the cost of borrowing for the Company, (vi) the
ability of the Company's operators to deliver high quality care and to attract
patients, (vii) the results of the ongoing investigation of the Company by the
U.S. Department of Justice and other litigation affecting the Company; (viii)
the Company's ability to acquire additional properties, (ix) changes in the
general economic conditions and/or in the markets in which the Company may,
from time to time, compete, (x) the ability of the Company to pay and/or
refinance its indebtedness as it becomes due, and (xi) the ability of the
Company and the Company's operators and other third parties to replace, modify
or upgrade computer systems in ways that adequately address the Year 2000
issue. Many of such factors are beyond the control of the Company and its
management.
In addition, please note that certain information contained in this Form 10-Q
has been provided by Vencor. Vencor is subject to the reporting requirements of
the Commission and is required to file with the Commission annual reports
containing audited financial information and quarterly reports containing
unaudited financial information. Although Vencor has provided certain
information to the Company, the Company has not verified this information
either through an independent investigation or by reviewing Vencor's Annual
Report on Form 10-K for the year ended December 31, 1998 or its Form 10-Q for
the three months ended March 31, 1999.
18
<PAGE>
The Company has no reason to believe that such information in inaccurate in any
material respects, but there can be no assurance that all such information is
accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's exposure to various market risks
contains "forward looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Nevertheless, because of the inherent unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected in such forward looking information.
The Company earns revenue by leasing its assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators,
subject to certain limitations. The Company's debt obligations are floating
rate obligations whose interest rate and related cash flows vary with the
movement in LIBOR. See Note 4 to the Company's Condensed Consolidated Financial
Statements included elsewhere herein. The general fixed nature of the Company's
assets and the variable nature of the Company's debt obligations creates
interest rate risk. If interest rates were to rise significantly, the Company's
lease revenue might not be sufficient to meet its debt obligations. In order to
mitigate this risk, at or about the date the Company spun off its healthcare
operations in connection with the Reorganization, it also entered into interest
rate swaps to convert most of its floating rate debt obligations to fixed rate
debt obligations. Interest rate swaps generally involve the exchange of fixed
and floating rate interest payments on an underlying notional amount. As of
March 31, 1999, the Company had $900 million of interest rate swaps outstanding
with a highly rated counterparty in which the Company pays a fixed rate of
5.985% and receives LIBOR from the counterparty. When interest rates rise the
interest rate swap agreement increases in market value to the Company and when
interest rates fall the interest rate swap agreement declines in value to the
Company. Since the interest rate swap agreement was executed, interest rates
have generally been lower and the market value of the interest rate swap
agreement has been an unrealized loss to the Company. As of March 31, 1999, the
interest rate swap agreement was in an unrealized loss position to the Company
of approximately $9.3 million. To highlight the sensitivity of the interest
rate swap agreement to changes in interest rates the following summary shows
the effects of an instantaneous change of 100 basis points (BPS) in interest
rates as of March 31, 1999:
<TABLE>
<CAPTION>
Market Value to the Company
Reflecting Change in Interest Rates
Market Value to the Company -------------------------------------
Notional Amount at March 31, 1999 -100 BPS +100 BPS
- --------------- --------------------------- ------------------ -----------------
<S> <C> <C> <C>
$900,000,000 ($9,254,699) ($ 62,608,000) $ 38,676,000
</TABLE>
The terms of this interest rate swap agreement require that the Company make
a cash payment or otherwise post collateral, such as a letter of credit from
one of the banks identified in the Bank Credit Agreement to the counterparty if
the market value loss to the Company exceed certain levels (the "threshold
levels"). See Note 4 to the Company's Condensed Consolidated Financial
Statements included elsewhere herein. The threshold levels vary based on the
relationship between the Company's debt obligations and the tangible fair
market value of its assets as defined in the Bank Credit Agreement. As of March
31, 1999, the threshold level under the interest rate swap agreement was a
market value loss of $35 million and the interest rate swap agreement was in an
unrealized loss position to the Company of $9.3 million. Under the interest
rate swap agreement, if collateral must be posted, the principal amount of such
collateral must equal the difference between the market value of the interest
rate swap at the time of such determination and the threshold amount. As of
March 31, 1999, the market value loss of the interest rate swap agreement was
below the $35 million threshold and therefore no collateral was required to be
posted under the interest rate swap agreement. As of May 11, 1999, the market
value of the unrealized loss of the interest rate swap agreement was $1.4
million.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, based on information provided to the Company by
Vencor, there has been no material change in the status of the litigation
reported in the Company's Form 10-K for the year ended December 31, 1998. The
information contained in this section was derived from Vencor's public filings
and from disclosures made by Vencor to the Company. The Company is not the
source of this information and has not verified independently the truth or
accuracy thereof or the activities of Vencor. There can be no assurance that
Vencor has provided the Company complete and accurate information in all
instances.
As set forth in the Company's Form 10-K for the year ended December 31,
1998, Vencor has been informed by the Department of Justice that it is the
subject of ongoing investigations into various aspects of its claims for
reimbursement from government payors, billing practices and various quality of
care issues in the hospitals and nursing centers operated by Vencor. These
investigations also include the Company's healthcare operations prior to the
date of the Reorganization. Thus, the Department of Justice has informed the
Company that for the period prior to the date of the Reorganization, if any
liability exists in connection with such investigations, the Company may be
liable for such liability. However, the Company believes that under agreements
entered into at the time of the Reorganization, Vencor is obligated to assume
the defense of, and to indemnify the Company for any liabilities that arise
out of, any claims that may result from the investigations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy these obligations. Vencor is in discussions
with the Department of Justice concerning the nature of the issues under
investigation and the possible settlement of some or all of the claims. Vencor
is cooperating fully in the investigations.
As set forth in the Company's Form 10-K, Vencor, on behalf of the Company,
is defending a class action lawsuit captioned Jules Brody v. Transitional
Hospitals Corporation, et al., Case No. CV-S-97-0047-PMP, which was filed on
June 19, 1997 in the United States District Court for the District of Nevada
on behalf of a class consisting of all persons who sold shares of Transitional
Hospitals Corporation common stock during the period from February 26, 1997
through May 4, 1997. On June 18, 1998, the court denied Vencor's motion,
acting on behalf of the Company, to dismiss the Section 14(e) and Section
20(a) claims, after which Vencor filed a motion for reconsideration. On March
23, 1999, the court granted Vencor's motion to dismiss all remaining claims,
and the case has been dismissed. The plaintiff has appealed this ruling.
Vencor, on behalf of the Company, is defending this action vigorously.
During the Company's discussions with Vencor discussed above under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments," Vencor has asserted various potential claims
against the Company arising out of the Reorganization. The Company intends to
defend these claims vigorously if they are asserted in a legal or mediation
proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<C> <S>
4.1 Fourth Amendment to Rights Agreement, dated as of April 15, 1999,
between the Company and National City Bank, as Rights Agent. Exhibit
1 to the Company's Form 8-A/A, filed on April 19, 1999, is
incorporated herein by reference.
10.1 Employment Agreement dated March 5, 1999, between the Company and
Debra A. Cafaro.
10.2 Form of Second Amendment to Master Lease, dated April 12, 1999,
between the Company and Vencor, Inc. Exhibit 99.1 to the Company's
Form 8-K, filed on April 19, 1999, is incorporated herein by
reference.
10.3 Second Standstill Agreement, dated April 12, 1999, between the
Company and Vencor, Inc. Exhibit 99.2 to the Company's Form 8-K,
filed on April 19, 1999, is incorporated herein by reference.
</TABLE>
20
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<TABLE>
<C> <S>
10.4 Tolling Agreement, dated April 12, 1999, between the Company and
Vencor, Inc. Exhibit 99.3 to the Company's Form 8-K, filed on April
19, 1999, is incorporated herein by reference.
10.5 Standstill Agreement, dated March 31, 1999, between the Company and
Vencor, Inc. Exhibit 99.4 to the Company's Form 8-K, filed on April
19, 1999, is incorporated herein by reference.
10.6 Amendment Number 1 to the Second Standstill Agreement dated April 12,
1999, dated May 5, 1999, between the Company and Vencor, Inc.
10.7 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 May 8, 1999 between the Company and Vencor, Inc.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K:
On February 5, 1999, the Company filed a Current Report on Form 8-K
announcing that on January 13, 1999, the Company's Board of Directors declared
a quarterly cash dividend on its common stock of $.39 per share to be
distributed February 17, 1999. The dividend was paid to shareholders of record
as of January 29, 1999. The Company also announced its intention to qualify as
a real estate investment trust for federal income tax purposes for 1999.
On March 10, 1999, the Company filed a Current Report on Form 8-K announcing
that Debra A. Cafaro had been appointed President, Chief Executive Officer and
Director, replacing Thomas T. Ladt in each of those positions effective March
5, 1999.
On April 19, 1999, the Company filed a Current Report on Form 8-K announcing
certain agreements with Vencor, Inc., its principal tenant. Under the first
agreement, the Company agreed not to exercise remedies for non-payment of rent
due from Vencor on April 1, 1999 for a period ending April 12, 1999. Under a
second agreement (the "Second Standstill Agreement"), the Company agreed with
Vencor that if Vencor paid the full amount of April 1999 rent on an agreed
schedule, the Company would not exercise its remedies under its lease
agreements with Vencor. Under the Second Standstill Agreement, each of the
Company and Vencor also agreed not to pursue any claims against the other or
any third party relating to the April 1998 reorganization of the Company as
long as Vencor made the full lease payments for April 1999 and May 1999 under
the specified schedule. The Second Standstill Agreement provided that it would
terminate on May 5, 1999, on any date that a voluntary or involuntary
bankruptcy proceeding was commenced by or against Vencor or if Vencor failed to
pay rent in accordance with the specified schedule. The Company and Vencor also
agreed to amend each of the lease agreements between the companies to delete a
provision that permitted the Company to require Vencor to purchase a facility
upon the occurrence of certain events of default by Vencor. Finally, the
Company and Vencor agreed that any statutes of limitations or other time
constraints in a bankruptcy proceeding that might be asserted by one party
against the other will be extended or tolled from April 12, 1999 until May 5,
1999 or until the Second Standstill Agreement terminated due to Vencor's
failure to make the contemplated lease payments. These arrangements have been
subsequently modified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments."
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENTAS, INC.
Date: May 17, 1999 /s/ Debra A. Cafaro
_____________________________________
Debra A. Cafaro
President and Chief Executive Officer
Date: May 17, 1999 /s/ Steven T. Downey
_____________________________________
Steven T. Downey Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made as of the 5th day of March,
1999 (the "Effective Date"), by and between Ventas, Inc., a Delaware corporation
(the "Company"), and Debra A. Cafaro (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive as its President and
Chief Executive Officer; and
WHEREAS, the Company and Executive have reached agreement concerning the
terms and conditions of her employment and wish to formalize that 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
period commencing on the Effective Date and continuing through December 31,
2001. 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. The initial term together with all
extensions pursuant to the preceding sentence shall be treated as the
"Employment Term."
2. DUTIES. The Company hereby employs Executive and Executive hereby
accepts employment with the Company as President and Chief Executive Officer.
During the Employment Term, Executive shall have the title, status and duties of
President and Chief Executive Officer, shall report directly to the Board of
Directors of the Company ("Board"), and shall have duties consistent with and
authority comparable to Chief Executive Officers of other publicly-traded REITs,
including the designation of senior management. During the Employment Term, the
Company shall cause Executive to be a member of the Board. In addition, during
the Employment Term, Executive together with the Chairman of the Independent
Committee of the Board (or if none, Executive alone) shall have the right to
designate an individual (subject to the approval of W. Bruce Lunsford, which
approval shall not be unreasonably withheld) who shall be nominated by the Board
to serve as a director in lieu of an individual then serving as a director and
the Company shall use its best efforts to cause such designated individual to be
elected as a director of the Company. It is the parties' intention that if the
Board is expanded beyond seven (7) members, that the Executive together with the
Chairman of the Independent Committee of the Board (or if none, Executive alone)
will have the right to designate additional individuals in accordance with the
prior sentence, such that Executive and all such individuals designated pursuant
to the preceding sentence shall constitute at least the proportion of the
members of the Board as two (2) is to ten (10), and the parties agree to
cooperate to effectuate such intention.
<PAGE>
3. EXTENT OF SERVICES. Executive, subject to the direction and control of
the Board, shall have the power and authority commensurate with her status as
President and Chief Executive Officer and necessary to perform her full-time
duties hereunder. During the term, Executive shall devote her 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, that competes, conflicts or interferes with
the performance of her duties hereunder in any material way.
4. COMPENSATION. As compensation for services hereunder rendered,
Executive shall receive during the Employment Term:
(a) A base salary at a rate of not less than three hundred thirty five
thousand dollars ($335,000) per year in the period from the Effective Date until
December 31, 1999, not less than three hundred fifty one thousand seven hundred
fifty dollars ($351,750) in calendar year 2000 and in each calendar year
thereafter a base salary at a rate no less than 105% of the base salary rate for
the immediately prior calendar year. Executive's base salary shall be payable
in equal installments in accordance with the Company's normal payroll procedures
(but no less frequently than semimonthly). Executive's base salary shall not be
reduced after any increase and the term "Base Salary" for purposes of this
Agreement shall refer to Executive's base salary annualized, as most recently
increased.
(b) In addition to Base Salary, Executive shall be eligible to receive such
other bonuses and incentive compensation as the Board may approve from time to
time. Without limitation of the foregoing, Executive shall receive no later
than January 31, 2000, a bonus in an amount not less than two hundred thousand
dollars ($200,000) for the period ending December 31, 1999.
5. BENEFITS.
(a) Executive shall be entitled to participate in any and all 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.
Without limitation of the foregoing, the Company shall provide Executive,
without any cost to Executive, with two million dollars of life insurance
coverage and executive disability coverage with an "own occupation" definition
of disability providing annual benefits of at least 100% of Executive's Base
Salary. To the extent any of the benefits or payments within this Section are
treated as taxable to the Executive, the Company shall pay Executive an
additional amount such that the net amount or benefit retained by Executive
after deduction or payment of all federal, state, local and other taxes with
respect to amounts or benefits under this Section shall be equal to the full
amount of the payments or benefits required by this Section.
(b) Executive shall be granted on the Effective Date one hundred thousand
(100,000) shares of common stock of the Company ("Restricted Shares") and
certificates evidencing
2
<PAGE>
Executive's ownership of such Restricted Shares shall be delivered to Executive
on or before April 1, 1999. Such Restricted Shares shall vest and be fully
transferable at the rate of nine thousand ninety one (9,091) Restricted Shares
as of the first day of each calendar quarter beginning April 1, 1999 through the
third calendar quarter in 2001 and at the rate of nine thousand ninety (9,090)
Restricted Shares as of the first day of the last calendar quarter in 2001.
Notwithstanding the foregoing, all remaining unvested Restricted Shares shall
vest and be fully transferable immediately upon a Change of Control, the
termination of Executive's employment by the Company other than for Cause or by
the Executive for Good Reason or the termination of the Executive's employment
by death or Disability. The Executive shall have full voting rights with respect
to the Restricted Shares and shall be entitled to receive all dividends and
other distributions paid with respect to such Restricted Shares, whether or not
vested. In addition, Executive shall have customary registration rights with
respect to the Restricted Shares as well as the Option Shares described in
Section 5(c) and the Company and Executive shall promptly execute and deliver a
registration rights agreement regarding such rights.
(c) Executive shall be granted on the Effective Date five hundred thousand
(500,000) options ("Option") to purchase shares of common stock of the Company
("Shares"), of which the maximum permissible number (calculated based on the
vesting schedule described below) shall be treated as incentive stock options
("ISOs") pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"). The per share exercise price for the Shares to be issued
pursuant to the exercise of the Options ("Option Shares") shall be with respect
to the ISOs, the closing price of a Share on the New York Stock Exchange on the
Effective Date and for the remainder of the Option the lesser of: (i) the
closing price of a Share on the New York Stock Exchange on the Effective Date
and (ii) the closing price of a Share on the New York Stock Exchange on the one
hundred twentieth day after the execution of this Agreement (or the next
business day if the one hundred twentieth day after the execution of this
Agreement is not a business day). The Option shall be vested and immediately
exercisable upon grant with respect to one hundred sixty seven thousand six
hundred sixty seven (166,667) Option Shares and shall become vested and
immediately exercisable with respect to an additional one hundred sixty seven
thousand six hundred sixty seven (166,667) Option Shares on March 5, 2000 and an
additional one hundred sixty seven thousand six hundred sixty six (166,666)
Option Shares on March 5, 2001. For purposes of this Section, the ISOs shall
vest and become immediately exercisable in the same proportion as the remainder
of the Option. Notwithstanding the foregoing, the Option shall be vested and
immediately exercisable with respect to all Option Shares upon the termination
of Executive's employment by the Company other than for Cause or by Executive
for Good Reason, termination of Executive's employment by death or Disability or
upon a Change of Control; subject only to the following: Upon an Early Change
of Control, only two hundred fifty thousand (250,000) Option Shares shall become
vested and immediately exercisable as a result of the Early Change of Control.
For purposes of this subsection, "Early Change of Control" shall mean an
agreement for a Change of Control is executed and approved by the Company's
Board on or before July 4, 1999 and a Change of Control occurs in accordance
with and pursuant to the specific terms of such agreement. The Options shall
remain vested and exercisable for a period of ten years from the date of Option
grant regardless of whether
3
<PAGE>
or when the employment of the Executive terminates. Executive may exercise the
Option in a cashless exercise.
(d) Executive shall be entitled to participate in such bonus, stock option
and other incentive compensation plans of the Company and its affiliates in
effect from time to time for executives of the Company. Without limitation of
the Company's obligations under Section 4(b), the Company agrees that the
existing FFO - based formula under the bonus program and all performance
measurements under the Incentive Compensation Plan shall be promptly, formally
and equitably revised with downward targets to take into account changed
circumstances, if any, of the Company since the date of those plans, as deemed
appropriate by the Executive and the Board.
(e) Executive shall be entitled to four weeks of paid vacation each year,
earned on the Effective Date and the first day of each subsequent calendar 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.
(f) Executive may incur reasonable business related expenses including for
promoting the business and expenses for entertainment, travel, cellular
telephone and similar items related thereto. The Company shall reimburse
Executive for all such reasonable expenses subject to the Company's
reimbursement procedures regarding the reporting and documentation of such
expenses.
(g) The Company shall pay or promptly reimburse Executive for all
reasonable travel expenses incurred by Executive to travel to and from the
Chicago area once each week. In addition, the Company shall pay Executive
twenty-five thousand dollars ($25,000) within ten days after the Effective Date
in connection with Executive's relocation expenses. To the extent any of the
payments within this Section are treated as taxable to the Executive, the
Company shall pay Executive an additional amount such that the net amount
retained by Executive after deduction or payment of all federal, state, local
and other taxes with respect to amounts under this Section shall be equal to the
full amount of the payments required by this Section.
(h) The Company intends that Section 5(b) and Section 5(c), as well as all
other provisions of this Agreement, will be fully operative, effective, binding
and enforceable as of the Effective Date and agrees to adopt such employee
benefit plans, amendments to employee benefit plans or other arrangements, as
applicable, take such other acts and pay such other amounts as are necessary to
effectuate the provisions of Section 5(b) and Section 5(c) of this Agreement as
well as the other provisions of this Agreement effective on the Effective Date.
Without limitation of the foregoing, to the extent Executive experiences any
economic or tax or other detriment or diminution in benefit on account of or
related to any of such Sections or provisions not being fully operative,
effective, binding and enforceable on the Effective Date fully in accordance
with the terms and provisions of such Sections or provisions, or any delay or
failure to comply with the provisions of such Sections or provisions, the
Company shall immediately take such actions, and pay such amounts, as Executive
reasonably determines are appropriate so that the Executive achieves at least
the same economic, tax and other benefits the Executive would have had if such
Section 5(b) and
4
<PAGE>
Section 5(c) and such other provisions were fully operative, effective, binding
and enforceable in accordance with their terms as of the Effective Date.
6. LOAN. The Company shall lend to Executive (the "Loan") such funds as
are necessary to pay all federal, state, local and other taxes with respect to
Restricted Shares as and when the value of such Restricted Shares become
includible in Executive's income. For purposes of determining the amount of the
Loan, Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year of the Loan and
state and local income taxes at the highest marginal rates of taxation in the
state and locality of the Executive's residence or place of business, whichever
is higher, in the calendar year of the Loan. The principal of the Loan
(together with any accrued, unpaid interest) shall be payable on March 5, 2009
and may be prepaid without penalty or premium. The Loan shall bear interest at
the lowest applicable federal rate. Such interest shall be payable annually out
of and only to the extent of dividends from the vested Restricted Shares. To
the extent dividends are not sufficient, interest shall accrue without itself
bearing interest except to the extent required to avoid imputed interest. The
Loan shall be secured by a pledge of all of the Restricted Shares to which such
Loan relates and shall be non-recourse to Executive's assets other than the
pledged Restricted Shares. The Loan shall be forgiven and there shall be no
obligation to repay the Loan if there is a Change of Control, Executive's
employment is terminated by the Company other than for Cause or by the Executive
with Good Reason or the Executive's employment terminates by death or
Disability. To the extent the Loan or its forgiveness results in taxable income
to the Executive, the Company shall pay Executive an amount sufficient for the
payment of all federal, state, local and other taxes with respect to the Loan,
its forgiveness and the payments pursuant to this Section.
7. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Executive's employment shall terminate
automatically upon Executive's death during the Employment Term. If the Company
determines in good faith that the Disability of Executive has occurred during
the Employment 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 performance of
Executive's duties. For purposes of this Agreement, "Disability" shall mean
Executive's absence from duties hereunder for a period of 90 consecutive days
within a twelve-month period because of a physical or mental incapacity which is
expected to be permanent.
(b) CAUSE. The Company may terminate Executive's employment during the
Employment 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
her duties and responsibilities which is directly and materially harmful to the
business and reputation of the Company and which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best interests
of the Company and its
5
<PAGE>
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
her 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 or otherwise. "Good Reason" shall exist upon the occurrence, without
Executive's express written consent, of any of the following events:
(i) a diminution in Executive's position (including status, offices,
titles and reporting requirements), authority, duties or responsibilities
(including the assignment to Executive of any duties inconsistent with
Executive's position, authority, duties or responsibilities), excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
(ii) the Company shall (A) reduce the Base Salary or bonus or
incentive opportunity of Executive or (B) reduce (other than pursuant to a
uniform reduction applicable to all similarly situated executives of the
Company) Executive's benefits and perquisites;
(iii) the Company shall require Executive to relocate Executive's
principal business office to any location more than 30 miles from its location
on the Effective Date except that a relocation of the Executive's principal
business office to the Chicago business district shall not constitute Good
Reason;
(iv) the Company's failure or refusal to comply with the provisions
of this Agreement;
(v) the Company (1) is a debtor in any bankruptcy case in which an
order for relief is entered under any chapter of the federal Bankruptcy Code;
(2) is adjudicated a bankrupt under any bankruptcy, insolvency, or
reorganization law; (3) has a receiver of all or a substantial portion of its
assets or property appointed; or (4) makes an assignment for the benefit of
creditors;
(vi) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 13(c).
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by
Executive for Good Reason, shall be communicated by a 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
6
<PAGE>
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.
8. OBLIGATIONS OF THE COMPANY UPON TERMINATION. Following any termination
of Executive's employment hereunder for any reason whatsoever, the Company shall
pay Executive her Base Salary through the Date of Termination, all amounts
earned by Executive through the Date of Termination (including accrued vacation
and bonus and expenses incurred but not yet reimbursed), and all amounts owed to
Executive pursuant to the terms and conditions of the benefit plans, programs
and arrangements of the Company at the time such payments are due. In addition,
Executive shall be entitled to the following additional payments and benefits.
(a) DEATH OR DISABILITY. If, during the Employment Term, Executive's
employment shall terminate by reason of Executive's death or Disability, the
Company shall pay to Executive (or her designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus 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. In addition, if
during the Employment Term, Executive's employment shall terminate by reason of
Executive's Disability, the Company shall provide the benefits set forth in
Section 8(b)(2).
(b) GOOD REASON; OTHER THAN FOR CAUSE. If 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) (i) on or before March 5, 2000, the Company shall pay Executive
one million five hundred thousand dollars on the Executive's Date of Termination
or (ii) after March 5, 2000, the Company shall pay Executive on the Executive's
Date of Termination an amount equal to the sum of (x) the prorated portion of
the Target Bonus for Executive for the year in which the Date of Termination
occurs, plus (y) an amount equal to three (3) times the sum of the Executive's
Base Salary and Target Bonus as of the Date of Termination.
7
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(2) For a period of two (2) years following the Date of Termination,
the Executive shall be treated as if she had continued to be an Executive for
all purposes under the Company's Health Insurance Plan and Dental Insurance
Plan; or if the Company has not yet established its own Health Insurance Plan
and/or Dental Plan or the Executive is prohibited from participating in such
plan, the Company shall, at its sole cost and expense, provide health and dental
insurance coverage for Executive which is equivalent to the coverage provided to
Executive as of the Date of Termination. Such benefits shall not have any
waiting period for coverage and shall provide coverage for any pre-existing
condition. Following this continuation period, the Executive shall be entitled
to receive continuation coverage under Part 6 of Title I of ERISA ("COBRA
Benefits") treating the end of this period as a termination of the Executive's
employment if allowed by law.
(3) For a period of two (2) years following the Date of Termination,
Company shall maintain in force, at its expense, all life insurance being
provided or required to be provided to the Executive by the Company as of the
Date of Termination and shall thereafter enable Executive to assume such life
insurance at the Executive's expense.
(4) For a period of two (2) years following the Executive's Date of
Termination, the Company 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 any retirement, savings, deferred
compensation, profit sharing or similar arrangement of the Company shall be
automatically fully (i.e., 100%) vested, without regard to otherwise applicable
percentages for the vesting of employer contributions based upon the Executive's
years of service with the Company.
(6) The Company shall adopt such employee benefit plans or amendments
to its employee benefit plans, if any, as are necessary to effectuate the
provisions of this Agreement.
(7) Without limitation of Section 5(b) and Section 5(c), Executive
shall become vested in all restricted stock awards, stock options and other
performance related compensation.
(8) The Company shall provide Executive with executive office space
and an executive secretary (both the office space and secretary shall be of a
quality comparable to that the Executive had during the Employment Term) in a
city or other locale chosen by Executive for a period of one year after the
termination of Executive's employment with an aggregate cost not to exceed
$50,000.
8
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(c) 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.
9. CHANGE OF CONTROL.
(a) Upon any Change of Control on or before March 5, 2000, Executive shall
be paid in cash in one lump sum one million five hundred thousand dollars no
later than the date of the Change of Control. Upon any Change of Control
occurring after March 5, 2000, Executive shall be paid no later than the Change
of Control in cash in one lump sum the product of (A) 2.99 and (B) the sum of
(x) the Executive's Base Salary and Target Bonus as of the date of the Change
of Control, and (y) the fair market value (determined as of the date of the
Change of Control) of any targeted number of restricted shares authorized to be
issued to the Executive in respect of the year in which such Change of Control
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 Change of Control occurs were deemed to be
satisfied.
(b) For the purposes of all provisions of this Agreement, the term "Target
Bonus" shall mean the greater of (i) the highest actual bonus and performance
compensation earned by Executive with respect to any of the three preceding
calendar years and (ii) the full amount of bonuses and/or performance
compensation (including assumed awards granted under the Company's Incentive
Compensation Plan) that would be payable to the Executive, assuming all
performance criteria (at the highest applicable level) 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.
(c) For purposes of all provisions of this Agreement, the term "Change of
Control" shall mean any one or more of the following events:
(i) An acquisition of any voting or other securities by any "Person"
(having the meaning ascribed to such term in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended ("1934 Act") and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section 13(d)), such that
immediately after which such Person has "Beneficial Ownership" (within the
meaning of Rule 13d-3 under the 1934 Act) of 20% or more of either (i) any class
of then-outstanding equity securities of the Company ("Outstanding Shares") or
(ii) the combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors ("Voting
Securities"); provided, however, that in determining whether a Change of Control
has occurred, Outstanding Shares or Voting Securities which are acquired in an
acquisition by (i) the Company or any of its subsidiaries or, (ii) an employee
benefit plan (or a trust forming a part thereof) maintained by the Company or
any of its subsidiaries shall not constitute an acquisition which would cause a
Change of Control.
9
<PAGE>
(ii) The individuals who, as of the Effective Date, constituted the
Board (the "Incumbent Board") cease for any reason to constitute over 50% of the
Board; provided, however, that if the election, or nomination for election by
the Company's stockholders, of any new director was approved by a vote of over
50% of the Incumbent Board, such new director shall, for purposes of this
Section 9(c)(ii), be considered as though such person were a member of the
Incumbent Board; provided, further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Incumbent Board (a "Proxy Contest"), including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest.
(iii) Consummation of a merger, consolidation or reorganization
involving the Company, unless each of the following events occurs in connection
with such merger, consolidation or reorganization:
1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, have Beneficial Ownership, directly or
indirectly immediately following such merger, consolidation or reorganization,
of over 50% of the then outstanding shares of common stock and the combined
voting power of all voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving Company") in
substantially the same proportion as their Beneficial Ownership of the
Outstanding Shares and Voting Securities immediately before such merger,
consolidation or reorganization;
2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute over 50% of the members of the board
of directors of the Surviving Company; and
3) no Person (other than the Company, any of its subsidiaries,
any employee benefit plan (or any trust forming a part thereof) maintained by
the Company, the Surviving Company or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of 20% or more
of the then Outstanding Shares or Voting Securities) has Beneficial Ownership of
20% or more of the then outstanding shares of the Surviving Company or combined
voting power of the Surviving Company's then outstanding voting securities.
(iv) Approval by the Company's stockholders of a complete liquidation
or dissolution of the Company, or the occurrence of the same.
(v) Approval by the Company's stockholders of an agreement for the
assignment, sale, conveyance, transfer, lease or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a subsidiary of the Company), or the occurrence of the same.
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<PAGE>
(vi) The occurrence of any transaction which is reasonably likely to
result in the Company not continuing to be a real estate investment trust as
defined under section 856 of the Code (for example, such as because the Company
will not have sufficient qualifying income or assets).
(vii) Any other event that the Board shall determine constitutes an
effective Change of Control of Company.
(viii) Notwithstanding the foregoing, a Change of Control shall not
be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the Outstanding Shares
or Voting Securities as a result of the acquisition of Outstanding Shares or
Voting Securities by the Company which, by reducing the number of Outstanding
Shares or Voting Securities outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Person; provided that if a Change of
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Outstanding Shares or Voting Securities by the Company, and after
such acquisition of Shares or Voting Securities by the Company, the Subject
Person becomes the Beneficial Owner of any additional Outstanding Shares or
Voting Securities which increases the percentage of the then Outstanding Shares
or Voting Securities Beneficially Owned by the Subject Person, then a Change of
Control shall occur.
10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Executive becomes
entitled to any payments or benefits whether pursuant to the terms of or by
reason of this Agreement or any other plan, arrangement, agreement, policy or
program (including without limitation any restricted stock, stock option, stock
appreciation right or similar right, or the lapse or termination of any
restriction on the vesting or exercisability of any of the foregoing) with the
Company, any successor to the Company or to all or a part of the business or
assets of the Company (whether direct or indirect, by purchase, merger,
consolidation, spin off, or otherwise and regardless of whether such payment is
made by or on behalf of the Company or such successor) or any person whose
actions result in a change of control or any person affiliated with the Company
or such persons (in the aggregate, "Payments" or singularly, "Payment"), which
Payments are reasonably determined by the Executive to be subject to the tax
imposed by Section 4999 or any successor provision of the Code or any similar
state or local tax, or any interest or penalties are incurred by Executive with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), the
Company shall pay Executive an additional amount ("Gross-Up Payment") such that
the net amount retained by Executive, after deduction or payment of (i) any
Excise Tax on Payments, (ii) any federal, state and local income tax and Excise
Tax upon the payment provided for by this Section, and (iii) any additional
interest and penalties imposed because the Excise Tax is not paid when due,
shall be equal to the full amount of the Payments. The Gross-Up Payment shall
be paid to the Executive within ten (10) days of the Company's receipt of
written notice from the Executive that the Excise Tax has been paid, is or was
payable or will be payable at any time in the future.
11
<PAGE>
11. TAX PAYMENT. For purposes of determining the amount of payments
pursuant to Sections 5(a), 5(g), 5(h), 6, 10, 12 and 17 and elsewhere in this
Agreement, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the payment is to be made and state and local income taxes at the highest
marginal rates of taxation in the state and locality of the Executive's
residence or the Executive's place of business, whichever is higher, on the date
the payment is to be made. Without limitation on any other provision of this
Agreement, all such payments involving the calculation of taxes shall be made no
later than two (2) days after the receipt by the Company of written advice from
a professional tax advisor selected by the Executive that taxes are payable.
The expense incurred in obtaining such advice shall be paid by the Company.
Without limitation on any other provisions of this Agreement, the Company shall
indemnify Executive for all taxes with respect to the amounts for which payments
described in the first sentence of this Section are required to be made pursuant
to this Agreement and all other costs including interest and penalties with
respect to the payment of such taxes. To the extent any of the payments
pursuant to this Section are treated as taxable to the Executive, the Company
shall pay Executive an additional amount such that the net amount retained by
the Executive after deduction or payment of all federal, state, local and other
taxes with respect to amounts pursuant to this Section shall be equal to the
full amount of the payments required by this Section.
12. 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 Chicago, Illinois, 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. To the extent any of the payments within this Section
are treated as taxable to the Executive, the Company shall pay Executive an
additional amount such that the net amount retained by Executive after deduction
or payment of all federal, state, local and other taxes with respect to amounts
under this Section shall be equal to the full amount of the payments required by
this Section.
13. 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. This Agreement shall not be terminated
by the voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving corporation, or upon any
transfer of all or substantially all of the Company's stock or assets. In the
event of such merger, consolidation or transfer, the provisions of this
Agreement shall
12
<PAGE>
be binding upon and shall inure to the benefit of the surviving corporation or
corporation to which such stock or assets of the Company shall be transferred.
(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, absolutely
and unconditionally 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 in this Agreement, "Company" shall mean the
Company as herein before 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.
14. OTHER SEVERANCE BENEFITS. Executive hereby agrees that in
consideration for and subject to the receipt of the payments to be received
under this Agreement, Executive waives any and all rights to any payments or
benefits under any other plans, programs, contracts or arrangements of the
Company or their respective affiliates that provide for severance payments or
benefits upon a termination of employment, except as provided in this Agreement.
15. PRESS RELEASE. The Company shall not issue or permit to be issued any
press release or other public announcement regarding the Executive or the terms
of Executive's employment (including related to any termination of Executive's
employment for any reason) without Executive's prior approval.
16. INDEMNIFICATION AND INSURANCE. Beginning on the Effective Date and
continuing thereafter, including after the termination of Executive's employment
hereunder, the Company shall indemnify, defend and hold the Executive harmless
from and against any and all Expenses, liabilities, damages, costs, judgments,
penalties, fines and amounts paid in settlement, incurred by Executive in
connection with any Proceeding involving her by reason of her being or having
been an officer, director, employee or agent of the Company (or any affiliate of
the Company) to the fullest extent permitted by law, whether or not Executive
is, or is threatened to be made, a party to any threatened, pending, or
completed Proceeding, and whether or not Executive is successful in such
Proceeding. In addition, upon receipt from Executive of (i) a written request
for an advancement of Expenses which Executive reasonably believes will be
subject to indemnification hereunder and (ii) a written undertaking by Executive
to repay any such amounts if it shall ultimately be determined that she is not
entitled to indemnification under this Agreement or otherwise, the Company shall
advance such Expenses to Executive or pay such Expenses for Executive, all in
advance of the final disposition of any such matter. The provisions of the
preceding two sentences shall survive the termination of Executive's employment
hereunder for any reason whatsoever and the termination of this Agreement. The
rights of indemnification and to receive advancement of Expenses as provided by
this Agreement shall not be deemed exclusive of any other rights to which
Executive may at any time be entitled under applicable law, the Certificate of
Incorporation, the By-Laws of the Company, any other agreement, a vote of
stockholders or a resolution of the Board, or otherwise. For purposes hereof,
"Expenses" shall include all reasonable fees and expenses including, without
limitation, reasonable attorneys' fees, retainers, court costs,
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<PAGE>
transcript costs, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service
fees, and disbursements and expenses of the types customarily incurred in
connection with prosecuting, defending, preparing to prosecute or defend,
investigating, or being or preparing to be a witness in a Proceeding; and
"Proceeding" shall include (without limitation) any and all proceedings,
including, without limitation, actions, suits, arbitrations, alternative dispute
resolution mechanisms, investigations, administrative hearings and other
proceedings, whether civil, criminal, administrative or investigative, and
whether or not by or in the right of the Company. Beginning on the Effective
Date and continuing thereafter, including after the termination of Executive's
employment hereunder, Executive shall have coverage under a director's and
officer's liability insurance policy in amounts no less than, and on terms no
less favorable than those, as provided to officers of the Company as of the
Effective Date and in amounts no less than, and on terms no less favorable than
those, as provided to the other members of the Board and senior executive
officers of the Company from time to time.
17. ATTORNEY FEES. The Company will pay, or reimburse Executive for, at
Executive's discretion, all attorneys fees, costs and expenses incurred by
Executive in connection with the negotiation, execution and delivery of this
Agreement. All reasonable costs and expenses (including fees and disbursements
of counsel) incurred by Executive in seeking to interpret this Agreement or
enforce rights pursuant to this Agreement shall be paid on behalf of or
reimbursed to Executive promptly by the Company, whether or not Executive is
successful in asserting such rights; provided, however, that no reimbursement
shall be made of such expenses relating to any unsuccessful assertion of rights
if and to the extent that Executive's assertion of such rights was in bad faith.
To the extent any of the payments within this Section are treated as taxable to
the Executive, the Company shall pay Executive an additional amount such that
the net amount retained by Executive after deduction or payment of all federal,
state, local and other taxes with respect to amounts under this subsection shall
be equal to the full amount of the payments required by this Section.
18. WITHHOLDING. All payments to be made to Executive hereunder will be
subject to all applicable required withholding of taxes.
19. NO MITIGATION. Executive shall have no duty to mitigate her damages
by seeking other employment or taking other action by way of mitigation of the
amounts payable to the Executive under this Agreement and the payments required
hereunder shall not be reduced or offset by any amounts, including compensation
from other employment. Further, the Company's obligations to make any payments
hereunder shall not be subject to or affected by any set off, counterclaims or
defenses which the Company may have against Executive or others.
20. 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 and
effective when delivered by personal or overnight couriers, or registered mail,
in each case with confirmation of receipt, prepaid and addressed as follows:
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If to Executive:
Debra A. Cafaro
248 South Avenue
Glencoe, Illinois 60022
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attention: Peter J. Barack
and
---
Debra A. Cafaro
Ventas, Inc.
4360 Brownsboro Road, Suite 115
Louisville, KY 40207-1642
If to Company:
Ventas, Inc.
4360 Brownsboro Road, Suite 115
Louisville, KY 40207-1642
Attn: General Counsel
Either party may change its specified address by giving notice in writing
to the other in accordance with the foregoing method.
21. WAIVER OF BREACH AND SEVERABILITY. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision, which other
provision shall remain in full force and effect. 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, including all make-
whole provisions of this Agreement, including those set forth in Section 5(h),
shall continue to be binding and effective.
22. ENTIRE AGREEMENT; AMENDMENT. This instrument contains the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements (including the agreement and definitive term
sheet dated March 5, 1999 between the Company and the Executive regarding
Executive's employment), promises, covenants, arrangements,
15
<PAGE>
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.
23. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware.
24. HEADINGS. The headings in this Agreement are for convenience only and
shall not be used to interpret or construe its provisions.
25. 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.
VENTAS, INC.
By:
----------------------------------------
W. Bruce Lunsford, Chairman of the Board
--------------------------------------------
Executive
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EXHIBIT 10.6
AMENDMENT NUMBER 1 TO THE SECOND
STANDSTILL AGREEMENT DATED APRIL 12, 1999
------------------------------------------
These amendments dated May 5, 1999 (the "Amendment") are made and entered
into between Vencor, Inc., a corporation organized under the laws of Delaware,
for and on behalf of itself and its various subsidiaries and affiliates,
including, without limitation, Vencor Operating, Inc., and for and on behalf of
any of their respective successors including, without limitation, any debtor or
debtor-in-possession in a bankruptcy case commenced under Title 11 of the United
States Code (the "Bankruptcy Code") or any trustee appointed in any such case
(collectively, "Vencor"), and Ventas, Inc., a corporation organized under the
laws of Delaware for and on behalf of itself and its various subsidiaries and
affiliates, including, without limitation, Ventas Realty, Limited Partnership,
and for and on behalf of any of their respective successors, including, without
limitation, any debtor or debtor-in-possession in a bankruptcy case commenced
under the Bankruptcy Code or any trustee appointed in any such case
(collectively, "Ventas").
WHEREAS, the parties to the Amendment are in the process of attempting to
resolve any and all existing and potential claims that Vencor has asserted or
might in the future assert against Ventas (the "Vencor Claims"), the validity of
which Ventas has disputed, and any and all existing and potential claims that
Ventas has asserted or might in the future assert against Vencor (the "Ventas
Claims"), the validity of which Vencor has disputed (the Vencor Claims and the
Ventas Claims are collectively referred to herein as the "Claims").
NOW, THEREFORE, for good cause and adequate consideration, the parties
hereto agree as follows:
Extension of the Second Standstill Period
The fifth numbered paragraph of the Second Standstill Agreement (annexed hereto
as Exhibit A) shall be deleted and replaced with the following paragraph:
<PAGE>
During the period from the date of the Second Standstill Agreement,
April 12, 1999, through and including the earlier of (a) the
commencement by or against Vencor, as debtor, of a voluntary or
involuntary bankruptcy case under Title 11 of the United States Code,
or (b) 5:00 p.m. Eastern Daylight Savings Time on May 7, 1999 (such
period being referred to herein as the "Second Standstill Period"),
neither Vencor nor Ventas will file, commence, serve, or otherwise
initiate any civil action, arbitration proceeding, or other similar
action, litigation, case, or proceeding of any kind, character or
nature whatsoever (an "Action") against the other or any third party,
including, without limitation, any of Vencor's or Ventas' current or
former officers, directors, or employees, arising from or relating to
the Reorganization Agreement, any Ancillary Agreement, or any of the
Five Leases, or with respect to the various disputes identified in
Vencor's March 18, 1999 letter; nor shall Ventas exercise any rights
or remedies it may have against Vencor under any of the Five Leases
based on Vencor's late payment or non-payment of rent due under the
Five Leases for the month of May 1999 or based on any default arising
from or related to the disclosures made by Vencor to Ventas commencing
on or about March 30 and 31, 1999 and continuing to the date hereof.
Counterparts
This Amendment may be executed in one or more counterparts and by facsimile,
each of which counterparts shall be deemed an original hereof but all of which
together shall constitute one agreement.
Choice of Law
This Amendment adopts the ninth numbered paragraph as the choice of law
provision provided for in the Amendment.
Dated: New York, New York
May 5, 1999
CONFIRMED AND AGREED TO:
VENCOR, INC. VENTAS, INC.
By: By:
------------------------------- -------------------------------
Name: Name:
Title: Title:
<PAGE>
EXHIBIT 10.7
AMENDMENT NUMBER 2 TO THE SECOND STANDSTILL
AGREEMENT DATED APRIL 12, 1999 AND AMENDMENT
NUMBER 1 TO THE TOLLING AGREEMENT DATED APRIL 12, 1999
------------------------------------------------------
These amendments dated May 8, 1999 (the "Amendments") are made and entered
into between Vencor, Inc., a corporation organized under the laws of Delaware,
for and on behalf of itself and its various subsidiaries and affiliates,
including, without limitation, Vencor Operating, Inc., and for and on behalf of
any of their respective successors including, without limitation, any debtor or
debtor-in-possession in a bankruptcy case commenced under Title 11 of the United
States Code (the "Bankruptcy Code") or any trustee appointed in any such case
(collectively, "Vencor"), and Ventas, Inc., a corporation organized under the
laws of Delaware, for and on behalf of itself and its various subsidiaries and
affiliates, including, without limitation, Ventas Realty, Limited Partnership,
and for and on behalf of any of their respective successors, including, without
limitation, any debtor or debtor-in-possession in a bankruptcy case commenced
under the Bankruptcy Code or any trustee appointed in any such case
(collectively, "Ventas");
WHEREAS, the parties to the Amendments are in the process of attempting to
resolve any and all existing and potential claims that Vencor has asserted or
might in the future assert against Ventas (the "Vencor Claims"), the validity of
which Ventas has disputed, and any and all existing and potential claims that
Ventas has asserted or might in the future assert against Vencor (the "Ventas
Claims"), the validity of which Vencor has disputed (the Vencor Claims and the
Ventas Claims are collectively referred to herein as the "Claims");
WHEREAS, on Friday May 7, 1999 after 5:00 p.m., Ventas, by letters of T.
Richard Riney, Vice President and General Counsel of Ventas, issued five notices
of non-payment of rent (the "Non-Payment Notices") pursuant to paragraph 16.1(b)
of the agreements
<PAGE>
referenced in the first paragraph of each Non-Payment Notice, such agreements
being collectively defined in the Second Standstill Agreement as the Five
Leases;
WHEREAS, the parties hereto wish to extend the cure period referred to in
Section 16.1(b) of the Five Leases with respect to the Non-Payment Notices so
that Vencor's cure period is coterminous with that provided to the Leasehold
Mortgagee pursuant to Section 22.4 of the Five Leases, subject to the conditions
set forth below;
NOW, THEREFORE, in consideration of the premises and other good cause and
adequate consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
Extension of the Second Standstill Period and Suspension of the Expiration of
the Cure Period in the Five Leases
1. The fifth numbered paragraph of the Second Standstill Agreement dated
April 12, 1999 shall be deleted and replaced with the following paragraph:
(a) Other than delivery of the Non-Payment Notices, during the period
from the date of the Second Standstill Agreement, April 12, 1999,
through and including the earlier of (a) the commencement by or
against Vencor, as debtor, of a voluntary or involuntary bankruptcy
case under Title 11 of the United States Code, or (b) 5:00 p.m.
Eastern Daylight Savings Time on June 6, 1999 (such period being
referred to herein as the "Second Standstill Period"), neither Vencor
nor Ventas will file, commence, serve, or otherwise initiate any civil
action, arbitration proceeding, or other similar action, litigation,
case, or proceeding of any kind, character or nature whatsoever (an
"Action") against the other or any third party, including, without
limitation, any of Vencor's or Ventas' current or former officers,
directors, or employees, arising from or relating to the
Reorganization Agreement, any Ancillary Agreement, or any of the Five
Leases, or with respect to the various disputes identified in Vencor's
March 18, 1999 letter; nor shall Ventas exercise any rights or
remedies it may have against Vencor under any of the Five Leases
(including the giving of notices of termination pursuant to Section
16.1 of the Five Leases or any of them) based on Vencor's late payment
or non-payment of Rent (as that term is defined in the Five Leases)
due under the Five Leases, or based on any default arising from or
related to the
2
<PAGE>
disclosures made by Vencor to Ventas commencing on or about March 30
and 31, 1999 and continuing to the date hereof.
(b) Ventas further agrees that if Vencor pays the Rent for the month
of May 1999 on or before June 11, 1999 at 5:00 p.m. Eastern Daylight
Savings Time then such payment shall be deemed to be a timely cure,
within the meaning of Section 16.1 of the Five Leases and the Notices
of Non-Payment, and that, in such event, no Event of Default (as that
term is used in the Notices of Non-Payment and defined in the Five
Leases) shall have occurred with respect to the late payment or non-
payment of Rent for the month of May 1999. It is the intention of the
parties that this Subparagraph 5(b) shall not affect in any way,
including, without limitation, to shorten or extend, the cure period
provided to the Leasehold Mortgagee, pursuant to Section 22.4 of the
Five Leases. This Subparagraph 5(b) shall apply only to the Non-
Payment Notices and to the non-payment or late payment of the May 1999
Rent under the Five Leases.
(c) The immediately preceding Subparagraph 5(b) shall not be effective
and shall be void ab initio unless on or prior to 5:00 p.m. Eastern
-- ------
Daylight Savings Time on June 11, 1999, (i) Ventas is paid the Rent
for the month of May 1999 or (ii) Ventas has received written
confirmation from the Leasehold Mortgagee that it agrees that the
period of time by which it would be entitled to cure the failure of
Vencor to pay Rent for the month of May 1999 under Section 22.4 of the
Five Leases in order to prevent a termination of the Five Leases is
unchanged by Subparagraph 5(b) and such period of time is 35 days
beginning on May 7, 1999.
Amendment To Tolling Agreement
2. The first numbered paragraph of the Tolling Agreement dated April 12,
1999 shall be deleted and replaced with the following paragraph:
Any Vencor Claims, including, without limitation, those arising or
available under the Bankruptcy Avoidance Provisions (defined below)
that Vencor could otherwise assert against Ventas if Vencor were a
debtor in a case under the Bankruptcy Code commenced on the date
hereof, and whether arising under the Bankruptcy Code or under other
applicable federal or state law, shall not be prejudiced, impaired, or
waived by Vencor's failure to commence such a bankruptcy case, and any
and all statues of limitations, repose, or other legal or equitable
constrains on the time by which such a bankruptcy case or pleading
initiating any Vencor Claim must be filed to assert such a Vencor
Claim (including, without limitation, a cause of action under (S) 548
of the Bankruptcy Code) shall be tolled during the period of time from
April 12, 1999 to and including June 6, 1999 (the "Tolling Period").
For all purposes herein, both the
3
<PAGE>
first and last day of the Tolling Period shall be deemed to be
contained in the Tolling Period.
Counterparts
3. These Amendments may be executed in one or more counterparts and by
facsimile, each of which counterparts shall be deemed an original hereof but all
of which together shall constitute one agreement.
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENTAS, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 58,497
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 999,498
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 18,402
<OTHER-SE> (32,910)
<TOTAL-LIABILITY-AND-EQUITY> 999,498
<SALES> 0
<TOTAL-REVENUES> 56,633
<CGS> 0
<TOTAL-COSTS> 33,744
<OTHER-EXPENSES> 2,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,065
<INCOME-PRETAX> 20,338
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,338
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
