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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
OR
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(I.R.S. Employer Identification
(State or other jurisdiction of Number)
incorporation or organization)
4360 Brownsboro Road 40207-1642
Suite 115 (Zip Code)
Louisville, Kentucky
(Address of principal executive
offices)
(502) 357-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
Common Stock, par value $.25 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10-K. X
As of March 22, 1999, there were 67,895,781 shares of the Registrant's
common stock, $.25 par value ("Common Stock"), outstanding. The aggregate
market value of the shares of the Registrant held by non-affiliates of the
Registrant, based on the closing price of such stock on the New York Stock
Exchange on March 22, 1999, was approximately $231,351,268 For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
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Part III of this Annual Report on Form 10-K is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 18, 1999.
CAUTIONARY STATEMENTS
This Form 10-K 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-K
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 "Cautionary Statements"
section and elsewhere in this Form 10-K, including, without limitation, the
"Business--Risk Factors" section. 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 Company's ability to acquire
additional properties, (viii) changes in the general economic conditions
and/or in the markets in which the Company may, from time to time, compete,
(ix) the ability of the Company to pay and/or refinance its indebtedness as it
becomes due, and (x) 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-
K has been provided by the Company's primary tenant, Vencor, Inc. ("Vencor").
Vencor is subject to the reporting requirements of the Securities and Exchange
Commission (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,
which as of March 30, 1999 had not been filed with the Commission. The Company
has no reason to believe that such information is inaccurate in any material
respects, but there can be no assurances that all such information is
accurate.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
<S> <C> <C>
Item 1. Business............................................................................... 4
Item 2. Properties............................................................................. 32
Item 3. Legal Proceedings...................................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders.................................... 43
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 44
Item 6. Selected Financial Data................................................................ 46
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 57
Item 8. Financial Statements and Supplementary Data............................................ 58
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... 58
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 58
Item 11. Executive Compensation................................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 58
Item 13. Certain Relationships and Related Transactions......................................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 59
</TABLE>
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PART I
Item 1. Business
General
Ventas, Inc. ("Ventas" or 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
December 31, 1998. 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 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 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 a reorganization (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-K and other filings, 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. The Company is currently
invested in high quality healthcare related facilities including hospitals,
nursing centers and personal care facilities whose principal tenants are
healthcare related companies. If financial conditions warrant, the Company may
make additional investments in the form of operating leases or permanent
mortgage financing and may seek to reduce its tenant concentration with
Vencor. Any such acquired facilities will be leased to and operated by
experienced and qualified third party operators. The Company also may consider
opportunities in non-healthcare related properties.
The Company's evaluation of potential investments will include such factors
as (i) the quality and experience of the operator; (ii) the financial status
of the tenant/mortgagor and any guarantor; (iii) the geographic area, type of
property, and demographic profile; (iv) the construction quality, condition
and design of the improvements; (v) the current and anticipated cash flows and
its ability to meet operational needs and lease obligations and to provide a
competitive investment return to the Company's stockholders; (vi) the
potential for appreciation in the residual value of the property; (vii) the
growth, tax and regulatory environment of the community in which the property
is located; (viii) occupancy and demand for similar healthcare facilities in
the same or nearby communities; (ix) adequate mix of private, Medicare and
Medicaid patients; (x) potential alternative uses of the property; (xi) the
sources of patient referrals for the facility; and (xii) prospects for
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liquidity through financing or refinancing. The Company will also closely
evaluate the value of the property, the cost of the Company's capital needed
to acquire the property and the anticipated return thereon.
Recent Developments
On January 26, 1999, Vencor announced that it expected earnings for the
fourth quarter, exclusive of unusual transactions, to be substantially lower
than the third quarter of 1998. Vencor had reported a loss of $0.02 per share
for the third quarter ended September 30, 1998, excluding the effect of
unusual transactions and a change in the effective tax rate. Vencor also
announced that it expected 1998 results to be impacted adversely by certain
recurring year-end adjustments, the most significant of which relates to an
increase in the provision for bad debts for its nursing center and ancillary
service businesses which could aggregate approximately $20 million.
Adjustments to other accruals, as well as balance sheet adjustments related to
the Hillhaven, TheraTx and Transitional mergers were also expected to impact
negatively fourth quarter results.
In addition, Vencor disclosed that certain additional adjustments may be
recorded in connection with asset valuations in the fourth quarter, including
a write-down of its investment in a nursing center in Wisconsin and a
previously announced write-down of its investment in Behavioral Healthcare
Corporation. Vencor indicated that it also was reviewing the expected
recoverability of recorded amounts of goodwill and deferred tax assets at
year-end and may record a fourth quarter charge based on the results of the
review.
Vencor also announced that it may be required to renegotiate its bank credit
facility since the foregoing operating results and adjustments may result in
certain covenant violations. Vencor stated that it was in discussions with its
lead banks and anticipated that it would successfully conclude its
negotiations prior to releasing its financial results for 1998. Vencor
announced that its was in default of certain covenants, but that it has
received a waiver of those covenants contained in its bank credit facility
until March 31, 1999.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Lease Agreements and the Company has rejected that request. 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. The Company has entered
into an agreement with Vencor whereby the Company has agreed not to exercise
remedies for non-payment of rent, which is due from Vencor on April 1, 1999,
for a period ending on April 12, 1999. During the Company's discussions with
Vencor, Vencor has asserted various potential claims against the Company
arising out of the Reorganization. The Company intends to vigorously defend
these claims if they are asserted in a legal or mediation proceeding.
As a result of the recent announcements by Vencor and similar industry-wide
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 ability to comply with the
covenants in its bank credit facility. The Company has retained Merrill, Lynch
& Co., as financial advisor, to assist it in this review. In addition, the
Company, together with Merrill Lynch & Co., 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.
In connection with the Reorganization, an Independent Committee of the Board
of Directors was formed. The function of the Independent Committee is to
review and approve all agreements and transactions between the Company and
Vencor to ensure that such agreements and transactions represent arm's length
negotiations including, without limitation, the negotiation, enforcement and
renegotiations of any leases between the Company and Vencor. On November 17,
1998, the Company appointed Douglas Crocker II as an independent director of
the Company and as Chairman of the Independent Committee. In addition, the
Company has undertaken other initiatives to alleviate the potential conflict
of interest between the Company and Vencor. On September 21, 1998, the Company
hired Steven T. Downey as Chief Financial Officer. Mr. Downey was not
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previously employed by Vencor. Effective March 5, 1999, the Company accepted
the resignation of Thomas T. Ladt as President, Chief Executive Officer and
Chief Operating Officer and as a director of the Company. The Company
appointed Debra A. Cafaro as President and Chief Executive Officer and as a
director. Ms. Cafaro had previously served as president and a director of
Ambassador Apartments, Inc., a public real estate investment trust, from April
1997 to May 1998. W. Bruce Lunsford and R. Gene Smith, each directors of the
Company, have resigned as directors of Vencor. As of the date hereof, the
Company and Vencor have no common directors or officers.
As described below under "--Relationship with Vencor," Vencor provided the
Company with certain administrative services after the Reorganization. The
Company has recently moved its offices from space it shared with Vencor and is
in the process of assembling the resources necessary so that it no longer
requires administrative support from Vencor. However, as discussed below,
Vencor has agreed to assist in the preparation of certain tax returns for the
Company and to defend certain litigation to which the Company is or may become
a party.
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-K 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-K 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. As of March 30, 1999, Vencor
had not released financial results for 1998 or filed its Annual Report on Form
10-K for the year ended December 31, 1998.
Relationship with Vencor
The Company leases all of its hospitals and 210 of its nursing centers to
Vencor under four Master Lease Agreements. For the eight months ended December
31, 1998, Vencor accounted for approximately 98.7% of the Company's revenues.
In order to govern certain of the relationships between the Company and
Vencor after the Reorganization and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the Reorganization. The Company believes that the agreements contain terms
which generally are comparable to those which would have been reached in arm's
length negotiations with unaffiliated parties. The most significant terms of
the Master Lease Agreements and other related agreements are described below.
The reader is also strongly encouraged to review and consider the factors
described in "Business--Risk Factors."
Master Lease Agreements
In the Reorganization, the Company retained substantially all of its real
property, buildings and other improvements (primarily long-term care hospitals
and nursing centers) and leased these facilities to Vencor under four Master
Lease Agreements. Such Master Lease Agreements contain terms which govern the
rights, duties and responsibilities of the Company and Vencor relative to each
of the leased properties. The leased properties include land, buildings,
structures, easements, improvements on the land and permanently affixed
equipment, machinery and other fixtures relating to the operation of the
facilities.
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all insurance, taxes, utilities and maintenance
related to the properties. The base annual rent is approximately $221.5
million, plus a 2% per annum escalator, which escalator is contingent upon
Vencor achieving net patient service
revenue for the applicable year in excess of 75% of net patient service
revenue for the base year of 1997. The initial terms of these leases were for
periods ranging from 10 to 15 years.
Except as noted below, upon the occurrence of an event of default under a
Master Lease, the Company may, at its option, exercise the remedies under a
Master Lease on all properties included within that particular
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Master Lease. The remedies which may be exercised under the Master Lease by
the Company, at its option, include the following: (i) after not less than 10
days' notice to Vencor, terminate the Master Lease, repossess the leased
property and relet the leased property to a third party and require that
Vencor pay to the Company, as liquidated damages, the net present value of the
rent for the balance of the term, discounted at the prime rate; (ii) without
terminating the Master Lease, repossess the leased property and relet the
leased property with Vencor remaining liable under the Master Lease for all
obligations to be performed by Vencor thereunder, including the difference, if
any, between the rent under the Master Lease and the rent payable as a result
of the reletting of the leased property; (iii) demand that Vencor purchase
either the property which is the subject of the default or all of the
properties included within that Master Lease, at the Company's option, for the
higher of the fair market value or the minimum repurchase price, both as
defined in the Master Lease; and (iv) any and all other rights and remedies
available at law or in equity. The Master Leases require Vencor to cooperate
with the Company in connection with license transfers and certain other
regulatory matters arising from a lease termination.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the property that is the subject of the default
upon the occurrence of any one of the following events of default: (i) the
occurrence of a final non-appealable revocation of Vencor's license to operate
a facility; (ii) the revocation of certification of a facility for
reimbursement under Medicare; or (iii) Vencor becomes subject to regulatory
sanctions at a facility and fails to cure the regulatory sanctions within the
applicable cure period. Upon the occurrence of the fifth such event of default
under a Master Lease with respect to any one or more properties, the Master
Lease permits the Company, at its option, to exercise the rights and remedies
under the Master Lease on all properties included within that Master Lease.
The occurrence of any one of the following events of default constitute an
event of default under all Master Leases permitting the Company, at its
option, to exercise the rights and remedies under all of the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the federal
bankruptcy laws, and (iv) a petition is filed against Vencor under federal
bankruptcy laws and same is not dismissed within 90 days of its institution.
Any notice of the occurrence of an event of default under a Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the "Leasehold Mortgagee"). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee 30 days prior written notice and the
opportunity to cure any such event of default. Following the expiration of
such cure period, the Company may then terminate a Master Lease by giving at
least 10 days prior written notice of such termination.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee assumes the
Master Lease in writing, (v) the sublease is subject and subordinate to the
terms of the Master Lease, and (vi) Vencor and any guarantor remains primarily
liable under the Master Lease.
Each Master Lease requires Vencor to maintain liability, all risk property
and workers' compensation insurance for the properties at a level reasonable
with respect to the properties. Each Master Lease further provides that in the
event a property is totally destroyed, or is substantially destroyed such that
the damage renders the property unsuitable for its intended use, Vencor will
have the option either to restore the property at its cost to its pre-
destruction condition or offer to purchase the leased property (in either
event all insurance
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proceeds, net of administrative and related costs, will be made available to
Vencor). If the Company rejects the offer to purchase, Vencor will have the
option either to restore the property or terminate the applicable Master Lease
with respect to the property. If the damage is such that the property is not
rendered unsuitable for its intended use, or if it is not covered by
insurance, each Master Lease requires Vencor to restore the property to its
original condition.
Pursuant to the Agreement and Plan of Reorganization dated as of April 30,
1998, all controversies, claims or disputes arising out of the Master Leases
shall be subject to mediation between the parties for a reasonable period of
time in an effort to settle such dispute. If the parties are unable to reach
resolution after such period of time, then the dispute shall then be submitted
to arbitration.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires, will
complete the construction of certain development properties substantially in
accordance with the existing plans and specifications for each such property.
Upon completion of each such development property, the Company has the option
to purchase the development property from Vencor at a purchase price equal to
the amount of Vencor's actual costs in acquiring and developing such
development property prior to the purchase date. If the Company purchases the
development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be 10% of the
actual costs incurred by Vencor in acquiring and developing the development
property. The other terms of the lease for the development property will be
substantially similar to those set forth in the Master Leases. As of December
31, 1998, the Company had acquired one skilled nursing center under the
Development Agreement for $6.2 million and has entered into a separate lease
with Vencor with respect to such facility. The Development Agreement has a
five year term, and the Company and Vencor each have the right to terminate
the Development Agreement in the event of a change of control.
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing center
or other healthcare facility, provided that Vencor and the Company can
negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility.
The Participation Agreement also provides, subject to certain terms, that
the Company has a right of first offer to purchase or finance any healthcare
related real property that Vencor determines to sell or mortgage to a third
party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term, and the Company and Vencor each have the right to
terminate the Participation Agreement in the event of a change of control.
Tax Allocation Agreement
The Tax Allocation Agreement provides that the Company will be liable for
taxes of the Company's consolidated group attributable to periods prior to the
Reorganization with respect to the portion of such taxes attributable to the
property held by the Company after the Reorganization, and Vencor will be
liable for such pre-distribution taxes with respect to the portion of such
taxes attributable to the property held by Vencor after the Reorganization.
The Tax Allocation Agreement further provides that the Company will be liable
for any taxes attributable to the Reorganization except that Vencor will be
liable for any such taxes to the extent that Vencor derives certain future tax
benefits as a result of the payment of such taxes. The Company and its
subsidiaries are liable for taxes payable with respect to periods after the
Reorganization that are attributable to the Company's operations, and Vencor
and its subsidiaries are liable for taxes payable with respect to periods
after the Reorganization that are attributable to Vencor's operations. If, in
connection with a tax audit or filing of an amended return, a taxing authority
adjusts the Company's or Vencor's tax liability with respect to taxes for
which the other party was liable under the Tax Allocation Agreement, such
other party would be liable for the resulting tax assessment or would be
entitled to the resulting tax refund.
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Agreement of Indemnity--Third Party Leases
In connection with the Reorganization, the Company assigned its former third
party lease obligations as a tenant or as a guarantor of tenant obligations to
Vencor. The Company remains primarily liable on substantially all of the third
party lease obligations assigned to Vencor. Under the terms of the Agreement
of Indemnity--Third Party Leases, Vencor and its subsidiaries have agreed to
indemnify and hold the Company harmless from and against all claims against
the Company arising out of the third party lease obligations assigned by the
Company to Vencor. If Vencor is unable to satisfy the obligations under any
third party lease assigned by the Company to Vencor, then the Company will be
liable for the payment and performance of the obligations under any such third
party lease. These leases have remaining terms ranging from 1 to 63 years. The
total aggregate remaining minimum rental payments under these leases are
approximately $177.7 million. The annual minimum rental payments under these
leases for 1999 will be approximately $39.2 million. See Note 8 to
Consolidated Financial Statements.
Agreement of Indemnity--Third Party Contracts
In connection with the Reorganization, the Company assigned its former third
party guaranty agreements to Vencor. The Company remains primarily liable on
substantially all of the third party guarantees assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Contracts, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the third party
guarantees assigned by the Company to Vencor. If Vencor is unable to satisfy
the obligations under any third party guaranty agreement assigned by the
Company to Vencor, then the Company will be liable for the payment and
performance of the obligations under any such agreement. These third party
guarantees were entered into in connection with certain acquisitions and
financing transactions. The total aggregate exposure under these guarantees is
approximately $45.9 million. Atria Communities, Inc. has also agreed to
indemnify and hold the Company harmless from and against all claims against
the Company arising out of one of the third party contracts, which has an
aggregate principal amount of approximately $35 million.
Transition Services Agreement
The Transition Services Agreement, which expired pursuant to its terms on
December 31, 1998, provided that Vencor would provide the Company with
transitional administrative and support services, including but not limited to
finance and accounting, human resources, risk management, legal, and
information systems support. The Company paid Vencor $1.6 million for the
eight months ended December 31, 1998 for services provided under the
Transition Services Agreement.
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. Vencor has also agreed to assist in the preparation
of certain tax returns and other tax filings to be made on behalf of the
Company for the period ending on or before December 31, 1998. There can be no
assurance that Vencor will continue to assist the Company in the preparation
of these tax documents or that the Company will be able to timely and
accurately complete such tax filings if Vencor should discontinue its
assistance, although the Company intends to take all actions necessary to
enable it do so.
Assumption of Certain Operating Liabilities and Litigation
In connection with the Reorganization, Vencor agreed to assume and to
indemnify the Company for any and all liabilities that may arise out of the
ownership or operation of the healthcare operations either before or after the
date of the Reorganization. The indemnification provided by Vencor also covers
losses, including costs and expenses, which may arise from any future claims
asserted against the Company based on these healthcare operations. In
addition, at the time of 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
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ownership or operation of the healthcare operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the Reorganization
which arise out of the ownership and operation of the healthcare operations.
There can be no assurance that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy its obligations incurred in
connection with the Reorganization. If Vencor is unable to satisfy the
obligations under these arrangements, then the Company will be liable for the
payment and performance of such obligations and will have to assume the
defense of such claims.
Vencor maintains insurance for certain professional liability claims and
losses through a wholly owned captive insurance company that insures the first
$2 million of claims and losses. Losses in excess of $2 million are insured
through unrelated commercial insurance carriers.
9--1
<PAGE>
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 1998.
<TABLE>
<CAPTION>
Type of Percentage Number of Number of Number of Number of
Facility of Portfolio (1) Facilities Beds/Units Operators States (2)
-------- ---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Hospitals............... 40.1% 45 4,194 1 21
Nursing Centers......... 59.8% 219 28,492 6 (3) 31
Personal Care
Facilities............. 0.1% 8 136 1 1
</TABLE>
- - --------
(1) Based on the percentage of total rent paid to the Company for the eight
months ended December 31, 1998.
(2) The Company has properties located in 36 states managed by seven different
operators.
(3) One of the six operators is Vencor.
Hospital Facilities
The Company's hospitals generally are long-term care hospitals that serve
medically complex, chronically ill patients. The operator of these hospitals
has the capability to treat patients who suffer from multiple systemic
failures or conditions such as neurological disorders, head injuries, brain
stem and spinal cord trauma, cerebral vascular accidents, chemical brain
injuries, central nervous system disorders, developmental anomalies and
cardiopulmonary disorders. Chronic patients are often dependent on technology
for continued life support, such as mechanical ventilators, total parenternal
nutrition, respiration or cardiac monitors and dialysis machines. While these
patients suffer from conditions which require a high level of monitoring and
specialized care, they may not necessitate the continued services of an
intensive care unit. Due to their severe medical conditions, these patients
generally are not clinically appropriate for admission to a nursing center or
rehabilitation hospital.
Nursing Center Facilities
The Company's nursing centers generally are skilled nursing facilities. In
addition to the customary services provided by skilled nursing centers, the
operators of the Company's nursing centers typically provide rehabilitation
services, including physical, occupational and speech therapies. The majority
of patients in rehabilitation programs stay in a facility for eight weeks or
less.
Personal Care Facilities
The Company's personal care facilities serve persons with acquired or
traumatic brain injury. The operator of the personal care facilities provides
services including supported living services, neurorehabilitation,
neurobehavioral management and vocational programs.
Competition
The Company competes for real property investments with healthcare
providers, other healthcare related REITs, real estate partnerships, banks,
insurance companies and other investors. Many of the Company's competitors are
significantly larger and have greater financial resources and lower cost of
capital than the Company. If the Company reinstates its original business
strategy, the Company's ability to compete successfully for real property
investments will be determined by numerous factors, including the ability of
the Company to identify suitable acquisition targets, the ability of the
Company to negotiate acceptable terms for any such acquisition, and the
availability and cost of capital.
The operators of the Company's properties compete on a local and regional
basis with other healthcare operators. The ability of the Company's operators
to compete successfully for patients at the Company's facilities depends upon
several factors, including the quality of care at the facility, the
operational reputation of the operator, physician referral patterns, physical
appearance of the facilities, other competitive systems of healthcare delivery
within the community, population and demographics, and the financial condition
of the operator. Private, federal and state reimbursement programs and the
effect of other laws and regulations also may have a significant effect on the
Company's operators to compete successfully for patients for the properties.
10
<PAGE>
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property from
which there is a release or threatened release of hazardous or toxic
substances or an entity that arranges for the disposal or treatment of
hazardous or toxic substances at a disposal site may be held jointly and
severally liable for the cost of removal or remediation of certain hazardous
or toxic substances, that could be located on, in or under such property or
other affected property. Such laws and regulations often impose liability
whether or not the owner, operator or otherwise responsible party, knew of, or
caused the presence of the hazardous or toxic substances. The costs of any
required remediation or removal of these substances could be substantial, and
the liability of a responsible party as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the liable party. The presence of these substances
or failure to remediate such substances properly also may adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing of the Company's
properties, the Company could be liable for these costs as well as certain
other costs, including governmental fines and injuries to person or properties
or natural resources. In addition, owners and operators of real property are
liable for the costs of complying with environmental, health, and safety laws,
ordinances, and regulations and can be subjected to penalties for failure to
comply. Such ongoing compliance costs and penalties for non-compliance can be
substantial. Changes to existing or the adoption of new environmental, health,
and safety laws, ordinances, and regulations could substantially increase an
owner or operator's environmental, health, and safety compliance costs and/or
associated liabilities. Environmental, health, and safety laws, ordinances,
and regulations potentially affecting the Company address a wide variety of
topics, including, but not limited to, asbestos, polychlorinated biphenyls
("PCBs"), fuel oil management, wastewater discharges, air emissions,
radioactive materials, medical wastes, and hazardous wastes. Under the Master
Leases, Vencor has agreed to indemnify the Company against any environmental
claims (including penalties and clean up costs) resulting from any condition
arising in, on or under, or relating to, the leased properties at any time on
or after the commencement date of the applicable Master Lease. Vencor also has
agreed to indemnify the Company against any environmental claim (including
penalties and clean up costs) resulting from any condition permitted to
deteriorate, on or after the commencement date of the applicable Master Lease
(including as a result of migration from adjacent properties not owned or
operated by the Company or any of its affiliates other than Vencor and its
direct affiliates). There can be no assurance that Vencor will have the
financial capability to satisfy any such environmental claims. See "--Recent
Developments." If Vencor is unable to satisfy such claims the Company will be
required to satisfy the claims. The Company has agreed to indemnify Vencor
against any environmental claims (including penalties and clean-up costs)
resulting from any condition arising on or under, or relating to, the leased
properties at any time before the commencement date of the Master Leases.
The Company does not expect that the Company will have to make any material
capital expenditures in connection with such environmental, health, and safety
laws, ordinances, and regulations during 1999.
Governmental Regulation
General
The operators of the Company's properties derive a substantial portion of
their revenues from third party payors, including the Medicare and Medicaid
programs. Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons age 65 and over and certain disabled
persons. Medicaid is a medical assistance program administered by each state
pursuant to which benefits are available to certain indigent patients. Within
the Medicare and Medicaid statutory framework, there are substantial areas
subject to administrative rulings, interpretations and discretion which may
affect payments made under Medicare and Medicaid. The amounts of program
payments received by the operators can be changed by legislative or regulatory
actions and by determinations by agents for the programs. The Balanced Budget
Act of 1997 (the "Budget Act") is intended to reduce the increase in Medicare
payments by $115 billion and reduce the increase in Medicaid payments by $13
billion between 1998 through 2002 and made extensive changes in the Medicare
11
<PAGE>
and Medicaid programs. In addition, private payors, including managed care
payors, increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk.
Efforts to impose greater discounts and more stringent cost controls upon
operators by private payors are expected to continue. Further, on March 25,
1999, President Clinton signed legislation preventing nursing center operators
that decide to withdraw from the Medicaid program from evicting or
transferring patients who rely on Medicaid to cover their long-term care
expenses. There can be no assurances that adequate reimbursement levels will
continue to be available for services to be provided by the operators of the
Company's properties which currently are being reimbursed by Medicare,
Medicaid or private payors. Significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on these operators' liquidity, financial condition and results of
operations which could affect adversely their ability to make rental payments
to the Company.
The operators of the Company's properties are subject to extensive federal,
state and local laws and regulations including, but not limited to, laws and
regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities, services, prices for services and billing
for services. These laws authorize periodic inspections and investigations,
and deficiencies which if not corrected can result in sanctions which include
loss of licensure to operate and loss of rights to participate in the Medicare
and Medicaid programs. Regulatory agencies have substantial powers to affect
the actions of operators of the Company's properties if the agencies believe
that there is an imminent threat to patient welfare, and in some states these
powers can include assumption of interim control over facilities through
receiverships. Medicare and Medicaid anti-kickback laws codified under Section
1128B(b) of the Social Security Act (the "Anti-kickback Laws") prohibit
certain business practices and relationships that might affect the provision
and cost of healthcare services reimbursable under Medicare and Medicaid,
including the payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other governmental programs. Sanctions
for violating the Anti-kickback Laws include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs
such as the Medicare and Medicaid programs. In the ordinary course of its
business, the operators of the Company's properties are subject regularly to
inquiries, investigations and audits by federal and state agencies that
oversee these laws and regulations.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the Department of Health and Human Services ("HHS") has issued
regulations that describe some of the conduct and business relationships
permissible under the Anti-kickback Laws ("Safe Harbors"). The fact that a
given business arrangement does not fall within a Safe Harbor does not render
the arrangement per se illegal. Business arrangements of healthcare service
providers that fail to satisfy the applicable Safe Harbors criteria, however,
risk increased scrutiny and possible sanctions by enforcement authorities.
The operators of the Company's properties also are subject to Sections 1877
and 1903(s) of the Social Security Act, which restrict referrals by physicians
of Medicare and other government-program patients to providers of a broad
range of designated health services with which they have ownership interests
or certain other financial arrangements. Many states have adopted or are
considering similar legislative proposals, some of which extend beyond the
Medicaid program to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of the source of
the payment for the care. These laws and regulations are extremely complex,
and little judicial or regulatory interpretation exists. These actions could
have a material adverse effect on these operators' liquidity, financial
condition and results of operations which could affect adversely their ability
to make rental payments to the Company.
12
<PAGE>
Government investigations and enforcement of healthcare laws has increased
dramatically over the past several years and is expected to continue. The
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104- 191)
("HIPAA"), which became effective January 1, 1997, greatly expanded the
definition of healthcare fraud and related offenses and broadened the scope to
include private healthcare plans in addition to government payors. HIPAA also
greatly increased funding for the Department of Justice, Federal Bureau of
Investigation and the Office of the Inspector General to audit, investigate
and prosecute suspected healthcare fraud. Private
enforcement of healthcare fraud also has increased due in large part to
amendments to the civil False Claims Act in 1986 that were designed to
encourage private individuals to sue on behalf of the government. These
whistleblower suits by private individuals, known as qui tam relators, may be
filed by almost anyone, including present and former patients, colleagues and
nurses and other employees. These actions could have a material adverse effect
on these operators' liquidity, financial condition and results of operations
which could affect adversely their ability to make rental payments to the
Company.
12--1
<PAGE>
The Budget Act also provides a number of additional anti-fraud and abuse
provisions. The Budget Act contains new civil monetary penalties for an
operator's violation of the Anti-kickback Laws and imposes an affirmative duty
on operators to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs. The Budget Act also
provides a minimum ten-year period for exclusion from participation in federal
healthcare programs for operators convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional
or expanded healthcare facilities or services. A certificate of need ("CON"),
which is issued by governmental agencies with jurisdiction over healthcare
facilities, is at times required for expansion of existing facilities,
construction of new facilities, addition of beds, acquisition of major items
of equipment or introduction of new services. The CON rules and regulations
may restrict an operator's ability to expand the Company's properties in
certain circumstances.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable healthcare
regulations, and, in either case, such operators or their lenders fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by various state licensing,
receivership, CON or other laws, as well as by Medicare and Medicaid change-
of-ownership rules. Such delays and limitations could have a material adverse
effect on the Company's ability to collect rent, to obtain possession of
leased properties, or otherwise to exercise remedies for tenant default. In
addition, the Company may also incur substantial additional expenses in
connection with any such licensing, receivership or change-of-ownership
proceedings.
Long-Term Hospitals
All but two of the Company's hospitals are operated as long-term hospitals.
In order to receive Medicare and Medicaid reimbursement, each hospital must
meet the applicable conditions of participation set forth by HHS relating to
the type of hospital, its equipment, personnel and standard of medical care,
as well as comply with state and local laws and regulations. Hospitals undergo
periodic on-site certification surveys, which generally are limited if the
hospital is accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). A loss of certification could adversely affect a
hospital's ability to receive payments from Medicare and Medicaid programs,
which could in turn adversely impact Vencor's ability to make rental payments
under the Master Leases.
Hospitals that are certified by Medicare as long-term hospitals are excluded
from the prospective payment system that applies to acute care hospitals
("PPS"). A long-term hospital has an average length of stay greater than 25
days. Inpatient operating costs for long-term hospitals are reimbursed under
the cost-based reimbursement system, subject to a computed target rate per
discharge for inpatient operating costs established by the Tax Equity and
Fiscal Responsibility Act of 1982 ("TEFRA"). Medicare and Medicaid
reimbursements generally are determined from annual cost reports filed by
Vencor and other operators which are subject to audit by the respective agency
administering the program. Under such programs of cost-based reimbursement,
costs which will be accepted for reimbursement are limited by statutes,
regulations and program policies relating to numerous factors, including
necessity, reasonableness, related-party principles and relatedness to patient
care.
Nursing Centers
The operators of the Company's nursing centers generally are licensed on an
annual or bi-annual basis and certified annually for participation in the
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided,
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers.
13
<PAGE>
The Budget Act also established a prospective payment system for nursing
centers for cost reporting periods beginning on or after July 1, 1998
("Nursing Center PPS"). During a nursing center's first three cost reporting
periods under Nursing Center PPS, the per diem rates are based on a blend of
facility-specific costs and federal costs. Thereafter, the per diem rates will
be based solely on federal costs. The rates for such services were first
published in the Federal Register on May 12, 1998, after the consummation of
the Reorganization. The payments
13--1
<PAGE>
received under the new Nursing Center PPS cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs. The new Nursing Center PPS has resulted, and will likely continue to
result in, reduced reimbursement for the operators of the Company's
properties, thereby adversely impacting the operators' ability to satisfy
their obligations, including payment of rent, under the leases with the
Company.
Healthcare Reform
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contains extensive changes to the Medicare
and Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
will be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from 1993 to
1997. Virtually all spending reductions will come from healthcare operators
and changes in program components.
The Budget Act reduced payments made to the hospitals operated by Vencor and
others by reducing incentive payments pursuant to TEFRA, allowable costs for
capital expenditures and bad debts, and payments for services to patients
transferred from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1, 1998. The Budget Act also established
Nursing Center PPS for cost reporting periods beginning on or after July 1,
1998. During a nursing center's first three cost reporting periods under
Nursing Center PPS, the per diem rates will be based on a blend of facility-
specific costs and federal costs. Thereafter, the per diem rates will be based
solely on federal costs. The rates for such services were published by the
Health Care Financing Administration ("HCFA") in the Federal Register on May
12, 1998. The payments received under PPS cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs. The payments that Vencor and others are receiving under Nursing Center
PPS are substantially less than before enactment of the Budget Act. Vencor has
been subject to Nursing Center PPS since July 1, 1998.
The Budget Act established the National Bipartisan Commission on the Future
of Medicare, which held its first meeting on March 6, 1998, and charged it
with reviewing and analyzing financial conditions of Medicare, identifying
problems that threaten the financial integrity of the Medicare Trust Fund, and
making recommendations to address the program's long-term financing
challenges. The Commission recently concluded its deliberations without making
an official recommendation, but proposals considered by the Commission are now
under independent consideration by the Congress. The Budget Act also afforded
states more flexibility in administering their Medicaid plans, including the
ability to shift most Medicaid enrollees into managed care plans without first
obtaining a federal waiver. Accordingly, the Medicare and Medicaid programs,
including payment levels and methods, are in a state of change and are less
predictable than before enactment of the Budget Act.
There can be no assurance that the Budget Act, future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs will not have a material adverse effect on the liquidity,
financial condition or results of operations of the Company's operators which
could have a material adverse effect on their ability to make rental payments
to the Company.
Federal Income Tax Considerations
The Company intends to make an election to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year that began on January 1, 1999. The Company believes it has been
organized and has operated in such a manner as to enable it to qualify as a
REIT commencing with that taxable year, and the Company intends to continue to
operate in such a manner as to enable it to so qualify. The Company's actual
qualification and taxation as a REIT, however, will depend upon its ability to
14
<PAGE>
meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code. These tests are discussed below. No assurance can be
given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failing to qualify as a REIT, see "--Failure to Qualify,"
below.
The discussion of "Federal Income Tax Considerations" set forth herein is
not exhaustive of all possible tax considerations and is not tax advice.
Moreover this summary does not deal with all tax aspects that might be
relevant to a particular stockholder in light of his personal circumstances,
nor does it deal with particular types of stockholders that are subject to
special treatment under the Code, such as insurance companies, financial
institutions and broker-dealers. The Code provisions governing the federal
income tax treatment of REITs are highly technical and complex, and this
summary is qualified in its entirety by the applicable Code provisions, rules
and Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof. The following discussion is based on current
law, which could be changed at any time, possibly retroactively.
Federal Income Taxation of the Company
As noted above, the Company intends to make an election to be taxed as a
REIT commencing with its taxable year that began on January 1, 1999. With
respect to that taxable year and subsequent taxable years, if the Company
qualifies for taxation as a REIT, it generally will not be subject to federal
corporate income tax on net income that it currently distributes to
stockholders. This treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and stockholder levels) that generally
results from investment in a corporation. Notwithstanding its REIT election,
however, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by foreclosure
or otherwise on default of a loan secured by the property) that is held
primarily for sale to customers in the ordinary course of business or (ii)
other non-qualifying income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if the Company has
net income from "prohibited transactions" (which are, in general, certain
sales or other dispositions of property (other than foreclosure property) held
primarily for sale to customers in the ordinary course of business), such
income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the product of (a) the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% gross income test, and (b) a
fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year (other than retained long-term capital
gain the Company elects to treat as having been distributed to stockholders),
and (iii) any undistributed taxable income from prior years, the Company would
be subject to a non-deductible 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
should receive rents from a tenant deemed not to be fair market value rents,
or if the Company values its assets incorrectly, the Company may be liable for
valuation penalties. Finally, if the Company acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other asset) in
the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by the Company, then,
to the extent of such asset's "Built-in Gain" (i.e., the excess of the fair
market value of such property at the time of acquisition by the Company over
the adjusted basis of such asset at such time), such gain will be subject to
tax at the highest regular corporate rate applicable (as provided in
regulations that have been announced but not yet promulgated (the "Built-in
Gain Rules")).
15
<PAGE>
The Company owns appreciated assets that it held on January 1, 1999, the
effective date of its anticipated REIT election. These assets are subject to
the Built-in Gain Rules discussed above because the Company was a taxable C
corporation prior to January 1, 1999. If the Company recognizes taxable gain
upon the disposition of any of these assets within the ten-year Recognition
Period, the Company generally will be subject to regular corporate income tax
on that gain to the extent of the Built-in Gain in that asset as of January 1,
1999. The total amount of gain on which the Company can be taxed under the
Built-in Gain Rules is limited to its net built-in gain at the time it became
a REIT, i.e., the excess of the aggregate fair market value of its assets at
the time it became a REIT over the adjusted tax bases of those assets at that
time.
Requirements for Qualification
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to
stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a shorter taxable year (the "100 Shareholder Rule");
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the IRS that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The 5/50 Rule
and the 100 Shareholder Rule do not apply to the first taxable year for which
an election is made to be taxed as a REIT; thus, these rules will not apply to
the Company until the year 2000 (assuming as is anticipated that 1999 will be
the Company's first taxable year as a REIT).
For purposes of the 5/50 Rule, an unemployment compensation benefits plan, a
private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. A REIT will be treated
as having satisfied the 5/50 Rule if it complies with certain regulations for
ascertaining the ownership of its stock and if it did not know (or after the
exercise of reasonable diligence would not have known) that its stock was
sufficiently closely held to cause it to violate the 5/50 Rule. See "Annual
Record Keeping Requirements," below.
In order prevent a concentration of ownership of the Company's stock that
would cause the Company to fail the 5/50 Rule or the 100 Shareholder Rule, the
Company amended its Certificate of Incorporation on April 30, 1998 to provide
that no holder (with certain exceptions) is permitted to own, either actually
or constructively under the applicable attribution rules of the Code, more
than 9.0% of the Common Stock or 9.9% of any class of preferred stock issued
by the Company. Certain persons who owned stock in the Company in excess of
the foregoing limits on April 30, 1998 (the date that the Certificate of
Incorporation was amended) are not subject to the general ownership limits
applicable to other stockholders; rather, they generally are permitted to own
up to the same percentage of the Company's outstanding stock that they owned
on April 30, 1998. No holder, however, is permitted to own, either actually or
constructively under the applicable attribution rules of the Code, any shares
of any class of the Company's stock if such ownership would cause more than
50% in value of the Company's outstanding stock to be owned by five or fewer
individuals or would result in the Company's stock being beneficially owned by
fewer than 100 persons (determined without reference to any rule of
attribution).
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To qualify as a REIT, a corporation may not have (as of the end of the
taxable year) any earnings and profits that were accumulated in periods before
it elected REIT status. The Company believes that it currently does not have,
and believes that it will not have as of December 31, 1999, any accumulated
earnings and profits that are attributable to periods during which the Company
was not a REIT.
Section 856(i) of the Code provides that a corporation that is a "qualified
REIT subsidiary" will not be treated as a separate corporation for federal
income tax purposes, and all assets, liabilities, and items of income,
deduction and credit of a qualified REIT subsidiary will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. A
"qualified subsidiary" is defined as any wholly owned corporate subsidiary of
a REIT. The Company does not currently have any qualified REIT subsidiaries.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. The Company directly owns a 98% general partnership interest in the
Operating Partnership and indirectly owns the remaining 2% limited partnership
interest in the Operating Partnership through two wholly owned limited
liability companies. Under the Check-the-Box Regulations, the two limited
liability companies, and therefore the Operating Partnership, are disregarded
as entities separate from the Company for federal income tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the income and asset
tests described below. If and when the Operating Partnership admits a partner
other than the Company, a qualified REIT subsidiary of the Company, or a
entity that is disregarded under the Check-the-Box Regulations as an entity
separate from the Company, the Company's proportionate share of the assets and
gross income of the Operating Partnership will be treated as the assets and
gross income of the Company for purposes of applying the requirements
described herein.
Income Tests
To qualify as a REIT, the Company must satisfy certain annual gross income
requirements. First, at least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist
of defined types of income derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" (defined below) and, in certain circumstances, interest) or
certain types of temporary investment income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property or temporary
investments, dividends, interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.
Substantially all of the Company's gross income is derived from leasing its
properties to Vencor under the Master Leases. Rents received or deemed
received by the Company under its leases (including the Master Leases) will
qualify as "rents from real property" in satisfying the gross income
requirements described above only if the Company's leases are respected as
"true" leases for federal income tax purposes and are not treated as service
contracts, joint ventures, or some other type of arrangement. The
determination of whether the Company's leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property) or the potential for economic gains (e.g.,
appreciation) with respect to the property. Based upon advice of counsel at
the time the Master Leases
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were negotiated, the Company believes that its leases should be treated as
"true" leases for federal income tax purposes. Investors should be aware,
however, that there are no controlling Treasury regulations, published
rulings, or judicial decisions involving leases with terms substantially the
same as the Company's leases that discuss whether such leases constitute true
leases for federal income tax purposes. If the leases are recharacterized as
service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Company receives from its tenants would not be
considered rent or would not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or the 95% gross income tests,
and, as a result, would lose its REIT status.
Assuming that the Company's leases are "true" leases for tax purposes, rents
received by the Company will qualify as "rents from real property" for
purposes of the REIT gross income tests only if several additional conditions
are satisfied. First, the amount of rent generally must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, amounts received from a tenant will not qualify
as "rents from real property" if the Company, or an owner of 10% or more of
the Company, directly or constructively is deemed to own 10% or more of the
ownership interests in the tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," the Company generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" who is adequately compensated and
from whom the Company derives no income. The "independent contractor"
requirement, however, does not apply to the extent that the services provided
by the Company are "usually or customarily rendered in connection with the
rental of space for occupancy only," which are services of a type that a tax-
exempt organization can provide to its tenants without causing its rental
income to be unrelated business taxable income ("UBTI"). In addition, the
"independent contractor" requirement does not apply to noncustomary services
provided by the Company, the annual value of which does not exceed 1% of the
gross income derived from the property with respect to which the services are
provided (the "1% de minimis exception"). For this purpose, such services may
not be valued at less than 150% of the Company's direct cost of providing the
services.
The Company has not, and does not anticipate that it will in the future, (i)
charge rent that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage or percentages
of receipts or sales consistent with the rule described above), (ii) derive
rent attributable to personal property leased in connection with real property
that exceeds 15% of the total rents, (iii) derive rent attributable to a
Related Party Tenant, or (iv) provide any noncustomary services to tenants
other than through qualifying independent contractors, except as permitted by
the 1% de minimis exception or to the extent that the amount of resulting
nonqualifying income would not cause the Company to fail to satisfy the 95%
and 75% gross income tests.
If rents received by the Company from Vencor under the Master Leases do not
represent fair market value rentals at the time of execution of the Master
Leases and the IRS determines that the Company and Vencor were under common
control at that time, the IRS may reallocate income between the Company and
Vencor. The reallocation could cause the Company or Vencor to become subject
to valuation penalties. The Company believes that the rent payments represent
fair market value rentals.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return and any
incorrect information on the schedules was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these
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relief provisions. Even if these relief provisions were to apply, a tax would
be imposed with respect to the excess net income.
Asset Tests
At the close of each quarter of its taxable year, the Company must satisfy
two tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets"
or, in cases where the Company raises new capital through stock or long-term
(at least five years) debt offerings, temporary investments in stock or debt
instruments during the one-year period following the Company's receipt of such
capital (the "75% asset test"). The term "real estate asset" includes
interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the
75% asset class, the value of any one issuer's debt and equity securities
owned by the Company (other than the Company's interest in any entity
classified as a partnership for federal income tax purposes, or the stock of a
qualified REIT subsidiary) may not exceed 5% of the value of the Company's
total assets (the "5% asset test"), and the Company may not own more than 10%
of any one issuer's outstanding voting securities (except for the Company's
ownership interest in an entity that is classified as a partnership for
federal income tax purposes or the stock of a qualified REIT subsidiary) (the
"10% voting securities test").
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to fail to qualify as a
REIT or to lose its REIT status if (i) it satisfied all of the asset tests at
the close of the preceding calendar quarter and (ii) the discrepancy between
the value of the Company's assets and the asset test requirements arose from
changes in the market values of its assets and was not wholly or partly caused
by an acquisition of nonqualifying assets. If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose. The Company intends
to maintain adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions as may be required to
comply with those tests.
Annual Distribution Requirements
In order to be taxed as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax on the undistributed amount at regular capital gains and ordinary
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year (other than long-term capital gain the Company elects to retain and treat
as having been distributed to stockholders), and (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. In addition, during its Recognition Period, if
the Company disposes of any assets subject to the Built-in Gain Rules, the
Company will be required, pursuant to guidance issued by the IRS, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized
on the disposition of the asset.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions
in computing REIT taxable income. Accordingly, the Company
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anticipates that it generally will have sufficient cash or liquid assets to
enable it to satisfy the 95% distribution requirement. It is possible,
however, that the Company, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement or to distribute
such greater amount as may be necessary to avoid income and excise taxation,
as a result of timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income
and deduction of such expenses in arriving at the Company's taxable income, or
as a result of nondeductible expenses such as principal amortization or
repayments, or capital expenditures in excess of noncash deductions. In the
event that such timing differences occur, the Company may find it necessary to
borrow funds or to issue equity securities (there being no assurance that it
will be able to do so) or, if possible, to pay taxable stock dividends in
order to meet the REIT distribution requirements. The Company's debt
facilities may restrict the Company's ability to incur additional indebtedness
under certain circumstances, thereby preventing the Company from borrowing
funds in order to make such distributions. In addition, the failure of Vencor
to make rental payments under the Master Leases would impair materially the
ability of the Company to make distributions. Consequently, there can be no
assurance that the Company will be able to make distributions at the required
distribution rate or any other rate.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay interest to the IRS based upon the amount of any
deduction taken for deficiency dividends.
Annual Record Keeping Requirements
In its first taxable year in which it qualifies as a REIT and thereafter,
the Company is required to maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding shares. The Company intends to comply with
these requirements. The Company will be subject to a penalty of $25,000
($50,000 for intentional violations) for any year in which it does not comply
with the rules.
Failure to Qualify
If the Company does not make an election to be taxed as a REIT because it
cannot meet the applicable requirements for REIT qualification, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
will not be deductible by the Company, nor will they be required to be made.
To the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate stockholders may be eligible for
the dividends received deduction. If the Company does not make an election to
be taxed as a REIT with respect to the current taxable year (1999), it will
not for that reason be prevented from making an election to be taxed as a REIT
with respect to any subsequent taxable year.
If the Company elects to be taxed as a REIT and that election is revoked or
terminated (e.g., due to a failure to meet the REIT qualification tests), the
Company and its stockholders generally would be subject to the same tax
consequences that are described in the preceding paragraph in the taxable year
in which the Company ceased to qualify as a REIT. In addition, the Company
would be prohibited from re-electing REIT status for the four taxable years
following the year during which the Company ceased to qualify as a REIT,
unless certain relief provisions of the Code applied. It is impossible to
predict whether the Company would be entitled to such statutory relief.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of the Company's
common stock (the "Common Stock") that for U.S. federal income tax purposes is
(i) a citizen or resident of the United States,
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(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United
States or (iv) any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such trust and (B) one
or more U.S. persons have the authority to control all substantial decisions
of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations.
Distributions that are designated as capital gain dividends will be taxed as a
capital gain (to the extent such distributions do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its shares. The tax rates applicable to such
capital gains are discussed below. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's shares, such distributions will be included in income as capital
gains assuming the shares are capital assets in the hands of the stockholder.
The tax rate applicable to such capital gain will depend on the stockholder's
holding period for the shares. In addition, any distribution declared by the
Company in October, November or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to its stockholders (including for
purposes of the 4% excise tax discussed above under "Requirements for
Qualification--Annual Distribution Requirements"). If the Company should make
such an election, the Company's stockholders would be required to include in
their income as long-term capital gain their proportionate share of the
Company's undistributed net capital gain, as designated by the Company. Each
such stockholder would be deemed to have paid its proportionate share of the
income tax imposed on the Company with respect to such undistributed net
capital gain, and this amount would be credited or refunded to the
stockholder. In addition, the tax basis of the stockholder's shares would be
increased by its proportionate share of undistributed net capital gains
included in its income, less its proportionate share of the income tax imposed
on the Company with respect to such gains.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the stockholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of the shares (or
distributions treated as such) will be treated as investment income only if
the stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify stockholders after the close of
the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital
and capital gain.
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be
treated as capital gain or loss. Lower marginal tax rates for individuals may
apply in the case of capital gains, depending on the holding period of the
shares that are sold. However, any loss upon a sale or exchange of shares by a
stockholder who has held such shares for six months or less (after
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applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Company required to be treated by
such stockholder as long-term capital gain. All or a portion of any loss
realized upon a taxable disposition of shares may be disallowed if other
shares are purchased within 30 days before or after the disposition.
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal individual income
tax rate applicable to ordinary income is 39.6%. Any capital gain generally
will be taxed to a non-corporate taxpayer at a maximum rate of 20% with
respect to capital assets held for more than one year. The tax rates
applicable to ordinary income apply to gain attributable to the sale or
exchange of capital assets held for one year or less. In the case of capital
gain attributable to the sale or exchange of certain real property held for
more than one year, an amount of such gain equal to the amount of all prior
depreciation deductions not otherwise required to be taxed as ordinary
depreciation recapture income will be taxed at a maximum rate of 25%. With
respect to distributions designated by a REIT as capital gain dividends
(including deemed distributions of retained capital gains), the REIT also may
designate (subject to certain limits) whether the dividend is taxable to non-
corporate stockholders as a 20% rate gain distribution or an unrecaptured
depreciation distribution taxed at a 25% rate.
The characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains
may be deducted against a non-corporate taxpayer's ordinary income only up to
a maximum annual amount of $3,000. Non-corporate taxpayers may carry forward
their unused capital losses. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Treatment of Tax-Exempt Stockholders
Tax-exempt organizations, including qualified employee pension and profit
sharing trusts and individual retirement accounts, (collectively, "Exempt
Organizations") generally are exempt from federal income taxation. However,
they are subject to taxation on their UBTI. While many investments in real
estate generate UBTI, the IRS has issued a published ruling that dividend
distributions by a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on
that ruling, and subject to the exceptions discussed below, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition
of the Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17) and (20), respectively,
of Section 501(c) of the Code are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. In addition, in certain circumstances, a pension trust that owns more
than 10% of the Company's stock is required to treat a percentage of the
dividends from the Company as UBTI (the "UBTI Percentage"). The UBTI
Percentage is the gross income, less related direct expenses, derived by the
Company from an unrelated trade or business (determined as if the Company were
a pension trust) divided by the gross income, less related direct expenses, of
the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only
if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively own more than 50% of
the value of the Company's stock.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and
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no attempt will be made herein to provide more than a summary of such rules.
Non-U.S. stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to their
ownership of the Common Stock, including any reporting requirements.
For purposes of this discussion, the term "Non-U.S. Stockholder" does not
include any foreign stockholder whose investment in the Company's stock is
"effectively connected" with the conduct of a trade or business in the United
States. Such a foreign stockholder, in general, will be subject to United
States federal income tax with respect to its investment in the Company's
stock in the same manner as a U.S. Stockholder is taxed (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). In addition, a foreign corporation receiving
income that is treated as effectively connected with a U.S. trade or business
also may be subject to an additional 30% "branch profits tax," unless an
applicable tax treaty provides a lower rate or an exemption. Certain
certification requirements must be satisfied in order for effectively
connected income to be exempt from withholding.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gain dividends (or deemed
distributions of retained capital gains) will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Stockholder's shares, such distributions will
give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of its shares, as
described below.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Stockholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits
tax in the hands of a foreign corporate stockholder not entitled to treaty
relief or exemption.
Unless a reduced rate of withholding applies under an applicable tax treaty,
the Company generally will withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, 30% of all distributions out of current or
accumulated earnings and profits, subject to the application of FIRPTA
withholding rules discussed below. In addition, the Company is required to
withhold 10% of any distribution in excess of its current and accumulated
earnings and profits. Because the Company generally cannot determine at the
time a distribution is made whether or not it will be in excess of earnings
and profits, the Company intends to withhold 30% of the entire amount of any
distribution (other than distributions subject to the 35% withholding
discussed below). Generally, however, a Non-U.S. Stockholder will be entitled
to a refund from the IRS to the extent an amount is withheld from a
distribution that exceeds the amount of U.S. tax owed by such Non-U.S.
Stockholder.
Under FIRPTA, the Company is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as
a capital gain dividend. Thus, if the Company designates previously made
distributions as capital gain dividends, subsequent distributions (up to the
amount of such prior distributions) will be treated as capital gain dividends
for purposes of FIRPTA withholding.
Under Regulations that are currently in effect, dividends paid to an address
in a country outside the United States generally are presumed to be paid to a
resident of such country for purposes of determining the
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applicability of withholding discussed above and the applicability of a tax
treaty rate. Regulations issued in October 1997, however, provide that a Non-
U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate
must satisfy certain certification and other requirements. Such Regulations
generally will be effective for distributions made after December 31, 1999.
For so long as the Common Stock continues to be regularly traded on an
established securities market, the sale of such stock by any Non-U.S.
Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below)
generally will not be subject to United States federal income tax (unless the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for more than 182 days during the taxable year of the sale and
certain other conditions apply, in which case such gain will be subject to a
30% tax on a gross basis). A "Five Percent Non-U.S. Stockholder" is a Non-U.S.
Stockholder who, at some time during the five-year period preceding such sale
or disposition, beneficially owned (including under certain attribution rules)
more than 5% of the total fair market value of the Common Stock (as
outstanding from time to time) or owned shares of another class of stock of
the Company that represented value greater than 5% of the Common Stock
(measured at the time such shares were acquired).
In general, the sale or other taxable disposition of the Common Stock by a
Five Percent Non-U.S. Stockholder (as defined below) also will not be subject
to United States federal income tax if the Company is a "domestically
controlled REIT." A REIT is a "domestically controlled REIT" if, at all times
during the five-year period preceding the relevant testing date, less than 50%
in value of its shares is held directly or indirectly by Non-U.S. Stockholders
(taking into account those persons required to include the Company's dividends
in income for United States federal income tax purposes). Although the Company
believes that it currently qualifies as a "domestically controlled REIT,"
because the Common Stock is publicly traded, no assurance can be given that
the Company will qualify as a domestically controlled REIT at any time in the
future. If the Company does not constitute a domestically controlled REIT, a
Five Percent Non- U.S. Stockholder will be taxable in the same manner as a
U.S. Stockholder with respect to gain on the sale of the Common Stock (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals).
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. Stockholders and to the IRS the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide the Company
with its correct taxpayer identification number also may be subject to
penalties imposed by the IRS. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail
to certify their non-foreign status to the Company.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for an exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. Stockholder will be allowed as a credit against the U.S. Stockholder's
United States federal income tax liability and may entitle the U.S.
Stockholder to a refund, provided that the required information is furnished
to the IRS.
Backup withholding tax and information reporting generally will not apply to
distributions paid to Non-U.S. Stockholders outside the United States that are
treated as (i) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (ii) capital gain dividends or (iii) distributions
attributable to gain from the sale or exchange by the Company of U.S. real
property interests. As a general matter, backup withholding and information
reporting will not apply to a payment of the proceeds of a sale of the Common
Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of
the proceeds of a sale of the Common Stock by a foreign office of a broker
that (i) is a United
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States person, (ii) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, or (iii)
is a "controlled foreign corporation" for United States tax purposes, unless
the broker has documentary evidence in its records that the holder is a Non-
U.S. Stockholder and certain other conditions are satisfied, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of the Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a
Non- U.S. Stockholder or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund with the IRS.
The Treasury Department issued final Regulations in October 1997 concerning
the withholding of tax and information reporting for certain amounts paid to
non-resident alien individuals and foreign corporations. These new withholding
rules alter the current withholding regime, and generally will be effective
for distributions made after December 31, 1999. Stockholders should consult
their tax advisors concerning the impact, if any, of these new Regulations on
their ownership of shares of the Common Stock.
Other Tax Considerations
The Company and its stockholders may be subject to state and local tax in
states and localities in which they do business or own property. The tax
treatment of the Company and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of
state and local tax laws on their ownership of shares of the Common Stock.
Employees
As of December 31, 1998, the Company had seven full-time employees. The
Company considers its relationship with its employees to be good.
Insurance
The Company maintains, or causes its operators to maintain, appropriate
liability and casualty insurance on its assets and operations. Under the
Master Leases, Vencor is required to maintain, at its expense, certain
insurance coverages related to the properties under the Master Leases and
Vencor's operations at the related facilities. See "Relationship with Vencor--
Master Lease Agreements with Vencor." There can be no assurance that Vencor
will maintain such insurance and any failure by Vencor to do so could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
The Company believes that its insurance protection is adequate in amount and
coverage. There can be no assurance that in the future such insurance will be
available at a reasonable price or that the Company will be able to maintain
adequate levels of insurance coverage.
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RISK FACTORS
Going Concern
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. See "Business--Recent Developments," "--Government Regulation," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The inclusion of the explanatory paragraph regarding the ability
of the Company to continue as a going concern could have a material adverse
effect on the results of operations and financial condition of the Company and
on the ability of the Company to meet the terms of its credit agreements.
Dependence of the Company on Vencor
The Company leases substantially all its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to meet its rent obligations will determine
the Company's revenues and its ability to service its indebtedness and to make
distributions to its stockholders. In addition, any failure by Vencor to
conduct its operations effectively could have a material adverse effect on its
business reputation and on its ability to enlist or maintain patients in its
facilities. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Master Leases. Since the Company derives approximately 98.7% of its
revenue from Vencor and since the Master Leases are triple-net leases under
which Vencor is responsible for all insurance, taxes and maintenance and
repair expenses required in connection with the leased properties, the
inability of Vencor to satisfy its obligations under the Master Leases would
have a material adverse effect on the condition of the leased properties, as
well as on the results of operations and financial condition of the Company
and on the ability of the Company to meet the terms of its credit agreements,
and could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT. In addition, the credit standing of
the Company is affected by the general creditworthiness of Vencor.
Due to the Company's dependence on Vencor's rental payments as the primary
source of the Company's revenues, the Company may be negatively affected by
enforcing its rights under the Master Leases or by terminating a Master Lease.
If Vencor fails to comply with the terms of a Master Lease or to comply with
applicable healthcare regulations and, in either case, Vencor or its lenders
fail to cure such default within the specified cure period, the Company may
have to find another lessee/operator for the properties covered by one or all
of the Master Leases. While the Company is attempting to locate one or more
lessee/operators there could be a decrease or cessation of rental payments by
Vencor. There can be no assurance that the Company will be able to locate
another suitable lessee/operator or that if the Company is successful in
locating such an operator, that the rental payments from such new operator
would not be materially less than the existing rental payments. The ability of
the Company to locate another suitable lessee/operator may be materially
delayed or limited by various state licensing, receivership, CON or other
laws, as well as by Medicare and Medicaid change of ownership rules.
In addition, pursuant to the Reorganization, the Company assigned to Vencor
and Vencor assumed leases, and the rights, obligations and duties as a tenant
thereunder, to seven long-term acute care hospitals and 76 nursing centers
(the "Third Party Leases"), as well as certain third party guarantees (the
"Third Party Guarantees"). The rent obligation under the Third Party Leases
for the 1999 fiscal year is expected to be approximately $39.2 million. See
Note 8 to Consolidated Financial Statements. In connection with these
assignments, the Company remained primarily liable for substantially all of
the obligations under the Third Party Leases and the Third Party Guarantees.
Vencor has indemnified the Company for any losses, claims, liabilities and the
like which may be incurred by or asserted against the Company in connection
with the Third Party Leases and the Third Party Guarantees. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the arrangements or
the indemnification. If Vencor
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is unable to satisfy such obligations, the Company will be obligated to
satisfy the Third Party Lease obligations and the Third Party Guarantees. The
Company's performance of these obligations could have a material adverse
effect on the results of operations and financial condition of the Company and
on the ability of the Company to meet the terms of its credit agreements and
could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT.
In connection with the Reorganization, Vencor agreed to assume and to
indemnify the Company for any and all liabilities that may arise out of the
ownership or operation of the healthcare operations either before or after the
date of the Reorganization. The indemnification provided by Vencor also covers
losses, including costs and expenses, which may arise from any future claims
asserted against the Company based on these healthcare operations. In
addition, at the time of 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 arise out of the
ownership and operation of the healthcare operations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the Reorganization. If Vencor is unable to satisfy the obligations under these
arrangements, then the Company will be liable for the payment and performance
of such obligations and will have to assume the defense of such claims. The
Company's performance of these obligations and/or the assumption of the
defense of such claims could have a material adverse effect on the results of
operations and financial condition of the Company and on the ability of the
Company to meet the terms of its credit agreement and could prevent the
Company from paying dividends to its stockholders as required to maintain its
status as a REIT.
Vencor maintains insurance for certain professional liability claims and
losses through a wholly owned captive insurance company that insures the first
$2 million of claims and losses. Losses in excess of $2 million are insured
through unrelated commercial insurance carriers.
Lack of Operating History
In connection with the Reorganization, the Company ceased being one of the
largest providers of long-term healthcare services and instead has limited its
activities to owning and acquiring real estate and real estate related assets.
With the exception of the Company's Chief Executive Officer, management has no
experience operating a REIT, and management has no experience in operating a
REIT in the healthcare industry. The Company has relied, and for the
foreseeable future will need to rely, on Vencor to generate sufficient cash
flow from its healthcare operations to enable Vencor to meet the rent
obligations under the Master Leases.
Substantial Leverage and Ability to Raise Capital
The Company is highly leveraged and a substantial portion of its cash flow
from operations is dedicated to the payment of principal and interest on
indebtedness. The Company is substantially dependent upon lease payments from
Vencor to meet its interest expense and principal repayment obligations under
its current debt facilities. These obligations will need to be met before
distributions for any period are made to holders of Common Stock, except that
the Company is permitted under its credit agreements to make such
distributions as are necessary to maintain its status as a REIT. In addition,
the credit standing of the Company will be affected by the general
creditworthiness of Vencor.
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The Company has $275 million of indebtedness that matures on October 30,
1999. The Company will have to refinance the indebtedness, extend the maturity
date of such indebtedness, raise equity, liquidate assets to pay such
indebtedness, or implement a plan which includes a combination of the
foregoing. There can be no assurance that the Company will be able to
successfully implement such alternatives and any failure to do so could lead
to an event of default under the Company's indebtedness.
Adverse economic conditions could cause the terms on which the Company can
obtain additional borrowings to become unfavorable. In such circumstances, if
the Company is in need of capital to repay indebtedness as it matures or to
otherwise finance indebtedness, the Company may be required to liquidate one
or more investments in properties at times that may not permit realization of
the maximum return on such investments, and which could result in adverse tax
consequences to the Company. In addition, certain healthcare regulations may
constrain the ability of the Company to sell assets. There can be no
assurances that the Company
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will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets.
Lack of Control Over Properties
The Company is dependent on the ability of Vencor, as triple-net lessee
under the Master Leases, and its other lessees to manage and maintain the
leased properties. The Company may be unable to take action if it believes
Vencor is operating one of the leased properties inefficiently or in a manner
adverse to the Company's interests, unless a specific material default exists
under a Master Lease. In the case of such a default, the Company's redress may
be limited to terminating the applicable Master Lease and seeking to recover
damages from Vencor. See "--Relationship with Vencor--Master Lease
Agreements." In such event, the Company would have to locate a suitable
lessee/operator for the property under the applicable Master Lease. There can
be no assurance that the Company will be able to locate another suitable
lessee/operator or that if the Company is successful in locating such an
operator, that the rental payments from such new operator would not be
materially less than the existing rental payments. In addition, the ability of
the Company to locate another suitable lessee/operator may be materially
delayed or limited by various state licensing, receivorship, CON or other
laws, as well as Medicare and Medicaid change of ownership rules.
Conflicts of Interest
While the Company believes that the terms of the Master Leases and the other
agreements with Vencor reflect terms that would have been obtained in arm's
length negotiations, the Company and Vencor may be subject to conflicts of
interest and loyalties when enforcing such terms. Because of the pre-existing
and continuing ownership interests and interrelationships between certain
members of management and directors of the Company and Vencor, there may be
conflicts of interest and loyalties with respect to the ongoing operations of
the Company and Vencor. W. Bruce Lunsford is currently Chairman of the Board
of the Company and was Chief Executive Officer of the Company until December
1998. Mr. Lunsford was also Chairman of the Board and Chief Executive Officer
of Vencor through January 1999 and President of Vencor through November 1998.
Currently, however, there are no common members of management or common
directors. In the event that the Master Leases or other agreements are not
enforced on an arm's length basis, the Company's results of operations could
be affected adversely. There can be no assurance that the enforcement of the
terms of such agreements will occur in a manner similar to that which would
occur between unrelated parties, although the Independent Committee of the
Company's Board of Directors has taken and will continue to take steps to
ensure arm's length enforcement by the Company of all agreements with Vencor.
Healthcare Industry Risks
Dependence on Healthcare Industry
Because all of the properties are used as healthcare facilities, the Company
is directly affected by the risks associated with the healthcare industry. The
ability of Vencor and the Company's other tenants and operators to generate
profits and pay rent under their leases may be adversely affected by such
risks. See "Business-- Governmental Regulation."
Vencor and the other lessees derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and
Medicaid programs. Such programs are highly regulated and subject to frequent
and substantial changes. The Budget Act is intended to reduce the increase in
Medicare payments by $115 billion and reduce the increase in Medicaid payments
by $13 billion between 1998 through 2002 and made extensive changes in the
Medicare and Medicaid programs. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk
of operating a healthcare facility. Efforts to impose greater discounts and
more stringent cost controls by private payors are expected to continue. There
can be no assurances that adequate reimbursement levels will continue to be
available for services to be provided by Vencor and other lessees which
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are currently being reimbursed by Medicare, Medicaid or private payors.
Significant limits on the scope of services reimbursed and on reimbursement
rates and fees could have a material adverse effect on the liquidity,
financial condition and results of operations of Vencor and other lessees.
Extensive Regulation
The healthcare industry is subject to extensive federal, state and local
laws and regulations including, but not limited to, laws and regulations
relating to licensure, conduct of operations, ownership of facilities,
addition of facilities, services, prices for services and billing for
services. These laws authorize periodic inspections and investigations, and
deficiencies which if not corrected can result in sanctions which include loss
of licensure to operate and loss of rights to participate in the Medicare and
Medicaid programs. Regulatory agencies have substantial powers to affect the
actions of operators of the Company's properties if the agencies believe that
there is an imminent threat to patient welfare, and in some state these powers
can include assumption of interim control over facilities through
receiverships. The Anti-kickback Laws prohibit certain business practices and
relationships that might affect the provision and cost of healthcare services
reimbursable under Medicare and Medicaid, including the payment or receipt of
remuneration for the referral of patients whose care will be paid by Medicare
or other governmental programs. Sanctions for violating the Anti-kickback Laws
include criminal penalties and civil sanctions, including fines and possible
exclusion from government programs such as the Medicare and Medicaid programs.
In the ordinary course of its business, the Company's operators are subject
regularly to inquiries, investigations and audits by federal and state
agencies that oversee these laws and regulations. See "Business--Governmental
Regulation."
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the operators' results of operations, financial condition, and their
ability to make rental payments to the Company.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable healthcare
regulations and, in either case, such,operators or their lendors fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by various state licensing,
receivership, CON or other laws, as well as by Medicare and Medicaid change-
of-ownership rules. Such delays and limitations could have a material adverse
effect on the Company's ability to collect rent, to obtain possession of
leased properties, or otherwise to exercise remedies for tenant default. In
addition, the Company may also incur substantial additional expenses in
connection with any such licensing, receivership or change-of-ownership
proceedings.
Healthcare Reform
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contains extensive changes to the Medicare
and Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
will be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from the last
five years. Virtually all spending reductions will come from healthcare
operators and changes in program components.
The Budget Act reduced payments made to the hospitals operated by Vencor by
reducing incentive payments pursuant to TEFRA, allowable costs for capital
expenditures and bad debts, and payments for services to patients transferred
from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1, 1998. The Budget Act also established
Nursing Center PPS for cost reporting periods beginning on or after July 1,
1998. During a nursing center's first three cost reporting periods under
Nursing Center PPS, the per diem rates will be based on a blend of facility-
specific costs and federal costs. Thereafter, the per diem rates will be
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based solely on federal costs. The rates for such services were published by
HCFA in the Federal Register on May 12, 1998. The payments received under
Nursing Center PPS cover all services for Medicare patients, including all
ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered drugs. The payments
that Vencor is receiving under Nursing Center PPS are substantially less than
before enactment of the Budget Act. Vencor has been subject to Nursing Center
PPS since July 1, 1998.
The Budget Act established the National Bipartisan Commission on the Future
of Medicare, which held its first meeting on March 6, 1998, and charged it
with reviewing and analyzing financial conditions of Medicare, identifying
problems that threaten the financial integrity of the Medicare Trust Fund, and
making recommendations to address the program's long-term financing
challenges. This Commission recently concluded its deliberations without
making an official recommendation, but proposals considered by the commission
are now under independent consideration by the Congress. The Budget Act also
afforded states more flexibility in administering their Medicaid plans,
including the ability to shift most Medicaid enrollees into managed care plans
without first obtaining a federal waiver. Accordingly, the Medicare and
Medicaid programs, including payment levels and methods, are in a state of
change and are less predictable than before enactment of the Budget Act.
There can be no assurance that the Budget Act, future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs will not have a material adverse effect on the liquidity,
financial condition or results of operations of the Company's operators which
could have a material adverse effect on their ability to make rental payments
to the Company.
Implementation of Original Business Strategy
At the time of the Reorganization, the business strategy of the Company was
to diversify itself from its Vencor tenant concentration. However, current
conditions have impeded this strategy. If and when Vencor has stabilized its
financial condition and the Company has resolved its short-term debt
maturities, the Company intends to re-implement its original business
strategy. Accordingly, if the Company does begin to pursue acquisitions or
development of additional healthcare or other properties, it may encounter
certain risks and/or financing constraints. Acquisitions entail general
investment risk associated with any real estate investments, including risks
that investments will fail to perform in accordance with expectations, the
estimates of the cost of improvements necessary for acquired properties will
prove inaccurate, and the inability of the lessee/operator to meet performance
expectations. The Company does not presently contemplate any development
projects, although if the Company were to pursue new development projects,
such projects would be subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Company must distribute 95% of its net taxable income in order to
maintain its qualification as a REIT may limit the Company's ability to rely
upon rental payments from its properties or subsequently acquired properties
to finance acquisitions or new developments. As a result, if debt or equity
financing is not available on acceptable terms, further acquisitions or
development activities might be curtailed or cash available for distribution
would be affected adversely.
The Company competes for investment opportunities with entities that have
substantially greater financial resources than the Company. The Company's
ability to compete successfully for such opportunities is affected by many
factors, including the cost to the Company of obtaining debt and equity
capital at rates comparable to or better than its competitors. Competition
generally may reduce the number of suitable investment opportunities available
to the Company and increase the bargaining power of property owners seeking to
sell, thereby impeding the implementation of the Company's business strategy.
Risks Associated with REIT Status
Failure to Qualify
If the Company does not make an election to be taxed as a REIT because it
cannot meet the applicable requirements for REIT qualification, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
will not be deductible by the Company, nor will they be required to be made.
To the extent of current and accumulated
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earnings and profits, all distributions to stockholders will be taxable as
ordinary income, and, subject to certain limitations in the Code, corporate
stockholders may be eligible for the dividends received deduction. If the
Company does not make an election to be taxed as a REIT with respect to the
current taxable year (1999), it will not for that reason be prevented from
making an election to be taxed as a REIT with respect to any subsequent
taxable year.
If the Company elects to be taxed as a REIT and that election is revoked or
terminated (e.g., due to a failure to meet the REIT qualification tests), the
Company and its stockholders generally would be subject to the same tax
consequences that are described in the preceding paragraph in the taxable year
in which the Company ceased to qualify as a REIT. In addition, the Company
would be prohibited from re-electing REIT status for the four taxable years
following the year during which the Company ceased to qualify as a REIT,
unless certain relief provisions of the Code applied. It is impossible to
predict whether the Company would be entitled to such statutory relief.
Inability to Maintain Required Distributions
The Company is required to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise
tax. See "Business--Federal Income Tax Considerations--Annual Distribution
Requirements." The Company's funds from operations will be generated primarily
by rental income from the Master Leases. Differences in timing between taxable
income and cash flow could require the Company to borrow funds on a short-term
basis to meet the 95% distribution requirement. The Company's debt facilities
may restrict the ability of the Company to incur additional indebtedness under
certain circumstances, thereby preventing the Company from borrowing funds in
order to make such distributions. In addition, the failure of Vencor to make
rental payments under the Master Leases would impair materially the ability of
the Company to make distributions. Consequently, there can be no assurance
that the Company will be able to make distributions at the required
distribution rate or any other rate.
Potential Liabilities Due to Fraudulent Transfer Considerations and Legal
Dividend Requirements
The Reorganization and the simultaneous distribution of the Vencor common
stock to the Ventas 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, if a court
in a lawsuit by an unpaid creditor or a representative of creditors (such as a
trustee or debtor-in-possession in bankruptcy of the Company or any of its
respective subsidiaries) were to determine that, as of the Reorganization, the
Company did not receive fair consideration or reasonably equivalent value for
distributing the stock distributed in the Distribution and, at the time of the
Distribution, the Company or any of its subsidiaries (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, then such court could order the holders
of the stock distributed in the Distribution to return the value of the stock
and any dividends paid thereon, bar future dividend and redemption payments on
the stock, and invalidate, in whole or in part, the Distribution as a
fraudulent conveyance.
In addition, the Distribution is subject to review under state corporate
distribution and dividend statutes. Under Delaware law, a corporation may not
pay a dividend to its stockholders if (i) the net assets of the corporation do
not exceed its capital, unless the amount proposed to be paid as a dividend is
less than the corporation's net profits for the current and/or preceding
fiscal year in which the dividend is to be paid, or (ii) the capital of the
corporation is less than the aggregate amount allocable to all classes of its
preferred stock.
The Company believes that (i) the Company and each of its subsidiaries were
solvent (in accordance with the foregoing definitions) at the time of
Distribution, were able to repay their debts as they matured following the
Reorganization and the Distribution and had sufficient capital to carry on
their respective businesses and (ii) the Distribution was made entirely in
compliance with Delaware Law.
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There is no certainty, however, that a court would reach the same conclusions
in determining whether the Company was insolvent at the time of, or after
giving effect to, the Reorganization and the Distribution or whether lawful
funds were available for the Distribution.
The agreement between the Company and Vencor pursuant to which the
Reorganization was effected (the "Reorganization Agreement") and certain of
the ancillary agreements to the Reorganization Agreement provide for the
allocation, immediately prior to the Distribution, of certain debt of the
Company. Further, pursuant to the Reorganization Agreement, from and after the
date of the Reorganization and the Distribution, each of the Company and
Vencor is responsible for the debts, liabilities and other obligations related
to the businesses which it owns and operates following the consummation of the
Reorganization and the Distribution. It is possible that a court would
disregard the allocation agreed to among the parties, and require the Company
or Vencor to assume responsibility for obligations allocated to the other,
particularly if the other were to refuse or to be unable to pay or perform the
subject allocated obligations.
Unasserted Claims
During the Company's discussions with Vencor, Vencor has asserted various
potential claims against the Company arising out of the Reorganization. The
Company intends to vigorously defend these claims if they are asserted in a
legal or mediation proceeding. If these claims were to prevail, it could have
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreement and could prevent the Company from paying dividends to its
stockholders required to maintain its status as a REIT.
Effects of Bankruptcy Proceedings
The Company's ability to manage its assets and operations is subject to
state laws that limit creditors' rights and remedies available to real
property owners to collect delinquent rents, and with respect to tenants of
the Company who are subject to a bankruptcy proceeding, to federal bankruptcy
laws. If a tenant files for bankruptcy protection, the tenant, including
without limitation, Vencor, will have an obligation to pay rent to the Company
as landlord during the pendancy of the proceeding. The tenant will also have
the right to assume or reject any real property lease to which the tenant is a
party. If the tenant assumes a real property lease, it must do so pursuant to
the original contract terms and it must cure all pre-petition and all post-
petition defaults under the lease. If the tenant rejects a real property
lease, the Company may lease the property to another tenant. If a tenant
becomes insolvent or files for bankruptcy protection, there can be no
assurances that the Company will be able to timely recover the premises from
the tenant or from a trustee or debtor-in-possession in any bankruptcy
proceeding relating to that tenant. There can also be no assurances that the
Company will receive rent in the proceeding equal to the amount set forth in
the leases or sufficient to cover the Company's expenses with respect to the
premises. If a tenant becomes subject to bankruptcy protection, the U.S.
Bankruptcy Code will apply, which may restrict the amount and recoverability
of the Company's claims against the tenant. These proceedings could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
If Vencor were to become a debtor in a bankruptcy case commenced under the
U.S. Bankruptcy Code, then Vencor as a debtor in possession or any trustee
appointed for it could seek to avoid transfers made and obligations incurred
as part of the Reorganization. Under fraudulent transfer laws, such transfers
and obligations could be avoided if they were made or incurred with the actual
intent to delay, hinder or defraud creditors. They also could be avoided if,
as of the Reorganization, Vencor did not receive fair consideration or
reasonably equivalent value in exchange for the transfers and obligations made
and incurred by it and, at the time of the Reorganization, Vencor (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.
32
<PAGE>
The Company believes that Vencor was solvent (in accordance with the
foregoing definitions) at the time of Reorganization, was able to repay its
debts as they matured following the Reorganization and had sufficient capital
to carry on its business. Moreover, the Company at the time of the
Reorganization received third party opinions as to Vencor's solvency and the
adequacy of Vencor's capitalization. There is no certainty, however, that a
court would reach the same conclusions in determining whether Vencor was
insolvent or adequately capitalized at the time of, or after giving effect to,
the Reorganization.
Item 2. Properties
The Company believes that it has a high quality portfolio of healthcare
facilities, diversified in terms of geography and healthcare services provided
at such facilities. The Company believes that the geographic diversity of the
leased properties makes the portfolio less susceptible to adverse changes in
state regulation and regional economic downturns. The long-term acute care
hospitals owned by the Company primarily provide long-term acute care to
medically complex, chronically ill patients, covering approximately 4,194 beds
in 45 hospitals. The nursing centers owned by the Company are leading
providers of rehabilitation services, including physical, occupational and
speech therapies, and care for patients with Alzheimer's disease, covering
approximately 28,492 beds in 219 nursing centers. The personal care facilities
owned by the Company provide services including supporting living services,
neurorehabilitation, neurobehavioral management and vocational programs,
covering approximately 136 beds in eight centers.
32--1
<PAGE>
The following table sets forth certain information for each hospital owned by
the Company:
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
ARIZONA: $ 2,814,000
Vencor Hospital--Phoenix..................... 58
Vencor Hospital--Tucson...................... 51
CALIFORNIA: $11,187,000
THC, Orange County........................... 48
Vencor Hospital--Ontario..................... 91
Vencor Hospital--San Leandro................. 99
Vencor Hospital--Orange County............... 99
Vencor Hospital--San Diego................... 70
Recovery Inn of Menlo Park................... 16
COLORADO: $ 2,360,000
Vencor Hospital--Denver...................... 68
FLORIDA: $13,458,000
Vencor Hospital--Central Tampa............... 102
Vencor Hospital--Coral Gables................ 53
Vencor Hospital--Ft. Lauderdale.............. 64
Vencor Hospital--Hollywood................... 124
Vencor Hospital--St. Petersburg.............. 60
Vencor Hospital--North Florida............... 60
ILLINOIS: $11,921,000
Vencor Hospital--Chicago North............... 205
Vencor Hospital--Sycamore.................... 77
Vencor Hospital--Northlake................... 94
Vencor Hospital--Lake Shore.................. 103
INDIANA: $ 3,392,000
Vencor Hospital--Indianapolis................ 59
Vencor Hospital--LaGrange.................... 62
KENTUCKY: $ 4,189,000
Vencor Hospital--Louisville.................. 374
LOUISIANA: $ 500,000
Vencor Hospital--New Orleans................. 168
MASSACHUSETTS: $ 2,912,000
Vencor Hospital--Boston...................... 36
Vencor Hospital--Boston Northshore........... 50
MICHIGAN: $ 2,556,000
Vencor Hospital--Metro Detroit............... 240
Vencor Hospital--Detroit..................... 160
MINNESOTA: $ 800,000
Vencor Hospital--Minneapolis................. 111
MISSOURI: $ 5,212,000
Vencor Hospital--Kansas City................. 167
Vencor Hospital--St. Louis................... 60
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Total Licensed
Annual Rent Beds by
Facility and Location by State(1) Facility
- - --------------------- ----------- --------
<S> <C> <C>
NEVADA: $ 500,000
THC--Las Vegas Hospital.................................... 52
NEW MEXICO: $ 600,000
Vencor Hospital--Albuquerque(2)............................ 61
NORTH CAROLINA: $ 6,147,000
Vencor Hospital--Greensboro................................ 124
OKLAHOMA: $ 1,492,000
Vencor Hospital--Oklahoma City............................. 59
PENNSYLVANIA: $ 3,508,000
Vencor Hospital--Philadelphia.............................. 52
Vencor Hospital--Pittsburgh................................ 63
TENNESSEE: $ 1,602,000
Vencor Hospital--Chattanooga............................... 49
TEXAS:..................................................... $10,454,000
Vencor Hospital--Ft. Worth Southwest....................... 80
Vencor Hospital--Ft. Worth West............................ 67
Vencor Hospital--Houston(2)................................ 94
Vencor Hospital--Houston Northwest......................... 84
Vencor Hospital--Mansfield................................. 55
Vencor Hospital--San Antonio............................... 59
VIRGINIA:.................................................. $ 3,802,000
Vencor Hospital--Arlington................................. 206
WISCONSIN:................................................. $ 834,000
Vencor Hospital--Mt. Carmel................................ 60
----------- -----
TOTAL...................................................... $90,240,000 4,194
=========== =====
</TABLE>
- - --------
(1) Based on contract rental amounts as of March 1, 1999
(2) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of ground lease, improvements revert to the
landlord.
The following table sets forth certain information for each nursing center
that is owned or leased by the Company:
<TABLE>
<CAPTION>
Total
Annual Licensed
Rent by Beds by
Facility and Location State(1) Facility
- - --------------------- ---------- --------
<S> <C> <C>
ALABAMA:.................................................. $2,507,000
Rehabilitation & Healthcare Center of Huntsville--
Huntsville............................................... 159
Rehabilitation & Healthcare Center of Birmingham--
Birmingham(2)............................................ 114
Rehabilitation & Healthcare Center of Mobile--Mobile(2)... 174
ARIZONA:.................................................. $2,624,000
Valley Healthcare & Rehabilitation Center--Tucson......... 147
Desert Life Rehabilitation & Care Center--Tucson.......... 240
Sonoran Rehabilitation & Care Center--Phoenix............. 100
Villa Campana Healthcare Center--Tucson................... 120
Kachina Point Health Care & Rehabilitation--Sedona........ 120
Hacienda Rehabilitation and Care Center--Sierra Vista(3).. 100
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
CALIFORNIA:............................. $5,389,000
Nob Hill Healthcare Center--San
Francisco.............................. 180
Canyonwood Nursing & Rehabilitation
Center--Redding........................ 115
Californian Care Center--Bakersfield.... 160
Magnolia Gardens Care Center--
Burlingame............................. 84
Lawton Healthcare Center--San
Francisco.............................. 75
Valley Gardens Healthcare &
Rehabilitation--Stockton............... 120
Alta Vista Healthcare Center--
Riverside.............................. 99
Maywood Acres Healthcare Center--
Oxnard................................. 98
La Veta Healthcare Center--Orange(2).... 112
Bay View Nursing & Rehabilitation
Center--Alameda........................ 180
Village Square Nursing & Rehabilitation
Center--San Marcos..................... 120
COLORADO: $4,910,000
Cherry Hills Health Care Center--
Englewood.............................. 95
Aurora Care Center--Aurora.............. 120
Castle Garden Care Center--Northglenn... 180
Brighton Care Center--Brighton.......... 120
CONNECTICUT: $4,625,000
Andrew House Healthcare--New Britain.... 90
Camelot Nursing & Rehabilitation
Center--New London..................... 66
Hamilton Rehabilitation & Healthcare
Center--Norwich........................ 160
Windsor Rehabilitation & Healthcare
Center--Windsor........................ 120
Nutmeg Pavilion Healthcare--New London.. 140
Parkway Pavilion Healthcare--Enfield.... 140
Courtland Gardens Health Center, Inc.--
Stamford............................... 180
Homestead Health Center--Stamford....... 87
FLORIDA: $8,400,000
Bay Pointe Nursing Pavilion--St.
Petersburg............................. 120
East Manor Medical Care Center--
Sarasota............................... 169
Healthcare & Rehabilitation Center of
Sanford--Sanford....................... 114
Titusville Rehabilitation & Nursing
Center--Titusville..................... 157
Colonial Oaks Rehabilitation Center-Ft.
Myers--Ft. Myers....................... 120
Carrollwood Care Center--Tampa.......... 120
Evergreen Woods Healthcare &
Rehabilitation--Springhill............. 120
Rehabilitation & Healthcare Center of
Tampa--Tampa........................... 174
Rehabilitation & Healthcare Center of
Cape Coral--Cape Coral................. 120
Casa Mora Rehabilitation & Extended
Care--Bradenton........................ 240
North Broward Rehabilitation & Nursing
Center--Pompano Beach.................. 194
Highland Pines Rehabilitation Center--
Clearwater............................. 120
Pompano Rehabilitation & Nursing
Center--Pompano Beach.................. 127
Abbey Rehabilitation & Nursing Center--
St. Petersburg......................... 152
Windsor Woods Convalescent Center--
Hudson................................. 103
GEORGIA: $2,597,000
Savannah Rehabilitation & Nursing
Center--Savannah....................... 120
Specialty Care of Marietta--Marietta.... 146
Lafayette Nursing & Rehabilitation
Center--Fayetteville................... 179
Savannah Specialty Care Center--
Savannah............................... 104
Tucker Nursing Center--Tucker........... 148
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
IDAHO: $ 4,127,000
Cascade Care Center--Caldwell.............. 112
Emmett Rehabilitation and Healthcare--
Emmett.................................... 95
Lewiston Rehabilitation and Care Center--
Lewiston.................................. 96
Nampa Care Center--Nampa................... 151
Weiser Rehabilitation and Care Center--
Weiser.................................... 89
Moscow Care Center--Moscow................. 94
Mountain Valley Care and Rehabilitation--
Kellogg................................... 68
Hillcrest Rehabilitation and Care Center--
Boise..................................... 123
INDIANA: $11,879,489
Rolling Hills Health Care Center--New
Albany.................................... 115
Royal Oaks Healthcare & Rehabilitation
Center--Terre Haute....................... 230
Southwood Health & Rehabilitation Center--
Terre Haute............................... 149
Valley View Health Care Center--Elkhart.... 140
Wildwood Healthcare Center--Indianapolis... 173
Meadowvale Healthcare & Rehabilitation
Center--Bluffton.......................... 120
Columbia Healthcare Facility--Evansville... 186
Bremen Health Care Center--Bremen.......... 97
Windsor Estates Health & Rehabilitation
Center--Kokomo............................ 145
Muncie Health Care & Rehabilitation--
Muncie.................................... 205
Parkwood Health Care Center--Lebanon....... 153
Westview Nursing & Rehabilitation Center--
Bedford................................... 149
Columbus Health & Rehabilitation Center--
Columbus.................................. 235
Wedgewood Healthcare Center--Clarksville... 124
Vencor Corydon--Corydon.................... 80
KENTUCKY: $ 7,247,000
Rosewood Health Care Center--Bowling
Green..................................... 186
Oakview Nursing & Rehabilitation Center--
Calvert City.............................. 116
Cedars of Lebanon Nursing Center--Lebanon.. 94
Winchester Centre for
Health/Rehabilitation--Winchester......... 192
Riverside Manor Health Care--Calhoun....... 84
Maple Manor Healthcare Center--Greenville.. 101
Danville Centre for Health &
Rehabilitation--Danville.................. 106
Lexington Centre for Health &
Rehabilitation--Lexington................. 180
North Centre for Health & Rehabilitation--
Louisville................................ 120
Hillcrest Health Care Center--Owensboro.... 156
Woodland Terrace Health Care Facility--
Elizabethtown............................. 118
Harrodsburg Health Care Center--
Harrodsburg............................... 112
MAINE: $ 4,121,000
Augusta Rehabilitation Center--Augusta..... 78
Eastside Rehabilitation and Living Center--
Bangor.................................... 78
Winship Green Nursing Center--Bath......... 72
Brewer Rehabilitation & Living Center--
Brewer.................................... 114
Kennebunk Nursing Center--Kennebunk........ 80
Norway Rehabilitation & Living Center--
Norway.................................... 73
Shore Village Rehabilitation & Nursing
Center--Rockland.......................... 61
Westgate Manor--Bangor..................... 118
Brentwood Rehabilitation & Nursing Center--
Yarmouth.................................. 83
Fieldcrest Manor Nursing Center--
Waldoboro................................. 70
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
MASSACHUSETTS: $15,609,000
Laurel Ridge Rehabilitation & Nursing
Center--Jamaica Plain..................... 120
Blue Hills Alzheimer's Care Center--
Stoughton................................. 101
Brigham Manor Nursing & Rehabilitation
Center--Newburyport....................... 64
Presentation Nursing & Rehabilitation
Center--Brighton.......................... 122
Country Manor Rehabilitation & Nursing
Center--Newburyport....................... 123
Crawford Skilled Nursing & Rehabilitation
Center--Fall River........................ 124
Hallmark Nursing & Rehabilitation Center--
New Bedford............................... 124
Sachem Nursing & Rehabilitation Center--
East Bridgewater.......................... 123
Hammersmith House Nursing Care Center--
Saugus.................................... 88
Oakwood Rehabilitation & Nursing Center--
Webster................................... 81
Timberlyn Heights Nursing & Alzheimer's
Center Great--Barrington.................. 78
Star of David Nursing &
Rehabilitation/Alzheimer's Center--West
Roxbury................................... 149
Brittany Healthcare Center--Natick......... 126
Briarwood Health Care Nursing Center--
Needham................................... 120
Westridge Healthcare Center--Marlborough... 196
Bolton Manor Nursing Center--Marlborough... 160
Hillcrest Nursing Center--Fitchburg........ 96
Country Gardens Skilled Nursing &
Rehabilitation--Swansea................... 86
Quincy Rehabilitation & Nursing Center--
Quincy.................................... 139
West Roxbury Manor--West Roxbury........... 76
Newton and Wellesley Alzheimer Center--
Wellesley................................. 110
Den-Mar Rehabilitation & Nursing Center--
Rockport(2)............................... 80
Eagle Pond Rehabilitation & Living Center--
South Denis............................... 142
Blueberry Hill Healthcare--Beverly......... 146
Colony House Nursing & Rehabilitation
Center--Abington.......................... 102
Embassy House Skilled Nursing &
Rehabilitation--Brockton.................. 123
Franklin Skilled Nursing & Rehabilitation
Center--Franklin.......................... 82
Great Barrington Rehabilitation & Nursing
Center--Great Barrington.................. 106
River Terrace--Lancaster................... 82
Walden Rehabilitation & Nursing Center--
Concord................................... 123
Harrington House Nursing & Rehabilitation
Center--Walpole........................... 90
MICHIGAN: $ 1,489,704
Birchwood Care Center--Marne............... 239
Grayling Health Care Center--Grayling...... 120
Clara Barton Terrace--Flint................ 149
Mary Avenue Care Center--Lansing........... 134
MINNESOTA: $ 250,000
Bearcreek Rehabilitation Center--
Rochester(7).............................. 159
MONTANA: $ 1,972,000
Park Place Health Care Center--Great
Falls..................................... 223
Parkview Acres Care & Rehabilitation
Center--Dillon............................ 108
NEBRASKA: $ 1,629,000
Homestead Healthcare and Rehabilitation
Center--Lincoln........................... 167
NEVADA: $ 1,042,188
Las Vegas Healthcare & Rehabilitation
Center--Las Vegas......................... 79
Torrey Pines Care Center--Las Vegas(4)..... 105(4)
Shadowmountain Convalescent Center--Las
Vegas..................................... 125
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
NEW HAMPSHIRE: $3,029,000
Dover Rehabilitation & Living Center--
Dover..................................... 112
Greenbriar Terrace Healthcare--Nashua(2)... 300
Hanover Terrace Healthcare--Hanover........ 100
NORTH CAROLINA: $9,277,000
Pettigrew Rehabilitation & Healthcare
Center--Durham............................ 107
LaSalle Healthcare Center--Durham.......... 126
Sunnybrook Alzheimer's & Healthcare
Specialist--Raleigh....................... 126
Blue Ridge Rehabilitation & Healthcare
Center--Asheville......................... 120
Raleigh Rehabilitation & Healthcare
Center--Raleigh........................... 174
Rose Manor Health Care Center--Durham...... 123
Cypress Pointe Rehabilitation & Healthcare
Center--Wilmington........................ 100
Winston-Salem Rehabilitation & Healthcare
Center--Winston-Salem..................... 230
Silas Creek Manor--Winston-Salem........... 99
Lincoln Nursing Center--Lincolnton......... 120
Guardian Care of Roanoke Rapids--Roanoke
Rapids.................................... 110
Guardian Care of Henderson--Henderson...... 80
Rehabilitation & Nursing Center of Monroe--
Monroe.................................... 174
Guardian Care of Kinston--Kinston.......... 114
Guardian Care of Zebulon--Zebulon.......... 60
Guardian Care of Rocky Mount--Rocky
Mount(1).................................. 118
Rehabilitation & Health Center of
Gastonia--Gastonia........................ 118
Chapel Hill Rehabilitation & Healthcare
Center--Chapel Hill....................... 120
Guardian Care of Elizabeth City--Elizabeth
City(5)................................... 120
OHIO: $8,552,836
Franklin Woods Health Care Center--
Columbus.................................. 100
Chillicothe Nursing & Rehabilitation
Center--Chillicothe....................... 101
Pickerington Nursing & Rehabilitation
Center--Pickerington...................... 100
Logan Health Care Center--Logan............ 159
Winchester Place Nursing & Rehabilitation
Center Canal--Winchester.................. 201
Minerva Park Nursing & Rehabilitation
Center--Columbus.......................... 101
West Lafayette Rehabilitation & Nursing
Center--West Lafayette.................... 96
Cambridge Healthcare & Rehabilitation
Center--Cambridge......................... 159
Coshocton Healthcare & Rehabilitation
Center--Coshocton......................... 110
Bridgepark Center for Rehabilitation &
Nursing Service--Akron.................... 174
Lebanon Country Manor--Lebanon............. 100
Marietta Convalescent Center--Marietta..... 150
Marigande--Sylvania Nursing Center--
Toledo.................................... 99
OREGON: $ 706,000
Sunnyside Care Center--Salem............... 124
Medford Rehabilitation and Healthcare
Center--Medford........................... 130
PENNSYLVANIA: $ 625,000
Wyomissing Nursing & Rehabilitation
Center--Reading........................... 103
RHODE ISLAND: $1,082,000
Health Havens Nursing & Rehabilitation
Center--E. Providence..................... 58
Oak Hill Nursing & Rehabilitation Center--
Pawtucket................................. 143
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
<S> <C> <C>
TENNESSEE: $ 3,616,322
Madison Healthcare & Rehabilitation
Center--Madison........................... 102
Cordova Rehabilitation & Nursing Center--
Cordova................................... 284
Primacy Healthcare & Rehabilitation
Center--Memphis........................... 120
Masters Health Care Center--Algood......... 175
TEXAS: $ 250,000
San Pedro Manor--San Antonio............... 150
UTAH: $ 3,173,000
Wasatch Care Center--Ogden................. 69
Crosslands Rehabilitation & Health Care
Center--Sandy............................. 120
St. George Care and Rehabilitation Center--
St. George................................ 159
Federal Heights Rehabilitation & Nursing
Center--Salt Lake City.................... 154
Wasatch Valley Rehabilitation--Salt Lake
City...................................... 118
VERMONT: $ 738,000
Birchwood Terrace Healthcare--
Burlington(2)............................. 160
VIRGINIA: $ 2,262,000
Nansemond Pointe Rehabilitation & Health
Care Center--Suffolk...................... 194
Harbour Pointe Medical & Rehabilitation
Centre--Norfolk........................... 172
River Pointe Rehabilitation & Healthcare
Center--Virginia Beach.................... 160
Bay Pointe Medical & Rehabilitation
Centre--Virginia Beach.................... 118
WASHINGTON: $ 5,658,000
Arden Rehabilitation & Healthcare Center--
Seattle................................... 100
Northwest Continuum Care Center--Longview.. 74
Bellingham Health Care & Rehabilitation
Services--Bellingham...................... 111
Rainier Vista Care Center--Puyallup........ 120
Lakewood Healthcare Center--Lakewood....... 80
Vencor of Vancouver Healthcare &
Rehabilitation--Vancouver................. 98
Heritage Health & Rehabilitation Center--
Vancouver................................. 53
Edmonds Rehabilitation & Healthcare
Center--Edmonds........................... 98
Queen Anne Healthcare--Seattle............. 171
WISCONSIN: $ 13,147,000
Eastview Medical & Rehabilitation Center--
Antigo.................................... 173
Colonial Manor Medical & Rehabilitation
Center--Wausau............................ 152
Colony Oaks Care Center--Appleton.......... 102
North Ridge Medical & Rehabilitation
Center--Manitowoc......................... 120
Vallhaven Care Center--Neenah.............. 133
Kennedy Park Medical & Rehabilitation
Center--Schofield......................... 164
Family Heritage Medical & Rehabilitation
Center--Wisconsin Rapid................... 140
Mt. Carmel Medical & Rehabilitation
Center--Burlington........................ 155
Mt. Carmel Healthcare & Rehabilitation
Center--Milwaukee......................... 657(5)
Sheridan Medical Complex--Kenosha.......... 106
Woodstock Healthcare & Rehabilitation
Center--Kenosha........................... 183
San Luis Medical and Rehabilitation
Center--Green Bay......................... 164
WYOMING: $ 2,236,000
Mountain Towers Healthcare &
Rehabilitation--Cheyenne.................. 170
South Central Wyoming Healthcare &
Rehabilitation--Rawlins................... 90
Wind River Healthcare & Rehabilitation
Center--Riverton.......................... 90
Sage View Care Center--Rock Springs........ 101
------------ ------
TOTAL...................................... $134,770,539 28,492
============ ======
</TABLE>
39
<PAGE>
- - --------
(1) Based on contract rental amounts as of March 1, 1999
(2) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of ground lease, improvements revert to the
landlord.
(3) Property is leased by the Company with an absolute option to purchase on
or after September 1, 1999. The consideration to be paid by the Company
will be in the form of the cancellation of a $2.7 million note made by the
landlord/owner payable to the order of the Company.
(4) In accordance with the terms of the Master Lease, the 15 acute care
hospital beds located in this facility were converted to nursing center
beds in 1998.
(5) Property is leased by the Company. The Company has exercised its option to
purchase the facility and is in a dispute with the present owner of the
property regarding the validity of the Company's option to purchase the
facility.
(6) In January 1999, the Company agreed to a reduction in the number of
licensed beds to 457 beds. The Company agreed to this reduction in
connection with a global settlement by Vencor of certain de-certification
actions by the state and federal regulatory authorities relative to this
facility. See "Legal Proceedings."
(7) The operator of this facility has failed to pay rent since February 1,
1999. In addition, the operator has indicated that it may file liquidation
proceedings under the federal bankruptcy laws.
The following table sets forth certain information for each personal care
facility owned by the Company:
<TABLE>
<CAPTION>
Total Annual Licensed
Facility and Location Rent by State(1) Beds by Facility
- - --------------------- ---------------- ----------------
<S> <C> <C>
TEXAS: $730,644
========
Tangram -- 8 sites............................ 136
===
</TABLE>
- - --------
(1) Based on contract rental amounts as of March 1, 1999
Item 3. Legal Proceedings
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
indemnification obligations or its obligations incurred in connection with the
Reorganization. In addition, the following descriptions are based on
information provided to the Company by Vencor. Because the Company and Vencor
have been unable to agree to date on acceptable terms for the sharing of
certain information, the Company has not been able to and has not conducted an
independent investigation to verify the facts surrounding these proceedings or
actions.
On October 21, 1998, Vencor was notified by HCFA Administrator in Chicago,
Illinois and the State of Wisconsin that the Medicare and Medicaid
certification for its 657-bed skilled nursing facility known as Mt. Carmel
Health & Rehabilitation Center in Milwaukee, Wisconsin (the "Facility") would
be terminated effective November 6, 1998. The State of Wisconsin Department of
Health and Family Services also informed Vencor that the Facility's license
would be terminated as of February 13, 1999. The Facility appealed that
termination. These actions resulted from the Facility's failure to attain
substantial compliance with federal and state requirements by an October 12,
1998 deadline. On November 6, 1998, Vencor filed an action against HCFA in
Federal District Court in Washington, D.C. and obtained an order enjoining
HCFA and its agents, including the State of Wisconsin, from terminating the
Facility's certification and from relocating any of the Facility's
40
<PAGE>
residents. That case was dismissed after Vencor reached agreements with state
and federal authorities to settle all fines and penalties and extend the
threatened certification termination date to January 29, 1999. Vencor has paid
state and federal fines totaling $500,000. On January 29, 1999, the Facility
was determined to be in substantial compliance with federal and state
requirements, which removed the threat of Medicare and Medicaid
decertification. On January 29, 1999, the Facility's license and operations
were transferred to Benedictine Health Dimensions ("BHD"), an unrelated
entity, under a management agreement with Vencor. There was no reduction in
the rent under the applicable Master Lease in connection with the transfer of
the licenses and operations to BHD, and Vencor remains primarily liable for
the payment of the full rental amount and the performance of all the tenant's
obligations under the applicable Master Lease. Vencor pays BHD a management
fee under the management agreement.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida (which was subsequently transferred
to Vencor in the Reorganization), which ordered the nursing center to cease
notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition,
HCFA imposed a fine of $113,000. Vencor, on behalf of the Company, appealed
both the AHCA and HCFA fines and has settled both appeals for a total of
$370,000. Vencor, on behalf of the Company, submitted an acceptable plan of
correction at the Tampa nursing center and was informed by AHCA that
"immediate jeopardy" no longer existed. The threatened termination of the
Tampa nursing center's Medicare provider agreement also was reversed. The
temporary injunction order has been dissolved, and that legal action has been
dismissed.
The Tampa Prosecuting Attorney's office has indicated to Vencor that it was
conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. Vencor cooperated fully with this
investigation and has been informed that no action will be taken against
Vencor.
Vencor received notice in June 1998 that the State of Georgia found
regulatory violations with respect to patient discharges, among other things,
at one of Vencor's nursing centers in Savannah, Georgia. The state recommended
a federal fine of $543,000 for these violations, which HCFA has imposed.
Vencor has appealed this fine.
The HCFA Administrator of the Medicare and Medicaid programs indicated in
April 1998 that the operations at the Company's facilities in other states
also are being monitored.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide (which were subsequently
transferred to Vencor in the Reorganization). The complaint alleges various
breaches of contract, and statutory and regulatory violations including
violations of federal and state RICO statutes. The original complaint has been
amended to delineate several purported subclasses. The plaintiffs seek class
certification, unspecified damages, attorneys' fees and costs. Vencor, on
behalf of the Company, is defending this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially
41
<PAGE>
inflated. In particular, the complaint alleges that the Company issued false
and misleading financial statements during the first, second and third
calendar quarters of 1997 which misrepresented and understated the impact that
changes in Medicare reimbursement policies would have on the Company's core
services and profitability. The complaint further alleges that the Company
issued a series of materially false statements concerning the purportedly
successful integration of its recent acquisitions and prospective earnings per
share for 1997 and 1998 which the Company knew lacked any reasonable basis and
were not being achieved. The suit seeks damages in an amount to be proven at
trial, pre-judgment and post-judgment interest, reasonable attorneys' fees,
expert witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted Vencor's motion,
acting on behalf of the Company, 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 the 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 Vencor and the Company have an effective remedy. Vencor
and the Company each believe that the allegations in the complaint are without
merit and Vencor, on behalf of the Company, intends to defend this action
vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospital
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a
class consisting of all persons who sold shares of Transitional common stock
during the period from February 26, 1997 through May 4, 1997, inclusive. The
complaint alleges that Transitional purchased shares of its common stock from
members of the investing public after it had received a written offer to
acquire all of Transitional's common stock and without making the required
disclosure that such an offer had been made. The complaint further alleges
that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had
reached an advanced stage with actual firm offers at substantial premiums to
the trading price of Transitional's stock having been made which were actively
being considered by Transitional's Board of Directors. The complaint asserts
claims pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and
common law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. On June 18, 1998, the court granted Vencor's
motion, acting on behalf of the Company, to dismiss with leave to amend the
Section 10(b) claim and the state law claims for misrepresentation. The court
denied Vencor's motion to dismiss the Section 14(e) and Section 20(a) claims.
Vencor, on behalf of the Company, has filed a motion for reconsideration and
intends to defend vigorously this action.
Vencor's subsidiary, American X-Rays, Inc. ("AXR"), which was previously a
subsidiary of the Company, is the defendant in a civil qui tam lawsuit which
was filed in the United States District Court for the Eastern District of
Arkansas and served on the Company on July 7, 1997. The United States
Department of Justice has intervened in the suit which was brought under the
Federal Civil False Claims Act. AXR provided portable X-ray services to
nursing facilities (including those operated by the Company) and other
healthcare providers. The Company acquired an interest in AXR when Hillhaven
was merged into the Company in September 1995 and purchased the remaining
interest in AXR in February 1996. The civil law suit alleges that AXR
submitted false claims to the Medicare and Medicaid programs. The suit seeks
damages in an amount of not less than
42
<PAGE>
$1,000,000, treble damages and civil penalties. In a related criminal
investigation, the United States Attorney's Office for the Eastern District of
Arkansas indicted four former employees of AXR; those individuals were
convicted of various fraud related counts in January 1999. AXR had been
informed previously that it was not a target of the criminal investigation,
and AXR was not indicted. Vencor, on behalf of the Company, cooperated fully
in the criminal investigation. Vencor, on behalf of the Company, is defending
vigorously the qui tam action.
On June 6, 1997, Transitional announced that it had been advised that it was
the target of a federal grand jury investigation being conducted by the United
States Attorney's Office for the District of Massachusetts arising from
activities of Transitional's formerly owned dialysis business. The
investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon
Corporation and Transitional. Transitional spun off its dialysis business, now
called Vivra, Incorporated, on September 1, 1989. In January 1998, the Company
was informed that no criminal charges would be filed against the Company. In
March 1998, the Company was added as a defendant to a previously pending qui
tam lawsuit against the other partners related to the partnerships' former
Medicare billing practices. Vencor, on behalf of the Company, is vigorously
defending the action.
Vencor's subsidiary, TheraTx, which was previously a subsidiary of the
Company, was a defendant and counterclaimant in an action pending in state
court in Jacksonville, Florida entitled Highland Pines Nursing Center, Inc.,
et al. v. TheraTx, Incorporated, et al. The plaintiffs claimed that they were
entitled to up to $40 million in earnout compensation from TheraTx's purchase
of several businesses from the plaintiffs in 1995 and to damages from related
tort claims. TheraTx asserted fraud counterclaims against the plaintiffs
relating to the original purchase. This case, along with other pending claims
between TheraTx and the various plaintiffs, was settled in January 1999 by
TheraTx's payment of $16.2 million in cash and other consideration to the
plaintiffs. All legal actions between the parties have been dismissed pursuant
to the settlement.
Vencor has been informed by the U.S. Department of Justice that it is the
subject of ongoing investigations into various aspects of its Medicare billing
practices. This investigation also includes the Company's healthcare
operations prior to the date of the Reorganization. Vencor is cooperating
fully in the investigations.
Vencor is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. Neither the Company nor Vencor
is able to predict the ultimate outcome of pending litigation and regulatory
investigations. In addition, there can be no assurance that HCFA or other
regulatory agencies will not initiate additional investigations related to
Vencor's business in the future, nor can there be any assurance that the
resolution of any litigation or investigations, either individually or in the
aggregate, would not have a material adverse effect on Vencor's liquidity,
financial position or results of operations, which in turn could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
The Company is a party to certain legal actions and regulatory
investigations which arise from the normal course of its prior healthcare
operations. The Company is unable to predict the ultimate outcome of pending
litigation and regulatory investigations. In addition, there can be no
assurance that other regulatory agencies will not initiate additional
investigations related to the Company's business in the future, nor can there
be any assurance that the resolution of any litigation or investigations,
either individually or in the aggregate, would not have a material adverse
effect on the Company's liquidity, financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
43
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages (as of January 1, 1999) and present and
past positions of the persons who are the current executive officers of the
Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
W. Bruce Lunsford........... 51 Chairman of the Board
Debra A. Cafaro............. 41 Chief Executive Officer, President and Director
Steven T. Downey............ 41 Vice President and Chief Financial Officer
T. Richard Riney............ 41 Vice President, General Counsel and Secretary
John C. Thompson............ 31 Vice President, Corporate Development
</TABLE>
W. Bruce Lunsford, an attorney, has served as Chairman of the Board since
the Company commenced operations on May 1, 1998. From May 1, 1998 through
December 1998, Mr. Lunsford also served as Chief Executive Officer of the
Company. Mr. Lunsford was a founder of Vencor and served as Chairman of the
Board, Chief Executive Officer and President of Vencor from the time it
commenced operations in 1985 until the time of the Reorganization. Mr.
Lunsford served as Chairman of the Board and Chief Executive Officer of Vencor
from May 1, 1998 until January 21, 1999 and as President of Vencor from May 1,
1998 until November 1998. Mr. Lunsford is a director of Churchill Downs
Incorporated, and Res-Care, Inc.
Debra A. Cafaro joined the Company on March 5, 1999. From April 1997 to May
1998, she served as President and Director of Ambassador Apartments, Inc.
(NYSE: AAH), a real estate investment trust. Ms. Cafaro was a founding member
of the Chicago law firm Barack Ferrazzano Kirschbaum Perlman & Nagelberg,
becoming a partner in 1987, where her areas of concentration were real estate,
finance and corporate transactions. Ms. Cafaro is admitted to the Bar in
Illinois and Pennsylvania. She is a member of the National Association of Real
Estate Investment Trusts ("NAREIT"), the National Multi-Housing Council, and
both the American and Chicago Bar Associations.
Steven T. Downey, a certified public accountant, has served as Vice
President and Chief Financial Officer of the Company since September 1998. He
served as Vice President and Controller of Providian Corporation from 1993
until 1997. Prior to that position, Mr. Downey held various management
positions with Providian Corporation from 1991 until 1993. Mr. Downey was
employed by Ernst & Young from 1978 to 1991. Mr. Downey is a member of NAREIT,
the American Institute of Certified Public Accountants and is a certified
public accountant in the State of Florida.
T. Richard Riney has served as Vice President, General Counsel and Secretary
of the Company since May 1998. He served as Transactions Counsel of Vencor
from April 1996 to April 1998. From May 1992 to March 1996, Mr. Riney was a
partner of Hirn, Reed & Harper, a law firm based in Louisville, Kentucky. Mr.
Riney is a member of NAREIT and the American, Indiana and Kentucky Bar
Associations.
John C. Thompson has served as Vice President, Corporate Development of the
Company since January 1999. He served as Director of Acquisitions from May
1998 to January 1999. Mr. Thompson served as Director of Development of Vencor
from April 1996 to May 1998 and as Development Manager of Vencor from 1993 to
April 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is listed and traded on the New York Stock Exchange
("NYSE") under the ticker symbol of VTR. As of the close of business on March
22, 1999, there were 67,895,781 shares of Common Stock outstanding and
approximately 4,098 stockholders of record. The prices in the table below, for
the calendar
44
<PAGE>
quarters indicated since the Reorganization, represent the high and low sales
prices for the Common Stock as reported on the NYSE. No cash dividends were
paid on Common Stock during such periods.
<TABLE>
<CAPTION>
Sales Price
of Common Stock
---------------
Calendar Quarter High Low
- - ---------------- ------- -------
<S> <C> <C>
Second Quarter (since May 1,1998).............................. $18 1/8 $13 1/2
Third Quarter.................................................. 15 10
Fourth Quarter................................................. 13 1/8 9 1/2
</TABLE>
The Company declared its first dividend of $0.39 per share on January 13,
1999 payable to stockholders of record on January 29, 1999. The Company
currently intends to make distributions to its stockholders on a quarterly
basis and anticipates that its quarterly dividends will be equal to a payout
ratio of approximately 80% of funds from operations (the "Distribution
Policy"). There can be no assurances that the Company will meet or maintain
its Distribution Policy. See "Business--Risk Factors."
The Company's Distribution Policy and the frequency and amounts of any
dividends could be affected by an adverse change in the results of operations
of the Company, an adverse change in economic conditions affecting the
Company's business or the business of Vencor and the other operators of its
properties or adverse changes in market and competitive factors that the
Company's Board deems relevant in setting a distribution policy. In
particular, any nonpayment of rent by Vencor under the Master Leases, or any
expectation that such nonpayment will occur in the future, would have a
material impact on the amount of the Company's distributions. Subject to
restrictions under the Company's debt facilities and other obligations, the
Board, in its sole discretion, will determine the actual distribution amount
and rate.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its REIT taxable
income (which does not include net capital gains). Under certain
circumstances, the Company may be required to make distributions in excess of
funds from operations 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 to retain its qualification as a REIT for federal
income tax purposes, although there can be no assurance that the Company would
be successful in such efforts. Although the Company is currently expected to
qualify as a REIT for the year ending December 31, 1999, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail to qualify as a REIT. See "Business--Federal Income Tax Considerations--
Annual Distribution Requirements."
45
<PAGE>
Item 6. Selected Financial Data
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed under Item 14 and are included on pages F-1 through F-17.
<TABLE>
<CAPTION>
Eight months
ended
December 31,
1998
---------------
(In thousands,
except per
share amounts)
<S> <C>
OPERATING DATA
Revenues...................................................... $ 149,933
Net Earnings Available to Common (before extraordinary
charge)...................................................... 34,809
Net Earnings Available to Common.............................. 26,758
Net Share Amounts:
Net Earnings (before extraordinary charge), Basic............. $ .51
Net Earnings Available to Common, Basic....................... .39
Net Earnings Available to Common, Diluted..................... .39
Weighted Average Shares Outstanding, Basic.................... 67,819
Weighted Average Shares Outstanding, Diluted.................. 67,865
<CAPTION>
As of December
31, 1998
---------------
(in thousands)
<S> <C>
BALANCE SHEET DATA
Costs of Investments.......................................... $1,185,965
Assets Held for Sale.......................................... --
Total Assets.................................................. 959,706
Bank Credit Facility and Other Debt........................... 931,127
Stockholders' Equity.......................................... (9,009)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion of background information on the Company and a
discussion of the consolidated results of operations, financial position and
liquidity and capital resources of the Company, which should be read in
conjunction with the consolidated financial statements and accompanying notes
thereto.
Background Information
The Company has announced its intention to operate and be treated as a self-
administered, self-managed 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
December 31, 1998. 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.
46
<PAGE>
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-K and other filings, 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.
Results of Operations
Rental income for the eight months ended December 31, 1998 totaled $149.9
million, of which $147.9 million resulted from leases with Vencor. Income from
operations was $34.8 million, or $0.51 per share. The Company incurred an
extraordinary loss for the eight months of $8.1 million, or $0.12 per share,
net of income taxes, related to the extinguishment of debt. Net income for the
eight months was $26.8 million, or $0.39 per share.
The Company considers funds from operations ("FFO") an appropriate measure
of performance of an equity REIT, and with the exception of non-cash
compensation expense, the Company uses the National Association of Real Estate
Investment Trusts ("NAREIT") definition of FFO. Pro forma FFO assumes that the
Company qualified to be taxed as a REIT on May 1, 1998, and the provision for
income taxes was therefore excluded. Pro forma FFO is defined to mean net
income available to common stockholders determined in accordance with
generally accepted accounting principles ("GAAP"), excluding income taxes,
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real estate assets and certain non-cash compensation expense.
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. Pro forma 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,
pro forma FFO should be examined in conjunction with net income as presented
in the consolidated financial statements and data included elsewhere in this
Form 10-K.
Pro forma FFO for the eight months ended December 31, 1998 are summarized in
the following table:
<TABLE>
<CAPTION>
Eight Months
Ended
December 31,
1998
--------------
(In thousands)
<S> <C>
Net income.................................................. $26,758
Extraordinary loss on extinguishment of debt, net of income
tax benefit of $4,935...................................... 8,051
-------
Income from operations before extraordinary loss............ 34,809
Provision for income taxes.................................. 21,151
-------
Pro forma income from operations............................ 55,960
Depreciation on real estate assets.......................... 28,700
Certain non-cash compensation expense....................... 139
-------
Pro forma funds from operations............................. $84,799
=======
</TABLE>
47
<PAGE>
On a pro forma basis, excluding the provision for income taxes based upon
the assumption that the Company qualified to be taxed as a REIT on May 1,
1998, FFO for the eight months would have totaled $84.8 million, or $1.25 per
share. Pro forma income from operations would have been $56.0 million, or
$0.82 per share. Rental income would not have changed on a pro forma basis for
the eight-month period.
Interest expense includes interest of $53.9 million on the Company's Bank
Credit Agreement (described below), swap payments of $1.2 million on the
Company's interest rate swap agreement (described below) and $0.9 million of
interest on other obligations.
Asset/Liability Management
Asset/liability management is a key element of the Company's overall risk
management program. The objective of asset/liability management is to support
the achievement of business strategies while maintaining appropriate risk
levels. The asset/liability management process focuses on a variety of risks,
including market risk (primarily interest rate risk) and credit risk.
Effective management of these risks is an important determinant of the
absolute levels and variability of FFO and net worth. The following discussion
addresses the Company's integrated management of assets and liabilities,
including the use of derivative financial instruments. The Company does not
use derivative financial instruments for speculative purposes.
Market Risk
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. See Note 8 to the Consolidated Financial
Statements. The Company's debt obligations are floating rate obligations whose
interest rate and related cash flows vary with the movement in the London
Interbank Offered Rate ("LIBOR"). See "--Liquidity and Capital Resources." 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 under 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 December 31, 1998, 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% to the counterparty 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 December 31, 1998, the interest rate
swap agreement was in an unrealized loss position to the Company of
approximately $39.2 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 December 31, 1998:
<TABLE>
<CAPTION>
Market Value to the Company
Reflecting Change in
Market Value Interest Rates
to the Company at -------------------------------------
Notional Amount December 31, 1998 -100 BPS +100 BPS
--------------- ----------------- ------------ -----------
<C> <S> <C> <C>
$900,000,000 ($39,175,449) ($95,222,331) $13,493,122
</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 "--Liquidity and Capital Resources." 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 December 31, 1998, 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 $39.2
million. Under the interest rate swap agreement, if collateral must be posted,
the principal amount of
48
<PAGE>
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 December 31, 1998, the Company had a letter of credit outstanding as
posted collateral under the interest rate swap agreement in the amount of
$10.9 million, which reduced the availability of the Company's revolving line
of credit under its Bank Credit Agreement as of that date by a similar amount.
As of March 19, 1999, the market value unrealized loss of the interest rate
swap agreement had declined below the $35 million threshold to $15 million and
the letter of credit outstanding had been reduced to one dollar ($1). Under
the Bank Credit Agreement, the maximum amount that may be outstanding under
such letters of credit at anytime is $25 million.
Credit Risk
The Company monitors credit risk under its lease agreements with its lessees
by monitoring publicly available financial information, discussions with its
lessees and review of information otherwise available to the Company. Pursuant
to the Reorganization, the Company has a significant concentration of credit
risk under its four Master Lease Agreements with Vencor. For the eight months
ended December 31, 1998, lease revenues from Vencor comprised $147.9 million,
or approximately 98.7% of the Company's total lease revenues of $149.9
million. Accordingly, Vencor's financial condition and ability to meet its
rent obligations will determine the Company's revenues and its ability to make
distributions to its stockholders. The operations of Vencor have been
negatively impacted by changes in reimbursement rates, by its current level of
indebtedness and by certain other factors. See "Business--Recent Developments"
and "Business--Governmental Regulation." In addition, any failure by Vencor to
effectively conduct its operations could have a material adverse effect on its
business reputation or on its ability to enlist and maintain patients in its
facilities. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Master Leases. Since the Company derives in excess of 98% of its revenues
from Vencor and since the Master Leases are triple-net leases under which
Vencor is responsible for all insurance, taxes and maintenance and repair
expenses required in connection with the leased properties, the inability of
Vencor to satisfy its obligations under the Master Leases would have a
material adverse effect on the condition of the leased properties, as well as
on the results of operations and the financial condition of the Company and on
the ability of the Company to meet the terms of the Bank Credit Agreement, and
could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT.
Portfolio Overview
The following information provides an overview of the Company's portfolio of
healthcare properties, which primarily include skilled nursing facilities and
hospitals operated by Vencor. For a description of the principal terms and
provisions of the Master Lease Agreements, see "Business--Relationship with
Vencor--Master Lease Agreements."
<TABLE>
<CAPTION>
Eight months
ended
December
# of 31,1998
Portfolio by Type Properties # of Beds/Units Revenue Percentage
- - ----------------- ---------- --------------- -------------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Skilled Nursing
Facilities.............. 219 28,492 $ 89,621 59.8%
Personal Care
Facilities.............. 8 136 152 0.1
Hospitals................ 45 4,194 60,160 40.1
--- ------ -------- -----
Total.................... 272 32,822 $149,933 100.0%
=== ====== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Investment
Investment Percentage Per Bed
-------------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Skilled Nursing Facilities................. $ 834,052 70.3% $29,273
Personal Care Facilities................... 7,133 0.6 52,448
Hospitals.................................. 344,780 29.1 82,207
---------- -----
Total...................................... $1,185,965 100.0% $36,133
========== ===== -------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Eight months
ended
Portfolio December 31,
by 1998
Oerator/Tenantp Revenue Percentage
- - --------------- -------------- ----------
(In thousands)
<S> <C> <C>
Vencor........................................................ $147,952 98.7%
Other......................................................... 1,981 1.3
-------- -----
Total......................................................... $149,933 100.0%
======== =====
</TABLE>
The Company's portfolio is broadly diversified by geographic location with
lease revenues from facilities in any state not comprising more than ten
percent of the Company's revenues.
<TABLE>
<CAPTION>
Eight months ended
December 31, 1998
Portfolio by State Revenue Percentage
------------------ ------------------ ----------
(In thousands)
<S> <C> <C>
1 Florida....................................... $ 14,572 9.7%
2 Massachusetts................................. 12,347 8.2
3 California.................................... 11,051 7.4
4 North Carolina................................ 10,283 6.9
5 Indiana....................................... 10,026 6.7
6 Wisconsin..................................... 9,321 6.2
7 Illinois...................................... 7,947 5.3
8 Kentucky...................................... 7,624 5.1
9 Texas......................................... 7,279 4.9
10 Ohio.......................................... 5,643 3.7
Other (26 states)................................ 53,840 35.9
-------- -----
$149,933 100.0%
======== =====
</TABLE>
In addition to diversification of lease revenues from geographic
diversification of the portfolio, the majority of the Company's facilities are
located in states which have certificate of need requirements. Certain states
require state approval for development and expansion of healthcare facilities
and services, including findings of need for additional or expanded healthcare
facilities or services. A certificate of need ("CON"), which is issued by
governmental agencies with jurisdiction over healthcare facilities, is at
times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The CON rules and regulations may restrict an
operator's ability to expand the Company's properties in certain
circumstances.
<TABLE>
<CAPTION>
Revenue Revenue
Percentage Percentage
Certificate of Need States SNFs Hospitals
- - -------------------------- ---------- ----------
<S> <C> <C>
States with CON Requirement......................................... 73.3% 58.1%
States without CON Requirement ..................................... 26.7 41.9
----- -----
100.0% 100.0%
===== =====
</TABLE>
As previously noted, almost all of the Company's leases are with Vencor and
were entered into as of the date of the Reorganization. The initial terms of
these leases were for periods ranging from 10 to 15 years. The following is a
summary of the Company's leases and the related period in which they are
subject to expiration or renewal.
50
<PAGE>
<TABLE>
<CAPTION>
Annual Revenue (in thousands)
-----------------------------
Renewal Information(*) Vencor Other Total Percent
- - ---------------------- ------- ----- ------- -------
<S> <C> <C> <C> <C>
1999.............................................. -- -- -- 0.0%
2000.............................................. -- -- -- 0.0%
2001.............................................. -- 462 462 0.2%
2002.............................................. -- -- -- 0.0%
2003.............................................. -- 592 592 0.3%
Thereafter........................................ 222,159 2,528 224,687 99.5%
------- ----- ------- -----
222,159 3,582 225,741 100.0%
======= ===== ======= =====
</TABLE>
- - --------
(*) Excludes future rent escalations.
Liquidity and Capital Resources
Cash provided by operations totaled $86.8 million for the eight months ended
December 31, 1998. Net cash provided by investing activities totaled $.9
million. Net cash used in financing activities totaled $85.5 million.
In connection with the Reorganization, the Company refinanced substantially
all of its long-term debt. In connection with the refinancing arrangements,
the Company entered into a $1.2 billion bank credit agreement, dated April 29,
1998, with NationsBank, N.A., as Administrative Agent (the "Bank Credit
Agreement") and retained approximately $6 million of prior debt obligations.
The Bank Credit Agreement comprises (i) a three year $250 million Revolving
Credit Facility priced at LIBOR plus 2 to 2 1/2% (the "Revolving Credit
Facility"), (ii) a $200 million 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 payable in various installments over five years priced at LIBOR
plus 2 3/4 to 3%, and (iv) a $400 million loan due on October 30, 1999 priced
at LIBOR plus 2 3/4 to 3%. For the eight months ended December 31, 1998, the
Company paid $12 million in financing fees related to establishing the Bank
Credit Agreement. As of December 31, 1998, the outstanding balances under the
Bank Credit Agreement and related principal payments due in 1999 are as
follows:
<TABLE>
<CAPTION>
Balance Current
Dec. 31, 1998 Maturity
------------- ------------
<S> <C> <C>
$250 million Revolving Credit Facility.............. $ 29,600,000 $ 0
$200 million Term A Loan............................ 181,818,182 0
$350 million Term B Loan............................ 318,181,818 3,500,000
$400 million Loan due October 30, 1999.............. 400,000,000 400,000,000
------------ ------------
$929,600,000 $403,500,000
============ ============
</TABLE>
At December 31, 1998, available borrowings under the Revolving Credit
Facility approximated $209.5 million. Subsequent to December 31, 1998, the
Company borrowed $125 million under its Revolving Credit Facility and used the
proceeds to pay down the $400 million loan due October 30, 1999. The Company
intends to pay down or refinance the remaining $275 million 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 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 $275
million loan and to meet its other liquidity requirements. As of March 19,
1999, the Company had outstanding borrowings and available borrowings under
its Revolving Credit Facility of $202.7 million and $47.3 million,
respectively. The $47.3 million is subject to certain restrictions under the
Bank Credit Agreement. In addition, as of March 19, 1999, cash and overnight
investments in banks totaled $65.8 million.
The Company leases substantially all 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
51
<PAGE>
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 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 affect on
the Company's relationships with its creditors and could have a material
adverse affect on the Company's business, financial condition and results of
operations.
Management has taken certain initiatives to address these issues. The
Company has retained Merrill Lynch & Co., as financial advisor, to assist it
in its review of Vencor's financial condition and its ability to comply with
the covenants in its bank credit facility. Merrill Lynch is also assisting the
Company in its review of alternatives to repaying the $275 million portion of
its credit facility that matures on October 30, 1999 and to assess other
strategic alternatives for the Company.
The Company has increased its cash position so that it has cash and
overnight investment, in banks, totaling $65.8 million as of March 19, 1999.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Leases and the Company has rejected that request. 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. The Company has entered into an
agreement with Vencor whereby the Company has agreed not to exercise remedies
for non-payment of rent, which is due from Vencor on April 1, 1999, for a
period ending on April 12, 1999. During the Company's discussions with Vencor,
Vencor has asserted various potential claims against the Company arising out
of the Reorganization. The Company intends to vigorously defend these claims
if they are asserted in a legal mediation or proceeding.
As of March 31, 1998, the Company was in compliance with the covenants
contained in the Bank Credit Agreement. Continued payment of rent by Vencor
under the Master Leases is essential to the Company's ability to remain in
compliance with the covenants contained in the Bank Credit Facility.
In connection with the Reorganization, the Company entered into an interest
rate swap agreement to eliminate the impact of changes in interest rates on
its floating rate debt obligations. 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 "--
Asset/Liability Management" and Note 1 of the Notes to Consolidated Financial
Statements.
In connection with the Reorganization, the Company sought to obtain
necessary consents to assign its former third party lease obligations to
Vencor. The Company has not and does not expect to receive consents for
assignments on one long-term care hospital and 16 nursing centers. The Company
remains primarily liable on substantially all lease obligations assigned to
Vencor, as well as certain third party guarantees. Vencor has contractually
indemnified the Company for these leases and guaranty obligations. See
"Business--Relationship with Vencor" and Note 8 of the Notes to Consolidated
Financial Statements.
The Company loaned, with interest provisions, approximately $3.9 million to
certain former executive officers of the Company to finance the income taxes
payable by them as a result of the Reorganization. The loans are payable over
a ten year period.
In connection with the Reorganization, the Company also received newly
issued Vencor Series A Non-Voting Convertible Preferred Stock. The Company
sold the preferred stock to certain of its employees, which
52
<PAGE>
includes both current Vencor employees and employees of the Company, for $17.7
million and used the proceeds to refinance long-term debt.
In order to qualify as a REIT, the Company must make annual distributions to
its stockholders of at least 95% of its "REIT taxable income" (excluding net
capital gain). 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 to retain its qualification as a
REIT for federal income tax purposes although there can be no assurance that
the Company would be successful in such efforts. Although the Company is
currently expected to qualify as a REIT for the year ending December 31, 1999,
it is possible that economic, market, legal, tax or other considerations may
cause the Company to fail to qualify as a REIT. See "Market for Registrant's
Common Equity and Related Stockholder Matters."
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, asset
sales or issuances of equity. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's liquidity may be affected
adversely.
The Company has invested $14.5 million for the eight months ended December
31, 1998 to acquire healthcare-related properties. The properties purchased
include two skilled nursing centers and eight personal care facilities. One of
the properties acquired was a skilled nursing facility purchased from Vencor
under the Development Agreement for $6.2 million in the third quarter of 1998.
The Company does not currently intend to acquire any additional properties in
1999.
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, or
a combination of the foregoing. 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 or capital 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 Code. 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.
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 its 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 is converting
to a new financial information system platform that is Y2K compliant. The
Company expects that the conversion should be completed during
53
<PAGE>
the first quarter of 1999. The Company also may be required to replace its
computer hardware with new equipment that is Y2K compliant. 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
the Master Leases, Vencor is responsible for upgrading all building
infrastructure components to be Y2K compliant. As of December 31, 1998, Vencor
advised the Company that it has tested and verified as Y2K compliant
approximately 70% of the facility components. 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
Master Leases 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 Master Leases 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.
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 Master Leases
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
provided to the Company by Vencor. The Company is
54
<PAGE>
not the source of this information, has not verified independently the
activities of Vencor, and there can be no assurance that Vencor has provided
the Company with complete and accurate information in all instances. The
Company is in contact with Vencor to monitor its progress.
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 internally developed, 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.
55
<PAGE>
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
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.
56
<PAGE>
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.
Item 7A. 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. See Note 8 to the Consolidated Financial
Statements. The Company's debt obligations are floating rate obligations whose
interest rate and related cash flows vary with the movement in LIBOR. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". 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 under 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
December 31, 1998, 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 December
31, 1998, the interest rate swap agreement was in an unrealized loss position
to the Company of approximately $39.2 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 December 31, 1998:
<TABLE>
<CAPTION>
Market Value to the Company
Market Value Reflecting Change in Interest Rates
to the Company at -------------------------------------
Notional Amount December 31, 1998 -100 BPS +100 BPS
--------------- ----------------- ------------------ -----------------
<S> <C> <C> <C>
$900,000,000 ($39,175,449) ($95,222,331) $ 13,493,122
</TABLE>
57
<PAGE>
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." 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 December 31, 1998, 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 $39.2
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 December 31, 1998, the Company had a letter of
credit outstanding as posted collateral under the interest rate swap agreement
in the amount of $10.9 million, which reduced the availability of the
Company's revolving line of credit under its Bank Credit Agreement as of that
date by a similar amount. As of March 19, 1999, the market value unrealized
loss of the interest rate swap agreement had declined below the $35 million
threshold to $15 million and the letter of credit outstanding had been reduced
to one dollar ($1). Under the Bank Credit Agreement, the maximum amount that
may be outstanding under such letters of credit at any time is $25 million.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in appendix pages F-1
through F-17 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items other than the information set forth
above under Part I, "Executive Officers of the Registrant," is omitted because
the Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K which includes the required information. The required information
contained in the Company's proxy statement is incorporated herein by
reference.
58
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1 Certificate of Incorporation of the Company, as amended. Exhibit 3 to
the Company's Form 10-Q for the quarterly period ended September 30,
1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company. Exhibit 3.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
3.3 Third Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10-K for the year ended December 31, 1997 (Comm. File
No. 1-10989) is hereby incorporated by reference.
4.1 Specimen Common Stock Certificate.
4.2 Article IV of the Certificate of Incorporation of the Company is
included in Exhibit 3.1.
4.3 Credit Agreement dated as of April 29, 1998, among Ventas Realty,
Limited Partnership, NationsBank, N.A., as Administrative Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, the
Senior Managing Agents, the Managing Agents and Co-Agents party
thereto, the Banks listed therein, and J.P. Morgan Securities, Inc.
and NationsBanc Montgomery Securities LLC, as Co-Arrangers. Exhibit
10.1 to the Company's Form 10-Q for the quarterly period ended
September 30, 1998 (Comm. File No. 1-10989) is hereby incorporated by
reference.
4.4 Rights Agreement dated as of July 20, 1993 between the Company and
National City Bank, as Rights Agent. Exhibit 1 to the Company's
Registration Statement on Form 8-A (Comm. File No. 1-10989) is hereby
incorporated by reference.
4.5 First Amendment to Rights Agreement dated as of August 11, 1995
between the Company and National City Bank, as Rights Agent. Exhibit 2
to the Company's Registration Statement on Form 8-A/A (Comm. File No.
1-10989) is hereby incorporated by reference.
4.6 Second Amendment to Rights Agreement dated February 1, 1998 between
the Company and National City Bank, as Rights Agent. Exhibit 1 to the
Company's Registration Statement on Form 8-A/A (Reg. No. 33-30212) is
hereby incorporated by reference.
4.7 Third Amendment to Rights Agreement dated July 27, 1998 between the
Company and National City Bank, as Rights Agent. Exhibit 1 to the
Company's Registration Statement on Form 8-A12B/A (Reg. No. 33-30212)
is hereby incorporated by reference.
10.1* Directors and Officers Insurance and Company Reimbursement Policies.
Exhibit 10.1 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.2 Guaranty of Payment dated as of April 29, 1998 between the Company and
its subsidiaries as guarantors and Morgan Guaranty Trust Company of
New York. Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.3* Form of Ventas, Inc. Promissory Note. Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended June 30, 1998 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.4* Amendment to Promissory Note entered into as of December 31, 1998 by
and between Venias Realty, Limited Partnership and W. Bruce Lunsford.
10.5* Promissory Note dated October 22, 1998 by Steven T. Downey in favor of
Ventas, Inc.
10.6 Form of Agreement and Plan of Reorganization between the Company and
Vencor, Inc.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.7 Form of Distribution Agreement between Vencor, Inc. and the Company.
10.8 Form of Master Lease Agreement between Vencor, Inc. and the Company.
10.9 Form of Amendment to Master Lease Agreement between Vencor, Inc. and
the Company.
10.10 Form of Development Agreement between Vencor, Inc. and the Company.
10.11 Form of Participation Agreement between Vencor, Inc. and the Company.
10.12 Tax Allocation Agreement dated as of April 30, 1998 by and between the
Company and Vencor, Inc. Exhibit 10.9 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.13 Transition Services Agreement dated April 30, 1998 by and between the
Company and Vencor, Inc. Exhibit 10.10 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.14 Agreement of Indemnity--Third Party Leases dated April 30, 1998 by and
between Vencor, Inc. and its subsidiaries and the Company. Exhibit
10.11 to the Company's Form 10-Q for the quarterly period ended June
30, 1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.15 Agreement of Indemnity--Third Party Contracts dated April 30, 1998 by
and between Vencor, Inc. and its subsidiaries and the Company. Exhibit
10.12 to the Company's Form 10-Q for the quarterly period ended June
30, 1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.16* Form of Employment Agreement dated as of July 31, 1998 between Ventas,
Inc. and each of W. Bruce Lunsford and Thomas T. Ladt. Exhibit 10.2 to
the Company's Form 10-Q for the quarterly period ended September 30,
1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.17* Amendment to Employment Agreement entered into as of December 31, 1998
by and between Ventas, Inc. and W. Bruce Lunsford.
10.18* Employment Agreement dated as of September 21, 1998 between Ventas,
Inc. and Steven T. Downey. Exhibit 10.3 to the Company's Form 10-Q for
the quarterly period ended September 30, 1998 (Comm. File No. 1-10989)
is hereby incorporated by reference.
10.19* Employment Agreement dated as of July 31, 1998 between Ventas, Inc.
and T. Richard Riney. Exhibit 10.4 to the Company's Form 10-Q for the
quarterly period ended September 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.20* Employment Agreement dated as of January 13, 1999 between Ventas, Inc.
and John Thompson
10.21* Separation Agreement and Release of Claims dated as of March 5, 1999
between Ventas, Inc. and Thomas T. Ladt.
10.22* 1987 Non-Employee Directors Stock Option Plan. Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-30212) is
hereby incorporated by reference.
10.23* 1987 Incentive Compensation Program. Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-30212) is hereby
incorporated by reference.
10.24* Amendment to the 1987 Incentive Compensation Program dated May 15,
1991. Exhibit 4.4 to the Company's Registration Statement on Form S-8
(Reg. No. 33-40949) is hereby incorporated by reference.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.25* Amendments to the 1987 Incentive Compensation Program dated May 18,
1994. Exhibit 10.13 to the Company's Form 10-K for the year ended
December 31, 1994 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.26* Amendment to the 1987 Incentive Compensation Program dated February
15, 1995. Exhibit 10.14 to the Company's Form 10-K for the year ended
December 31, 1994 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.27* Amendment to the 1987 Incentive Compensation Program dated September
27, 1995. Exhibit 10.17 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.28* Amendment to the 1987 Incentive Compensation Program dated May 15,
1996. Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1996 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.29* Amendment to 1987 Incentive Compensation Program dated April 30, 1998.
Exhibit 10.13 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.30* Amendment to the 1987 Incentive Compensation Program dated December
31, 1998.
10.31* Amendment to the 1987 Non-Employee Directors Stock Option Plan dated
April 30, 1998. Exhibit 10.14 to the Company's Form 10-Q for the
quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.32* 1997 Incentive Compensation Plan dated December 31, 1996. Exhibit
10.23 to the Company's Form 10-K for the year ended December 31, 1996
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.33* Amendment No. 1 dated May 8, 1997 to the 1997 Incentive Compensation
Plan. Exhibit 10.3 to the Company's Form 10-Q for the quarterly period
ended June 30, 1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.34* Amendment to the 1997 Incentive Compensation Plan dated April 30,
1998. Exhibit 10.15 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.35* Amendment to the Ventas, Inc. 1997 Incentive Compensation Plan dated
December 31, 1998.
10.36* 1997 Stock Option Plan for Non-Employee Directors dated December 31,
1996. Exhibit 10.25 to the Company's Form 10-K for the year ended
December 31, 1996 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.37* Amendment to the 1997 Stock Option Plan for Non-Employee Directors
dated April 30, 1998. Exhibit 10.16 to the Company's Form 10-Q for the
quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.38* TheraTx, Incorporated Amended and Restated 1994 Stock Option/Stock
Issuance Plan, as amended. Exhibit 10.7 to the Registration Statement
on Form S-1 of TheraTx (Reg. No. 33-92402) is hereby incorporated by
reference.
10.39* Amendment to the TheraTx, Incorporated Amended and Restated 1994 Stock
Option/Stock Issuance Plan. Exhibit 4.7 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-25519) is hereby incorporated by
reference.
10.40* TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. Exhibit
99.1 to the Registration Statement on Form S-8 of TheraTx (Reg. No.
333-15171) is hereby incorporated by reference.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.41* 1989 Amended and Restated Stock Option Plan of Helian Health Group,
Inc. ("Helian"). Exhibit 10.47 to the Registration Statement on Form
S-8 of Helian (Reg. No. 33-31520), Amendment No. 2 thereto filed
November 21, 1989 and Post-Effective Amendment No. 1 and No. 2 thereto
filed November 22, 1990 and January 16, 1991, is hereby incorporated
by reference.
10.42* Form of Vencor, Inc. Change-in-Control Severance Agreement. Exhibit
10.32 to the Company's Form 10-K for the year ended December 31, 1997
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.43* Amendment No. 1 to Change-in-Control Severance Agreement entered into
as November 19, 1997 between the Company and W. Bruce Lunsford.
10.44* Amendment No. 2 to Change-in-Control Severance Agreement entered into
as of December 31, 1998 by and between the Company and W. Bruce
Lunsford.
10.45 Form of Indemnification Agreement for directors of TheraTx. Exhibit
10.13 to the Registration Statement on Form S-1 of TheraTx (Reg. No.
33-78786) is hereby incorporated by reference.
10.46 Form of Assignment and Assumption of Lease Agreement between Hillhaven
and certain subsidiaries, on the one hand, and Tenet and certain
subsidiaries on the other hand, together with the related Guaranty by
Hillhaven, dated on or prior to January 31, 1990. Exhibit 10.37 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.47 Guarantee Reimbursement Agreement between Hillhaven and Tenet, dated
as of January 31, 1990. Exhibit 10.40 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.48 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of October 30, 1990. Exhibit 10.41 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.49 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 30, 1991. Exhibit 10.42 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.50 Second Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of October 2, 1991. Exhibit 10.43 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.51 Third Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of April 1, 1992. Exhibit 10.44 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.52 Fourth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of November 12, 1992. Exhibit 10.45 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.53 Fifth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of February 19, 1993. Exhibit 10.46 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.54 Sixth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 28, 1993. Exhibit 10.47 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.55 Seventh Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 28, 1993. Exhibit 10.48 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.56 Eighth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of September 2, 1993. Exhibit 10.49 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.57 Other Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished to the
Commission upon request.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (included only in filings under the Electronic
Data Gathering, Analysis, and Retrieval System).
</TABLE>
- - --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
On November 19, 1998, the Company filed a Current Report on Form 8-K
announcing that Thomas T. Ladt would replace W. Bruce Lunsford as Chief
Executive Officer effective January 1, 1999. In addition, the Company reported
that Douglas Crocker II, a director of the Company, had been appointed to the
Executive Committee of the Company's Board and would serve as Chairman of the
Company's Independent Committee.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this Report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is included in appendix pages S-1
through S-2 of this Report.
63
<PAGE>
ITEM X. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ventas, Inc.
We have audited the accompanying consolidated balance sheet of Ventas, Inc.
and subsidiaries as of December 31, 1998 and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for the
period May 1, 1998 through December 31, 1998. Our audit also included the
financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ventas, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of its operations and its cash flows for the period May 1, 1998
through December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 3 to the consolidated financial statements,
approximately 98.7% of the Company's 1998 rental income was received from
Vencor, Inc. As a result thereof, the Company is financially dependent upon
Vencor's ability to pay the rental income which is contractually due the
Company. Vencor has also announced that it will incur a significant loss for
1998. This could have a material adverse effect on Vencor's financial
condition and adversely affect its ability to make contractual and timely
rental payments to the Company. Vencor has also received approval to extend
its credit facility and a waiver of covenant violations through March 31,
1999, and there is no assurance that Vencor's lenders will further extend the
credit facility or provide additional waivers. As discussed in Notes 4 and 12,
the Company has a bridge loan in the amount of $275 million which is due on
October 30,1999, which will either have to be extended, refinanced or repaid.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Ernst & Young LLP
Louisville, Kentucky
January 22, 1999
F-A1
<PAGE>
VENTAS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1998
(In Thousands)
<TABLE>
<S> <C>
Assets
Real estate investments:
Land............................................................. $ 120,928
Building and improvements........................................ 1,065,037
Furniture and equipment.......................................... 15
----------
1,185,980
Accumulated depreciation......................................... (246,509)
----------
Total real estate investments.................................. 939,471
Cash and cash equivalents.......................................... 338
Deferred financing costs, net...................................... 8,816
Due from Vencor, Inc............................................... 6,967
Notes receivable from employees.................................... 4,027
Other.............................................................. 87
----------
Total assets................................................... $ 959,706
==========
Liabilities and stockholders' equity (deficit)
Liabilities:
Bank credit facility and other debt.............................. 931,127
Accrued salaries, wages and other compensation................... 552
Accrued interest................................................. 3,556
Other accrued liabilities........................................ 1,974
Deferred income taxes............................................ 31,506
----------
Total liabilities.............................................. 968,715
----------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.25 par value; authorized 180,000 shares; issued
73,608 shares................................................... 18,402
Capital in excess of par value................................... 140,103
Unearned compensation on restricted stock........................ (1,962)
Accumulated deficit.............................................. (9,637)
----------
146,906
Treasury stock--5,759 shares..................................... (155,915)
----------
Total stockholders' equity (deficit)........................... (9,009)
----------
Total liabilities and stockholders' equity (deficit)........... $ 959,706
==========
</TABLE>
See accompanying notes.
F-1
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENT OF INCOME
May 1, 1998 through December 31, 1998
(In Thousands, except per share amounts)
<TABLE>
<S> <C>
Rental income....................................................... $149,933
Operating expenses:
General and administrative........................................ 5,697
Amortization of unearned compensation on restricted stock......... 349
Depreciation...................................................... 28,700
Interest.......................................................... 56,004
Amortization of deferred financing costs.......................... 3,223
--------
Total operating expenses............................................ 93,973
--------
Income before provision for income taxes and extraordinary loss..... 55,960
Provision for income taxes.......................................... 21,151
--------
Income from operations before extraordinary loss.................... 34,809
Extraordinary loss on extinquishment of debt, net of income tax ben-
efit of $4,935..................................................... (8,051)
--------
Net income.......................................................... $ 26,758
========
Earnings per common share:
Basic:
Income from operations.......................................... $ 0.51
Extraordinary loss on extinguishment of debt.................... (0.12)
--------
Net income...................................................... $ 0.39
========
Diluted:
Income from operations.......................................... $ 0.51
Extraordinary loss on extinguishment of debt.................... (0.12)
--------
Net income...................................................... $ 0.39
========
</TABLE>
See accompanying notes.
F-2
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
May 1, 1998 through December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
Unearned
Common Capital in Compensation
Stock Excess of on Restricted Accumulated Treasury
Par Value Par Value Stock Deficit Stock Total
--------- ---------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1998.. $18,389 $139,480 $ -- $(36,395) $(157,869) $(36,395)
Net income.............. -- -- -- 26,758 -- 26,758
Proceeds from issuance
of shares for stock
incentive plans........ 13 142 -- -- -- 155
Grant of restricted
stock.................. -- 481 (2,311) -- 1,954 124
Amortization of
restricted stock
grants................. -- -- 349 -- -- 349
------- -------- -------- -------- --------- --------
Balance at December 31,
1998................... $18,402 $140,103 $(1,962) $ (9,637) $(155,915) $ (9,009)
======= ======== ======== ======== ========= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
May 1, 1998 through December 31, 1998
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income...................................................... $ 26,758
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 28,700
Amortization of deferred financing costs...................... 3,223
Amortization of restricted stock grants....................... 349
Extraordinary loss on extinguishment of debt, net of deferred
tax benefit of $4,935........................................ 8,051
Provision for deferred income taxes........................... 21,151
Increase in other assets...................................... (87)
Increase in accounts payable and accrued liabilities.......... 5,455
Increase in amount due from Vencor, Inc....................... (6,843)
-----------
Net cash provided by operating activities................... 86,757
Cash flows from investing activities:
Purchase of real estate investments and equipment............... (14,581)
Notes receivable from employees................................. (4,027)
Sale of Vencor, Inc. preferred stock in connection with the
Reorganization Transactions.................................... 17,700
-----------
Net cash used by investing activities....................... (908)
Cash flows from financing activities:
Net change in borrowings under revolving line of credit......... 29,600
Proceeds from long-term debt.................................... 951,540
Repayment of long-term debt..................................... (54,596)
Repayment of long-term debt in connection with the
Reorganization Transactions.................................... (1,000,171)
Payment of deferred financing costs............................. (12,039)
Issuance of common stock........................................ 155
-----------
Net cash used by financing activities....................... (85,511)
Increase in cash and cash equivalents............................. 338
Cash and cash equivalents at beginning of period.................. --
-----------
Cash and cash equivalents at end of period........................ $ 338
===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization and Significant Accounting Policies
Organization
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 December 31, 1998. The Company
conducts all of its business through a wholly-owned operating partnership,
Ventas Realty, Limited Partnership. 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. The
Company expects to use an operating partnership (UPREIT) upon election of REIT
status. 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 its former name), Vencor, Inc.
(Vencor) to stockholders of the Company of record as of April 27, 1998 (the
Reorganization Transactions). 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. The beginning balances in shareholders' equity at
May 1, 1998 reflect the net historical balances of the Company's real estate
investments, long-term borrowings and other real estate related assets and
liabilities after giving effect to the Reorganization Transactions.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 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 December 31, 1998, the
Company estimates that if adopted on December 31, 1998 it would report a
reduction of $39.2 million in other comprehensive income. The Company was not
required to report this $39.2 million unrealized loss in 1998.
Consolidation
The consolidated financial statements include the accounts of the Company,
Ventas Realty, Limited Partnership (the Partnership) and other subsidiaries
after elimination of all material intercompany accounts and transactions.
Real Estate Investments
Investments in real estate properties are recorded at cost. The cost of the
properties acquired is allocated between land and buildings based generally
upon independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 50 years.
F-5
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Assets
Provisions for impairment losses related to long-lived assets, if any, are
recognized when expected future cash flows are less than the carrying values
of the assets. If indicators of impairment are present, the Company evaluates
the carrying value of the related real estate investments in relationship to
the future undiscounted cash flows of the underlying operations. The Company
adjusts the net book value of leased properties and other long-lived assets to
fair value, if the sum of the expected future cash flow or sales proceeds is
less than book value. No impairment losses have been recorded for the period
ended December 31, 1998.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost
which approximates fair value.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings and are net of accumulated amortization of
approximately $3.22 million at December 31, 1998.
Revenue Recognition
Rental income is recognized as earned over the terms of the related Master
Leases and are treated as operating leases. Such income includes periodic
increases based on pre-determined formulas as defined in the Master Lease
agreements (see Master Lease Agreements in Transactions with Vencor--Note 8).
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period ended December 31, 1998. Average
shares outstanding for basic earnings per share were 67,819,205 for 1998. The
calculation of diluted earnings per share amounts reflect the additional
dilutive effect of stock options of 45,657 shares for 1998.
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
In addition, the Company grants shares of restricted stock to certain
executive officers and directors. Shares of restricted stock vest cumulatively
in four equal annual installments beginning on the first anniversary of the
date of the grant. In accordance with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, compensation expense is recognized
for these restricted stock grants over the vesting period.
Accounting Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Real Estate Investments
Substantially all of the Company's real estate investments are leased under
provisions of four Master Leases with Vencor with initial terms ranging from
10 to 15 years, plus renewal options. Each Master Lease provides for minimum
annual rentals which are subject to annual increases on May 1 of each calendar
year of two percent (2%) as long as net patient service revenues of the
facilities covered under the applicable Master Lease for the prior calendar
year exceed seventy-five percent (75%) of patient service revenues in the base
year of 1997. Under the terms of the Master Leases, the lessee is responsible
for all maintenance, repairs, taxes and insurance on the leased properties.
The future contracted minimum rentals, excluding rent escalations, for the
remainder of the initial terms of the master leases and other leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Vencor Other Total
---------- ------- ----------
<S> <C> <C> <C>
1999........................................... $ 222,159 $ 3,582 $ 225,741
2000........................................... 222,159 3,582 225,741
2001........................................... 222,159 3,428 225,587
2002........................................... 222,159 3,119 225,278
2003........................................... 222,159 2,862 225,021
Thereafter..................................... 1,416,213 11,884 1,428,097
---------- ------- ----------
Total........................................ $2,527,008 $28,457 $2,555,465
========== ======= ==========
</TABLE>
3. Concentration of Credit Risk and Going Concern
As of December 31, 1998, 70% of the Company's real estate investments
related to skilled nursing facilities. The remaining real estate investments
consist of hospitals and personal care facilities. The Company's facilities
are located in 36 states and lease revenues from operations in any one state
do not account for more than ten percent (10%). Approximately ninety-seven and
two-tenths percent (97.2%) of the Company's real estate investments, based on
the original cost of such investments, are operated by Vencor and
approximately ninety-eight and seven-tenths percent (98.7%) of rental income
is from Vencor leases. Of the remaining six operators, none operate
investments in facilities representing more than five percent (5%) of the
total real estate investments.
The Company is very dependent on the financial stability of Vencor and
Vencor's financial ability to meet its obligations under the Master Lease
Agreements and the other agreements identified in Note 8. Vencor has announced
that it expects fourth quarter results to be significantly lower than the
third quarter of 1998. Vencor has also disclosed that it expects to record
additional adjustments in the fourth quarter which could have a material
adverse effect on its financial condition. Vencor has also announced that it
may be necessary to renegotiate its bank credit facility since its operating
results and fourth quarter adjustments may result in covenant violations with
its lenders. Vencor has received approval to extend its credit facility and a
waiver of its covenant violations through March 31, 1999. Vencor is also
subject to significant government regulations in connection with operating
long-term acute care hospitals and nursing homes. Further, as a result of the
Balanced Budget Act of 1997, Vencor is now subject to the prospective payment
system which could adversely affect Vencor's revenues as a result of reduced
reimbursements from its Medicare and Medicaid patients and reduced revenue
from ancillary services.
If Vencor defaults on any of its lease payments to the Company, it will
adversely affect the Company's ability to meet its current obligations,
including the required payments on its bank credit facility, and in making the
required distributions to the stockholders required for the Company to qualify
as a REIT. Also, if Vencor is unable to meet its indemnification
responsibilities under the reorganization agreement, the agreement for
F-7
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indemnity for third party contracts and the agreement of indemnity under third
party leases, these obligations could revert back to the Company. These
obligations include, among other things, lawsuits, investigations and other
matters such as patient issues, third party contracts and the third party
leases, which arose prior to the Reorganization Transactions. The consolidated
financial statements do not contain any adjustments in the event that Vencor
defaults on any of its agreements with the Company and, therefore, would be
unable to fulfill its indemnity and other legal responsibilities to the
Company.
Continuation of the Company's operations in its present form is dependent
upon Vencor's ability to fulfill its indemnity and other legal
responsibilities to the Company in accordance with the agreements between the
two entities as described in Note 8. Also, the Company is dependent upon
Vencor's ability to make its lease payments on a timely basis and in
accordance with their contractual terms. As further described in Notes 4 and
12, the Company has a bridge loan in the amount of $275 million which is due
on October 30, 1999, which will have to be extended, refinanced or repaid. The
consolidated financial statements do not contain any adjustments that might
result from the outcome of these uncertainties. If and when Vencor has
stabilized its financial condition and the Company has resolved its short-term
debt maturities, the Company intends to reimplement its business strategy in
pursuing acquisitions or development of additional healthcare or other
properties.
Management has taken certain initiatives to address these issues. The
Company has retained Merrill Lynch & Co., as financial advisor, to assist in
its review of Vencor's financial condition and its ability to comply with the
covenants in its bank credit facility. Merrill Lynch is also assisting 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.
The Company has subsequently increased its cash position so that it has cash
and overnight investments in banks totaling $65.8 million.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Leases and the Company has rejected that request. The Company will consider
appropriate actions to take in response to any further proposals by Vencor as
may be in the best interests of the Company.
4. Borrowing Arrangements
The following is a summary of long-term borrowings at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25% (7.52% at December 31, 1998), due April 30, 2001....... $ 29,600
Bridge facility loan, bearing interest at a base rate of LIBOR plus
2.75% (8.02% at December 31, 1998), due October 30, 1999.......... 400,000
Term loan A, bearing interest at a base rate of LIBOR plus 2.25%
(7.52% at December 31, 1998), due April 30, 2001.................. 181,818
Term loan B, bearing interest at a base rate of LIBOR plus 2.75%
(8.02% at December 31, 1998), due in annual installments of $3.5
million with the balance due April 30, 2003....................... 318,182
Other.............................................................. 1,527
--------
$931,127
========
</TABLE>
On April 30, 1998, the Company, through Ventas Realty, Limited Partnership,
consummated a $1.2 billion bank credit agreement (the Bank Credit Agreement).
The Bank Credit Agreement comprises (i) a three year $250 million revolving
letter of credit facility (the Revolving Credit Facility) priced at the London
Interbank Offered
F-8
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rate (LIBOR) plus 2 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 Bank Credit Agreement is secured by a pledge of the Company's
general partnership interest in the operating partnership, Ventas Realty,
Limited Partnership and contains various covenants.
In connection with the Reorganization Transactions and the consummation of
the Bank Credit Agreement, the Company entered into an interest rate swap
agreement ($900 million outstanding at December 31, 1998) to eliminate the
impact of changes in interest rates on approximately $1 billion of floating
rate debt. The agreement expires in varying amounts through December 2006 as
set out in the table below 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 consolidated financial statements (see New Accounting
Pronouncements in Note 1). 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 amount of any such letters of credit to $25 million) to the
counterparty if the market value loss to the Company exceed 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 December 31, 1998, the Company had a letter of
credit outstanding as posted collateral under the interest rate swap agreement
in the amount of $10.9 million, which reduced the availability of the
Revolving Credit Facility as of that date by a similar amount.
F-8--1
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate swap agreement will amortize as follows (in thousands):
<TABLE>
<S> <C>
December 31, 1999................................................... $ 25,000
December 31, 2000................................................... 25,000
December 31, 2001................................................... 50,000
December 31, 2002................................................... 25,000
December 31, 2003................................................... 25,000
December 31, 2004................................................... 50,000
December 31, 2005................................................... 50,000
December 31, 2006................................................... 650,000
</TABLE>
In connection with the Reorganization Transactions, the Company refinanced
substantially all of its long-term debt. As a result, the Company incurred an
after tax extraordinary loss on extinguishment of debt of $8.1 million, net of
a $4.9 million tax benefit, for the eight months ended December 31, 1998.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each
of the five years following December 31, 1998 are as follows (in thousands)
(See Note 12--Subsequent Events):
<TABLE>
<S> <C>
1999................................................................ $405,023
2000................................................................ 3,504
2001................................................................ 214,918
2002................................................................ 3,500
2003................................................................ 304,182
--------
Total............................................................... $931,127
========
</TABLE>
5. Financial Instruments
At December 31, 1998, the carrying amounts and fair values of the Company's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Cash and cash equivalents................................. $ 338 $ 338
Notes receivable from employees........................... 4,027 4,027
Long-term debt, including amounts due within one year..... 931,127 970,327
</TABLE>
The estimate of fair value of the Company's long-term debt includes the
effect of the interest rate swap agreement (See New Accounting Pronouncements
in Note 1) and is based upon estimates of fair value based on the present
value of discounted cash flows for the same or similar issues of long-term
debt and the related interest rate swap agreement.
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.
6. Shareholders' Equity and Stock Options
The Company has plans under which options to purchase common stock may be
granted to officers, employees and certain non-employee directors. Options are
exercisable at the market price at the date of grant,
F-9
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expire ten years from the date of grant, and vest over four years. The Company
also grants restricted stock to officers, employees and certain non-employee
directors that vest over four years. As of December 31, 1998, options for
5,603,136 shares had been granted to eligible participants and remained
outstanding (including options granted and held by Vencor employees--see
Organization in Note 1) under the provisions of these plans. The Company
granted 150,000 shares of restricted stock for the period May 1, 1998 through
December 31, 1998. The market value of the restricted shares on the date of
the award has been recorded as unearned compensation on restricted stock, with
the unamortized balance shown as a separate component of shareholders' equity.
Unearned compensation is amortized to expense over the vesting period, with
charges to operations of approximately $349,000 in 1998.
At December 31, 1998, options currently exercisable (2,262,232) have a
weighted average exercise price of $15.74. Shares available for future grants
as of December 31, 1998 are 1,658,450.
The following is a summary of stock option activity under the plan:
<TABLE>
<CAPTION>
Stock Options
---------------------------------
Weighted
Average
Number of Exercise
Shares Exercise Price Price
--------- -------------- --------
<S> <C> <C> <C>
Outstanding at May 1, 1998................. 5,612,034 $ .33--$27.01 $ 15.76
Granted.................................. 669,000 10.81-- 17.25 17.25
Exercised................................ 51,607 .33-- 16.55 2.67
Canceled................................. 626,291 11.39-- 26.55 16.44
---------
Outstanding at December 31, 1998........... 5,603,136 $ .33--$27.01 $ 15.64
=========
</TABLE>
Under the terms of the Ventas, Inc. 1997 Incentive Compensation Plan (the
Employee Plan), the Company has reserved 3,400,000 shares for grants to be
issued to employees. Under the terms of the Ventas, Inc. 1997 Stock Option
Plan for Non-Employee Directors, the Company has reserved 200,000 shares for
grants to be issued to non-employee directors.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation
(Statement 123). This standard prescribes a fair value based method of
accounting for employee stock options or similar equity instruments and
requires certain pro forma disclosures. For purposes of the pro forma
disclosures required under Statement 123, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
estimated weighted average fair value of options granted in 1998 was
approximately $817,000.
Pro forma information follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
Pro forma income available to common stockholders.................. $ 19,803
Pro forma earnings per common share:
Basic............................................................ $ .29
Diluted.......................................................... .29
</TABLE>
In determining the estimated fair value of the Company's stock options as of
the date of grant, a Black-Scholes option pricing model was used with the
following weighted-average assumptions: risk-free interest rates of 6%; a
dividend yield of 9%; volatility factors of the expected market price of the
Company's common stock at .25%; and a weighted-average expected life of the
options of 8 years.
F-10
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
7. Income Taxes
As part of the Reorganization Transactions, the Company entered into a Tax
Allocation Agreement with Vencor which provides that the Company will be
liable for taxes of the Company's consolidated group attributable to periods
prior to the Distribution Date with respect to the portion of such taxes
attributable to the property held by the Company after the Distribution Date
and Vencor will be liable for such pre-distribution taxes with respect to the
portion of such taxes attributable to the property held by Vencor after the
Distribution Date. The Tax Allocation Agreement further provides that the
Company will be liable for any taxes attributable to the Reorganization
Transactions except that Vencor will be liable for any such taxes to the
extent that Vencor derives certain future tax benefits as a result of the
payment of such taxes. The Company and its subsidiaries are liable for taxes
payable with respect to periods after the Reorganization Transactions that are
attributable to the Company's operations and Vencor and its subsidiaries are
liable for taxes payable with respect to periods after the Reorganization
Transactions that are attributable to Vencor's operations. If, in connection
with a tax audit or filing of an amended return, a taxing authority adjusts
the Company's or Vencor's tax liability with respect to taxes for which the
other party was liable under the Tax Allocation Agreement, such other party
would be liable for the resulting tax assessment or would be entitled to the
resulting tax refund.
The provision for income taxes for the period May 1, 1998 through December
31, 1998, consists of the following (in thousands):
<TABLE>
<S> <C>
Deferred:
Federal......................................................... $18,602
State........................................................... 2,549
-------
21,151
Current tax benefit of extraordinary loss on extinguishment of
debt:
Federal......................................................... (4,350)
State........................................................... (585)
-------
(4,935)
-------
Provision for income taxes........................................ $16,216
=======
</TABLE>
A summary of non-current deferred income taxes by source included in the
consolidated balance sheet at December 31, 1998 follows (in thousands):
<TABLE>
<CAPTION>
(Assets)
Liabilities
-----------
<S> <C>
Depreciation..................................................... $15,700
Property......................................................... 905
Interest rate swap loss.......................................... 14,972
Compensation..................................................... (71)
-------
$31,506
=======
</TABLE>
F-11
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also has capital loss carryovers of approximately $260 million
which can only be utilized against future capital gains, if any.
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<TABLE>
<S> <C>
Federal statutory rate................................................ 33.05%
State income taxes, net of federal income tax benefit................. 4.75%
-----
Effective income tax rate............................................. 37.80%
=====
</TABLE>
8. Transactions with Vencor
In order to govern certain of the relationships between the Company and
Vencor after the Reorganization Transactions and to provide mechanisms for an
orderly transition, the Company and Vencor entered into various agreements at
the time of the Reorganization Transactions. The Company believes that the
agreements contain terms which generally are comparable to those which would
have been reached in arms' length negotiations with unaffiliated parties. The
terms of the Master Lease Agreements and other related agreements are
described below:
Master Lease Agreements
In the Reorganization Transactions, the Company retained substantially all
of its real property, buildings and other improvements (primarily long-term
care hospitals and nursing centers) and leased these facilities to Vencor
under four Master Lease Agreements. Such Master Lease Agreements contain terms
which govern the rights, duties and responsibilities of the Company and Vencor
relative to each of the leased properties. The leased properties include land,
buildings, structures, easements, improvements on the land and permanently
affixed equipment, machinery and other fixtures relating to the operations of
the facilities.
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all insurance, taxes, utilities and maintenance
related to the properties. The base annual rents is approximately $221.5
million plus a two percent (2%) per annum escalator, which escalator is
contingent upon Vencor achieving net patient service revenue for the
applicable year in excess of seventy-five percent (75%) of patient service
revenues in the base year of 1997. The initial terms of these leases were for
periods ranging from 10 to 15 years.
Except as noted below, upon the occurrence of an event of default under a
Master Lease, the Master Lease provides that the Company may, at its option,
exercise the remedies under the Master Lease on all properties included within
that Master Lease. The remedies which may be exercised under the Master Lease
by the Company, at its option, include the following: (i) after not less than
ten (10) days notice to Vencor, terminate the Master Lease, repossess the
leased property and relet the leased property to a third party and require
that Vencor pay to the Company, as liquidated damages, the net present value
of the rent for the balance of the term, discounted at the prime rate; (ii)
without terminating the Master Lease, repossess the leased property and relet
the leased property with Vencor remaining liable under the Master Lease for
all obligations to be performed by Vencor thereunder, including the
difference, if any, between the rent under the Master Lease and the rent
payable as a result of the reletting of the leased property; (iii) demand that
Vencor purchase either the property which is the subject of the default or all
of the properties included within that Master Lease, at the Company's option,
for the higher of the fair market value or the minimum repurchase price, both
as defined in the Master Lease; and (iv) any and all other rights and remedies
available at law or in equity.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the properties that is the subject of the
default upon the occurrence of any one of the following events of
F-12
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
default: (i) the occurrence of a final non-appealable revocation of Vencor's
license to operate a facility; (ii) the revocation of certification of a
facility for reimbursement under Medicare; or (iii) Vencor becomes subject to
regulatory sanctions at a facility and fails to cure the regulatory sanctions
within the applicable cure period. Upon the occurrence of the fifth such event
of default under a Master Lease with respect to any one or more properties,
the Master Lease permits the Company, at its option, to exercise the rights
and remedies under the Master Lease on all properties included within that
Master Lease.
The occurrence of any one of the following events of default constitute an
event of default under all Master Leases permitting the Company, at its
option, to exercise the rights and remedies under all the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the Federal
bankruptcy laws, and (iv) a petition is filed against Vencor under Federal
bankruptcy laws and same is not dismissed within ninety (90) days of its
institution.
Any notice of the occurrence of an event of default under the Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the Leasehold Mortgagee). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee thirty (30) days prior written
notice and an opportunity to cure the default.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee assumes the
Master Lease in writing, (v) the sublease is subject and subordinate to the
terms of the Master Lease and (vi) Vencor and any guarantor remains primarily
liable under the Master Lease.
Each Master Lease requires Vencor to maintain liability, all risk property
and workers' compensation insurance for the properties at a level reasonable
with respect to the properties. Each Master Lease further provides that in the
event a property is totally destroyed, or is substantially destroyed such that
the damage renders the property unsuitable for its intended use, Vencor will
have the option to either restore the property at its cost to its pre-
destruction condition or offer to purchase the leased property (in either
event all insurance proceeds, net of administrative and related costs, will be
made available to Vencor). If the Company rejects the offer to purchase,
Vencor will have the option to either restore the property or terminate the
applicable Master Lease with respect to the property. If the damage is such
that the property is not rendered unsuitable for its intended use, or if it is
not covered by insurance, each Master Lease requires Vencor to restore the
property to its original condition.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires, will
complete the construction of certain development properties substantially in
accordance with the existing plans and specifications for each such property.
Upon completion of each such development property, the Company has the option
to purchase the development property from Vencor at a purchase price equal to
the amount of Vencor's actual costs in acquiring and developing and such
development property prior to the purchase date. If the Company purchases the
development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be ten percent
(10%) of the actual costs incurred by Vencor in acquiring and developing the
development property. The other terms of the lease for the development
property will be substantially similar to those set forth in the Master
Leases. As of December 31, 1998, the Company had acquired one skilled nursing
center under the Development Agreement for $6.2 million and has entered into
separate lease with Vencor with respect to such facility. The Development
Agreement has a five year term, and the Company and Vencor each have the right
to terminate the Development Agreement in the event of a change of control.
F-13
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing center
or other healthcare facility, provided that Vencor and the Company can
negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility.
The Participation Agreement also provides, subject to certain terms, that
the Company has a right of first offer to purchase or finance any healthcare
related real property that Vencor determines to sell or mortgage to a third
party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term and the Company and Vencor each have the right to
terminate the Participation Agreement in the event of a change of control.
Transition Services Agreement
The Transition Services Agreement, which expired pursuant to its terms on
December 31, 1998, provided that Vencor would provide the Company with
transitional administrative and support services, including but not limited to
finance and accounting, human resources, risk management, legal, and
information systems support. The Company paid Vencor $1.6 million for the
eight months ended December 31, 1998, for services provided under the
Transition Services Agreement.
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). Subsequent to
year end, the Company moved to new office space and those services are no
longer provided by Vencor. Vencor has also agreed to assist in the preparation
of certain tax returns and other tax filings to be made on behalf of the
Company for the period ending on or before December 31, 1998. There can be no
assurance that Vencor will continue to assist the Company in the preparation
of these tax documents or that the Company will be able to timely and
accurately complete such tax filings if Vencor should discontinue its
assistance, although the Company intends to take all actions necessary to
enable it do so.
Agreement of Indemnity--Third Party Leases
In connection with the Reorganization Transactions, the Company assigned its
former third party lease obligations as a tenant or as a guarantor of tenant
obligations to Vencor. The Company remains primarily liable on substantially
all of the third party lease obligations assigned to Vencor. Under the terms
of the Agreement of Indemnity--Third Party Leases, Vencor and its subsidiaries
have agreed to indemnify and hold the Company harmless from and against all
claims against the Company arising out of the third party lease obligations
assigned by the Company to Vencor. If Vencor is unable to satisfy the
obligations under any third party lease assigned by the Company to Vencor,
then the Company will be liable for the payment and performance of the
obligations under any such third party lease. The leases have remaining terms
ranging from 1 to 63 years.
F-14
<PAGE>
The total aggregate remaining minimum rental payments under these leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Skilled
Nursing Office
Facilities Hospitals Land Leases Sub-leases Other Total
---------- --------- ------- ------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
1999........ $21,039 $ 6,987 $ 1,030 $ 2,761 $ 6,919 $ 457 $ 39,193
2000........ 18,981 2,792 1,033 2,187 6,688 372 32,053
2001........ 13,857 2,805 1,025 1,582 4,996 284 24,549
2002........ 8,836 2,661 987 940 2,466 285 16,175
2003........ 5,253 2,160 990 671 2,421 259 11,754
Thereafter.. 6,618 6,900 23,535 3,332 12,918 653 53,956
------- ------- ------- ------- ------- ------ --------
$74,584 $24,305 $28,600 $11,473 $36,408 $2,310 $177,680
======= ======= ======= ======= ======= ====== ========
</TABLE>
Agreement of Indemnity--Third Party Contracts
In connection with the Reorganization Transactions, the Company assigned its
former third party guaranty agreements to Vencor. The Company remains
primarily liable on substantially all of the third party guarantees assigned
to Vencor. Under the terms of the Agreement of Indemnity--Third Party
Contracts, Vencor and its
F-14--1
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the third party
guarantees assigned by the Company to Vencor. If Vencor is unable to satisfy
the obligations under any third party guaranty agreement assigned by the
Company to Vencor, then the Company will be liable for the payment and
performance of the obligations under any such agreement. These third party
guarantees were entered into in connection with certain acquisitions and
financing transactions. The total aggregate exposure under these guarantees is
approximately $45.9 million at December 31, 1998. Atria Communications, Inc.
has also agreed to indemnify and hold the Company harmless form and against
all claims against the Company arising out of the third party contracts, which
has an aggregate principal amount of approximately $35 million.
9. Supplemental Disclosure of Cash Flow Information
During the period May 1, 1998 through December 31, 1998, the Company paid
taxes and interest of approximately $616,000 and $52,448,000, respectively.
10. Litigation
The following litigation and other matters arose from the Company's
operations prior to the Reorganization Transactions. In connection with the
Reorganization Transactions, Vencor agreed to assume the defense, on behalf of
the Company, of any claims that were pending at the time of the Reorganization
Transactions 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 Transactions 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 Transactions.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially inflated. In particular, the
complaint alleges that the Company issued false and misleading financial
statements during the first, second and third calendar quarters of 1997 which
misrepresented and understated the impact that changes in Medicare
reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful
integration of its recent acquisitions and prospective earnings per share for
1997 and 1998 which the Company knew lacked any reasonable basis and were not
being achieved. The suit seeks damages in an amount to be proven at trial,
pre-judgment and post-judgment interest, reasonable attorneys' fees, expert
witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted the Company's
motion to dismiss the case. The plaintiff has appealed the dismissal to the
United States Court of Appeals for the Sixth Circuit. 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 Ventas against certain current and former
executive officers and directors of Vencor and Ventas. The complaint alleges
that the defendants damaged Vencor and Ventas by
F-15
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of Vencor and Ventas.
The plaintiff asserts that such actions were taken deliberately, in bad faith
and constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that Vencor and Ventas have an effective remedy. Vencor and
the Company each believe that the allegations in the complaint are without
merit and Vencor, on behalf of the Company, intends to defend this action
vigorously.
Unasserted claim--Potential Liabilities Due to Fraudulent Transfer
Considerations
Transfers made and obligations incurred in the Reorganization Transactions
and the simultaneous distribution of the Vencor common stock to the Ventas
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 Transactions, 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 Transactions, 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. In the context of the Distribution,
upon such a determination, any such court could order the holders of the stock
distributed in the Distribution to return the value of the stock and any
dividends paid thereon, bar future dividend and redemption payments on the
stock, and invalidate, in whole or in part, the Distribution as a fraudulent
conveyance. Although Vencor has not asserted a claim, Vencor's legal counsel
has raised questions relating to potential fraudulent conveyance issues
relating to the Reorganization Transactions. At the time of the Reorganization
Transactions, the Company obtained an opinion from an independent third party
that addressed issues of solvency and adequate capitalization. Nevertheless,
if a fraudulent conveyance claim is ultimately asserted by Vencor, creditors,
or others, the ultimate outcome of such a claim cannot presently be
determined. The Company intends to vigorously defend these claims if they are
asserted in a legal proceeding or mediation.
11. Related Party Transactions
At December 31, 1998, the Company had receivables of approximately $4
million due from certain executive officers of the Company. The loans include
interest provisions and were to finance the income taxes payable by the
executive officers as a result of the Reorganization Transactions. The loans
are payable over a ten year period.
On October 15, 1998, the Company acquired eight personal care facilities and
related facilities for approximately $7 million from Tangram Rehabilitation
Network, Inc. (Tangram). Tangram is a wholly owned subsidiary of Res-Care,
Inc. (Res-Care) of which a director of the Company is the Chairman, President
and Chief Executive Officer. The Company leases the Tangram facilities to
Tangram pursuant to a Master Lease Agreement which is guaranteed by Res-Care.
Through December 31, 1998, Tangram has paid the Company approximately $155,000
in rent payments.
12. Subsequent Events
Subsequent to December 31, 1998, the amount Due from Vencor, Inc. was paid
in full. Subsequent to December 31, 1998, the Company drew $125 million under
the revolving line of credit and used the proceeds to pay down the bridge
facility loan due October 30, 1999 reducing the balance of that loan to $275
million. In addition, the Company drew $50 million under the revolving line of
credit to use for working capital purposes.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999
Ventas, Inc.
/s/ Debra A. Cafaro
By: _________________________________
Debra A. Cafaro
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Walter F. Beran Director Date March 31, 1999
______________________________________
Walter F. Beran
/s/ Douglas Crocker II Director Date March 31, 1999
______________________________________
Douglas Crocker II
/s/ Ronald G. Geary Director Date March 31, 1999
______________________________________
Ronald G. Geary
/s/ Greg D. Hudson Director Date March 31, 1999
______________________________________
Greg D. Hudson
/s/ Debra A. Cafaro Chief Executive Officer, Date March 31, 1999
______________________________________ President (Principal
Debra A. Cafaro Executive Officer) and
Director
/s/ W. Bruce Lunsford Chairman of the Board and Date March 31, 1999
______________________________________ Director
W. Bruce Lunsford
/s/ Steven T. Downey Vice President and Chief Date March 31, 1999
______________________________________ Financial Officer
Steven T. Downey (Principal Financial and
Principal Accounting
Officer)
/s/ R. Gene Smith Director Date March 31, 1999
______________________________________
R. Gene Smith
</TABLE>
<PAGE>
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - -------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- -------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VENCOR SKILLED
NURSING
FACILITIES
Rehab. &
Healthc. Ctr.
of Huntsville Huntsville AL 534 4,216 -- 534 4,216 1,268 1968 1998
Rehab. &
Healthc. Ctr.
of Birmingham Birmingham AL -- 1,921 -- -- 1,921 747 1971 1998
Rehab. &
Healthcare Ctr.
of Mobile Mobile AL 5 2,981 -- 5 2,981 733 1967 1998
Valley
Healthcare &
Rehab. Center Tucson AZ 383 1,954 -- 383 1,954 517 1964 1998
Sonoran Rehab &
Care Center Phoenix AZ 781 2,755 -- 781 2,755 530 1962 1998
Desert Life
Rehab & Care
Center Tuscon AZ 611 5,117 -- 611 5,117 2,064 1979 1998
Hacienda Rehab.
& Care Center Sierra Vista AZ 31 294 -- 31 294 169 1982 1998
Villa Campana
Health Center Tuscon AZ 533 2,201 -- 533 2,201 463 1983 1998
Kachina Point
Health Care &
Rehab. Sedona AZ 364 4,179 -- 364 4,179 1,406 1983 1998
Nob Hill
Healthcare
Center San Francisco CA 1,902 7,531 -- 1,902 7,531 1,852 1967 1998
Canyonwood
Nursing &
Rehab. Ctr. Redding CA 401 3,784 -- 401 3,784 815 1989 1998
Californian Care
Center Bakersfield CA 1,438 5,609 -- 1,438 5,609 907 1988 1998
Magnolia Gardens
Care Center Burlingame CA 1,832 3,186 -- 1,832 3,186 760 1955 1998
Lawton
Healthcare
Center San Francisco CA 943 514 -- 943 514 158 1962 1998
Valley Gardens
HC & Rehab. Stockton CA 516 3,405 -- 516 3,405 876 1988 1998
Alta Vista
Healthcare
Center Riverside CA 376 1,669 -- 376 1,669 453 1966 1998
Maywood Acres
Healthcare
Center Oxnard CA 465 2,363 -- 465 2,363 542 1964 1998
La Veta
Healthcare
Center Orange CA 47 1,459 -- 47 1,459 353 1964 1998
Bay View Nursing
& Rehab. Center Alameda CA 1,462 5,981 -- 1,462 5,981 1,425 1967 1998
Village Square
Nsg. & Rehab.
Ctr. San Marcos CA 766 3,507 -- 766 3,507 491 1989 1998
Cherry Hills
Health Care
Center Englewood CO 241 2,180 -- 241 2,180 706 1960 1998
Aurora Care
Center Aurora CO 197 2,328 -- 197 2,328 556 1962 1998
Castle Garden
Care Center Northglenn CO 501 8,294 -- 501 8,294 1,821 1971 1998
Brighton Care
Center Brighton CO 282 3,377 -- 282 3,377 747 1969 1998
Andrew House
Healthcare New Britain CT 247 1,963 -- 247 1,963 417 1967 1998
Camelot Nursing
& Rehab. Center New London CT 202 2,363 -- 202 2,363 437 1969 1998
Hamilton Rehab.
& Healthcare
Center Norwich CT 456 2,808 -- 456 2,808 627 1969 1998
Windsor Rehab. &
Healthcare
Center Windsor CT 368 2,520 -- 368 2,520 560 1965 1998
Nutmeg Pavilion
Healthcare New London CT 401 2,777 -- 401 2,777 670 1968 1998
Parkway Pavilion
Healthcare Enfield CT 337 3,607 -- 337 3,607 823 1968 1998
Courtland
Gardens Health
Ctr., Inc. Stamford CT 1,126 9,399 -- 1,126 9,399 411 1956 1998
Homestead Health
Center Stamford CT 511 2,764 -- 511 2,764 128 1959 1998
East Manor
Medical Care
Center Sarasota FL 390 5,499 -- 390 5,499 1,223 1966 1998
Healthcare &
Rehab Ctr of
Sanford Sanford FL 329 3,074 -- 329 3,074 708 1965 1998
Titusville
Rehab. &
Nursing Center Titusville FL 398 3,810 -- 398 3,810 898 1966 1998
Bay Pointe
Nursing
Pavilion St. Petersburg FL 750 4,392 -- 750 4,392 594 1984 1998
Colonial Oaks
Rehab.Ctr-Ft.
Myers Ft. Meyers FL 1,058 5,754 -- 1,058 5,754 490 1995 1998
Carrollwood Core
Center Tampa FL 268 4,128 -- 268 4,128 1,027 1986 1998
<CAPTION>
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
<S> <C>
VENCOR SKILLED
NURSING
FACILITIES
Rehab. &
Healthc. Ctr.
of Huntsville 25 years
Rehab. &
Healthc. Ctr.
of Birmingham 20 years
Rehab. &
Healthcare Ctr.
of Mobile 29 years
Valley
Healthcare &
Rehab. Center 28 years
Sonoran Rehab &
Care Center 29 years
Desert Life
Rehab & Care
Center 37 years
Hacienda Rehab.
& Care Center 20 years
Villa Campana
Health Center 35 years
Kachina Point
Health Care &
Rehab. 45 years
Nob Hill
Healthcare
Center 28 years
Canyonwood
Nursing &
Rehab. Ctr. 45 years
Californian Care
Center 40 years
Magnolia Gardens
Care Center 28.5 years
Lawton
Healthcare
Center 20 years
Valley Gardens
HC & Rehab. 29 years
Alta Vista
Healthcare
Center 29 years
Maywood Acres
Healthcare
Center 29 years
La Veta
Healthcare
Center 28 years
Bay View Nursing
& Rehab. Center 45 years
Village Square
Nsg. & Rehab.
Ctr. 42 years
Cherry Hills
Health Care
Center 30 years
Aurora Care
Center 30 years
Castle Garden
Care Center 29 years
Brighton Care
Center 30 years
Andrew House
Healthcare 29 years
Camelot Nursing
& Rehab. Center 28 years
Hamilton Rehab.
& Healthcare
Center 29 years
Windsor Rehab. &
Healthcare
Center 30 years
Nutmeg Pavilion
Healthcare 29 years
Parkway Pavilion
Healthcare 28 years
Courtland
Gardens Health
Ctr., Inc. 45 years
Homestead Health
Center 20 years
East Manor
Medical Care
Center 28 years
Healthcare &
Rehab Ctr of
Sanford 29 years
Titusville
Rehab. &
Nursing Center 29 years
Bay Pointe
Nursing
Pavilion 35 years
Colonial Oaks
Rehab.Ctr-Ft.
Myers 45 years
Carrollwood Core
Center 37.5 years
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - -------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- -------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Evergreen Woods
Health & Rehab. Springhill FL 234 3,566 -- 234 3,566 668 1988 1998
Rehab. &
Healthcare Ctr.
of Tampa Tampa FL 355 8,291 -- 355 8,291 1,271 1969 1998
Rehab & Health
Ctr. of Cape
Coral Cape Coral FL 1,002 4,153 -- 1,002 4,153 948 1978 1998
Windsor Woods
Convalescent
Center Hudson FL 859 3,172 -- 859 3,172 704 N/A 1998
Casa Mora Rehab.
& Ext Care Bradenton FL 823 6,093 -- 823 6,093 272 1977 1998
North Broward
Rehab. & Nsg.
Ctr. Pompano Beach FL 1,360 5,913 -- 1,360 5,913 247 1965 1998
Highland Pines
Rehab. Center Clearwater FL 863 5,793 -- 863 5,793 253 1965 1998
Pompano
Rehab/Nursing
Ctr. Pompano Beach FL 890 3,252 -- 890 3,252 135 1975 1998
Abbey Rehab. &
Nsg. Center St. Petersburg FL 563 2,842 -- 563 2,842 218 1962 1998
Savannah Rehab.
& Nursing
Center Savannah GA 213 2,772 -- 213 2,772 655 1968 1998
Specialty Care
of Marietta Marietta GA 241 2,782 -- 241 2,782 732 1968 1998
Savannah
Specialty Care
Center Savannah GA 157 2,219 -- 157 2,219 611 1972 1998
Lafayette Nsg. &
Rehab. Ctr. Fayetteville GA 598 6,623 -- 598 6,623 551 1989 1998
Tucker Nursing
Center Tucker GA 512 8,153 -- 512 8,153 370 1972 1998
Hillcrest Rehab.
Care Center Boise ID 256 3,593 -- 256 3,593 405 1977 1998
Cascade Care
Center Caldwell ID 312 2,050 -- 312 2,050 208 1974 1998
Emmett
Rehabilitation
and Healthcare Emmett ID 185 1,670 -- 185 1,670 944 1960 1998
Lewiston
Rehabilitation
and Care Ctr. Lewiston ID 133 3,982 -- 133 3,982 1,006 1964 1998
Nampa Care
Center Nampa ID 252 2,810 -- 252 2,810 1,533 1950's 1998
Weiser
Rehabilitation
and Care Ctr. Weiser ID 157 1,760 -- 157 1,760 1,103 1963 1998
Moscow Care
Center Moscow ID 261 2,571 -- 261 2,571 846 1955 1998
Mountain Valley
Care and Rehab. Kellogg ID 68 1,281 -- 68 1,281 732 1971 1998
Rolling Hills
Health Care
Center New Albany IN 81 1,894 -- 81 1,894 406 1984 1998
Royal Oaks
Healthcare &
Rehab Ctr. Terre Haute IN 418 5,779 -- 418 5,779 463 1995 1998
Southwood Health
& Rehab Center Terre Haute IN 90 2,868 -- 90 2,868 502 1988 1998
Vencor Corydon Corydon IN 125 6,068 -- 125 6,068 59 N/A 1998
Valley View
Health Care
Center Elkhart IN 87 2,665 -- 87 2,665 533 1985 1998
Wildwood
Healthcare
Center Indianapolis IN 134 4,983 -- 134 4,983 907 1988 1998
Meadowvale
Health & Rehab.
Ctr. Bluffton IN 7 787 -- 7 787 40 1962 1998
Columbia
Healthcare
Facility Evansville IN 416 6,317 -- 416 6,317 1,245 1983 1998
Bremen Health
Care Center Bremen IN 109 3,354 -- 109 3,354 374 1982 1998
Windsor Estates
Health & Rehab
Ctr Kokomo IN 256 6,625 -- 256 6,625 897 1962 1998
Muncie Health
Care & Rehab. Muncie IN 108 4,202 -- 108 4,202 641 1980 1998
Parkwood Health
Care Center Lebanon IN 121 4,512 -- 121 4,512 753 1977 1998
Wedgewood
Healthcare
Center Clarksville IN 119 5,115 -- 119 5,115 478 1985 1998
Westview Nursing
& Rehab. Center Bedford IN 255 4,207 -- 255 4,207 779 1970 1998
Columbus Health
& Rehab. Center Columbus IN 345 6,817 -- 345 6,817 1,925 1966 1998
Rosewood Health
Care Center Bowling Green KY 248 5,371 -- 248 5,371 1,452 1970 1998
Oakview Nursing
& Rehab. Ctr. Calvert City KY 124 2,882 -- 124 2,882 775 1967 1998
Cedars of
Lebanon Nursing
Center Lebanon KY 40 1,253 -- 40 1,253 339 1930 1998
Winchester
Centre for
Health/Rehab. Winchester KY 137 6,120 -- 137 6,120 1,637 1967 1998
Riverside Manor
Health Care Calhoun KY 103 2,119 -- 103 2,119 577 1963 1998
Maple Manor
Healthcare
Center Greenville KY 59 3,187 -- 59 3,187 864 1968 1998
Danville Centre
for Health &
Rehab. Danville KY 322 3,538 -- 322 3,538 637 1962 1998
Lexington Centre
for Health &
Rehab. Lexington KY 647 4,892 -- 647 4,892 1,171 1963 1998
North Centre for
Health & Rehab. Louisville KY 285 1,555 -- 285 1,555 484 1969 1998
Hillcrest Health
Care Center Owensboro KY 544 2,619 -- 544 2,619 1,733 1963 1998
<CAPTION>
Life on
Which
Depreciation
Income
Statement is
Facility name Computed
- - ----------------- ------------
<S> <C>
Evergreen Woods
Health & Rehab. 25 years
Rehab. &
Healthcare Ctr.
of Tampa 28 years
Rehab & Health
Ctr. of Cape
Coral 32 years
Windsor Woods
Convalescent
Center 45 years
Casa Mora Rehab.
& Ext Care 45 years
North Broward
Rehab. & Nsg.
Ctr. 45 years
Highland Pines
Rehab. Center 20 years
Pompano
Rehab/Nursing
Ctr. 45 years
Abbey Rehab. &
Nsg. Center 35 years
Savannah Rehab.
& Nursing
Center 28.5 years
Specialty Care
of Marietta 28.5 years
Savannah
Specialty Care
Center 26 years
Lafayette Nsg. &
Rehab. Ctr. 20 years
Tucker Nursing
Center 45 years
Hillcrest Rehab.
Care Center 45 years
Cascade Care
Center 45 years
Emmett
Rehabilitation
and Healthcare 28 years
Lewiston
Rehabilitation
and Care Ctr. 29 years
Nampa Care
Center 25 years
Weiser
Rehabilitation
and Care Ctr. 25 years
Moscow Care
Center 25 years
Mountain Valley
Care and Rehab. 25 years
Rolling Hills
Health Care
Center 25 years
Royal Oaks
Healthcare &
Rehab Ctr. 45 years
Southwood Health
& Rehab Center 25 years
Vencor Corydon 45 years
Valley View
Health Care
Center 25 years
Wildwood
Healthcare
Center 25 years
Meadowvale
Health & Rehab.
Ctr. 22 years
Columbia
Healthcare
Facility 35 years
Bremen Health
Care Center 45 years
Windsor Estates
Health & Rehab
Ctr 35 years
Muncie Health
Care & Rehab. 25 years
Parkwood Health
Care Center 25 years
Wedgewood
Healthcare
Center 35 years
Westview Nursing
& Rehab. Center 29 years
Columbus Health
& Rehab. Center 25 years
Rosewood Health
Care Center 30 years
Oakview Nursing
& Rehab. Ctr. 30 years
Cedars of
Lebanon Nursing
Center 30 years
Winchester
Centre for
Health/Rehab. 30 years
Riverside Manor
Health Care 30 years
Maple Manor
Healthcare
Center 30 years
Danville Centre
for Health &
Rehab. 30 years
Lexington Centre
for Health &
Rehab. 28 years
North Centre for
Health & Rehab. 30 years
Hillcrest Health
Care Center 22 years
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ---------------- Capitalized ----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ---- ----------- ----------- ---- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Woodland Terrace
Health Care
Fac. Elizabethtown KY 216 1,795 -- 216 1,795 1,176 1969 1998
Harrodsburg
Health Care
Center Harrodsburg KY 137 1,830 -- 137 1,830 736 1974 1998
Laurel Ridge
Rehab. &
Nursing Ctr. Jamaica Plain MA 194 1,617 -- 194 1,617 531 1968 1998
Blue Hills
Alzheimer's
Care Center Stoughton MA 511 1,026 -- 511 1,026 666 1965 1998
Brigham Manor
Nursing & Rehab
Ctr Newburyport MA 126 1,708 -- 126 1,708 595 1806 1998
Presentation
Nursing &
Rehab. Ctr. Brighton MA 184 1,220 -- 184 1,220 736 1968 1998
Country Manor
Rehab. & Nsg.
Center Newburyport MA 199 3,004 -- 199 3,004 1,061 1968 1998
Crawford Skilled
Nsg. & Rehab.
Ctr. Fall River MA 127 1,109 -- 127 1,109 609 1968 1998
Hallmark Nursing
& Rehab. Ctr. New Bedford MA 202 2,694 -- 202 2,694 983 1968 1998
Sachem Nursing &
Rehab. Ctr. East Bridgewater MA 529 1,238 -- 529 1,238 767 1968 1998
Hammersmith
House Nsg. Care
Ctr. Saugus MA 112 1,919 -- 112 1,919 615 1965 1998
Oakwood Rehab. &
Nursing Center Webster MA 102 1,154 -- 102 1,154 621 1967 1998
Timberlyn
Heights Nsg. &
Alz. Ctr. Great Barrington MA 120 1,305 -- 120 1,305 609 1968 1998
Star of David
Nsg. &
Rehab/Alz Ctr. West Roxbury MA 359 2,324 -- 359 2,324 1,425 1968 1998
Brittany
Healthcare
Center Natick MA 249 1,328 -- 249 1,328 652 1996 1998
Briarwood Health
Care Nursing
Ctr Needham MA 154 1,502 -- 154 1,502 697 1970 1998
Westridge
Healthcare
Center Marlborough MA 453 3,286 -- 453 3,286 1,720 1964 1998
Bolton Manor
Nursing Home Marlborough MA 222 2,431 -- 222 2,431 1,075 1973 1998
Hillcrest
Nursing Home Fitchburg MA 175 1,461 -- 175 1,461 865 1957 1998
Country Gardens
Sk. Nsg. &
Rehab. Swansea MA 415 2,675 -- 415 2,675 893 1969 1998
Quincy Rehab. &
Nursing Center Quincy MA 216 2,911 -- 216 2,911 1,316 1965 1998
West Roxbury
Manor West Roxbury MA 91 1,001 -- 91 1,001 739 1960 1998
Newton and
Wellesley
Alzheimer Ctr. Wellesley MA 297 3,250 -- 297 3,250 1,109 1971 1998
Den-Mar Rehab. &
Nursing Center Rockport MA 23 1,560 -- 23 1,560 675 1963 1998
Eagle Pond
Rehab. & Living
Center South Dennis MA 296 6,896 -- 296 6,896 1,658 1985 1998
Blueberry Hill
Healthcare Beverly MA 129 4,290 -- 129 4,290 1,664 1965 1998
Colony House
Nsg. & Rehab.
Ctr. Abington MA 132 999 -- 132 999 650 1965 1998
Embassy House
Sk. Nsg. &
Rehab. Brockton MA 166 1,004 -- 166 1,004 591 1968 1998
Franklin Sk.
Nsg. & Rehab.
Center Franklin MA 156 757 -- 156 757 500 1967 1998
Great Barrington
Rehab. & Nsg.
Ctr. Great Barrington MA 60 1,142 -- 60 1,142 716 1967 1998
River Terrace Lancaster MA 268 957 -- 268 957 642 1969 1998
Walden Rehab. &
Nursing Center Concord MA 181 1,347 -- 181 1,347 909 1969 1998
Harrington House
Nsg. & Rehab.
Ctr. Walpole MA 4 4,444 -- 4 4,444 771 1991 1998
Eastside Rehab.
and Living
Center Bangor ME 316 1,349 -- 316 1,349 457 1967 1998
Winship Green
Nursing Center Bath ME 110 1,455 -- 110 1,455 543 1974 1998
Brewer
Rehabilitation
& Living Center Brewer ME 228 2,737 -- 228 2,737 873 1974 1998
Augusta
Rehabilitation
Center Augusta ME 152 1,074 -- 152 1,074 477 1968 1998
Kennebunk
Nursing Center Kennebunk ME 99 1,898 -- 99 1,898 632 1977 1998
Norway
Rehabilitation
& Living Center Norway ME 133 1,658 -- 133 1,658 590 1972 1998
Shore Village
Rehab. &
Nursing Ctr. Rockland ME 100 1,051 -- 100 1,051 455 1968 1998
Westgate Manor Bangor ME 287 2,718 -- 287 2,718 872 1969 1998
Brentwood Rehab.
& Nsg. Center Yarmouth ME 181 2,789 -- 181 2,789 912 1945 1998
Fieldcrest Manor
Nursing Home Waldoboro ME 101 1,020 -- 101 1,020 463 1963 1998
Park Place
Health Care
Center Great Falls MT 600 6,311 -- 600 6,311 1,510 1963 1998
Parkview Acres
Care & Rehab
Ctr. Dillon MT 207 2,578 -- 207 2,578 612 1965 1998
Pettigrew Rehab.
& Healthcare
Ctr. Durham NC 101 2,889 -- 101 2,889 724 1969 1998
LaSalle
Healthcare
Center Durham NC 140 3,238 -- 140 3,238 661 1969 1998
<CAPTION>
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
<S> <C>
Woodland Terrace
Health Care
Fac. 26 years
Harrodsburg
Health Care
Center 35 years
Laurel Ridge
Rehab. &
Nursing Ctr. 30 years
Blue Hills
Alzheimer's
Care Center 28 years
Brigham Manor
Nursing & Rehab
Ctr 27 years
Presentation
Nursing &
Rehab. Ctr. 28 years
Country Manor
Rehab. & Nsg.
Center 27 years
Crawford Skilled
Nsg. & Rehab.
Ctr. 29 years
Hallmark Nursing
& Rehab. Ctr. 26 years
Sachem Nursing &
Rehab. Ctr. 27 years
Hammersmith
House Nsg. Care
Ctr. 28 years
Oakwood Rehab. &
Nursing Center 31 years
Timberlyn
Heights Nsg. &
Alz. Ctr. 29 years
Star of David
Nsg. &
Rehab/Alz Ctr. 26 years
Brittany
Healthcare
Center 31 years
Briarwood Health
Care Nursing
Ctr 30 years
Westridge
Healthcare
Center 28.5 years
Bolton Manor
Nursing Home 34.5 years
Hillcrest
Nursing Home 25 years
Country Gardens
Sk. Nsg. &
Rehab. 27 years
Quincy Rehab. &
Nursing Center 24 years
West Roxbury
Manor 20 years
Newton and
Wellesley
Alzheimer Ctr. 30 years
Den-Mar Rehab. &
Nursing Center 30 years
Eagle Pond
Rehab. & Living
Center 50 years
Blueberry Hill
Healthcare 40 years
Colony House
Nsg. & Rehab.
Ctr. 40 years
Embassy House
Sk. Nsg. &
Rehab. 40 years
Franklin Sk.
Nsg. & Rehab.
Center 40 years
Great Barrington
Rehab. & Nsg.
Ctr. 40 years
River Terrace 40 years
Walden Rehab. &
Nursing Center 40 years
Harrington House
Nsg. & Rehab.
Ctr. 45 years
Eastside Rehab.
and Living
Center 30 years
Winship Green
Nursing Center 35 years
Brewer
Rehabilitation
& Living Center 33 years
Augusta
Rehabilitation
Center 30 years
Kennebunk
Nursing Center 35 years
Norway
Rehabilitation
& Living Center 39 years
Shore Village
Rehab. &
Nursing Ctr. 30 years
Westgate Manor 31 years
Brentwood Rehab.
& Nsg. Center 45 years
Fieldcrest Manor
Nursing Home 32 years
Park Place
Health Care
Center 28 years
Parkview Acres
Care & Rehab
Ctr. 29 years
Pettigrew Rehab.
& Healthcare
Ctr. 28 years
LaSalle
Healthcare
Center 29 years
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sunnybrook
Alzheimer's &
HC Spec. Raleigh NC 187 3,409 -- 187 3,409 975 1971 1998
Blue Ridge
Rehab. &
Healthcare Ctr. Asheville NC 250 3,819 -- 250 3,819 854 1977 1998
Raleigh Rehab. &
Healthcare
Center Raleigh NC 316 5,470 -- 316 5,470 1,584 1969 1998
Rose Manor
Health Care
Center Durham NC 201 3,527 -- 201 3,527 975 1972 1998
Cypress Pointe
Rehab & HC
Center Winmington NC 233 3,710 -- 233 3,710 955 1966 1998
Winston-Salem
Rehab & HC
Center Winston-Salem NC 305 5,142 -- 305 5,142 1,462 1968 1998
Silas Creek
Manor Winston-Salem NC 211 1,893 -- 211 1,893 452 1966 1998
Lincoln Nursing
Center Lincoln NC 39 3,309 -- 39 3,309 1,160 1976 1998
Guardian Care of
Roanoke Rapids Roanoke Rapids NC 339 4,132 -- 339 4,132 1,156 1967 1998
Guardian Care of
Henderson Henderson NC 206 1,997 -- 206 1,997 482 1957 1998
Rehab. & Nursing
Center of
Monroe Monroe NC 185 2,654 -- 185 2,654 781 1963 1998
Guardian Care of
Kinston Kinston NC 186 3,038 -- 186 3,038 703 1961 1998
Guardian Care of
Zebulon Zebulon NC 179 1,933 -- 179 1,933 457 1973 1998
Guardian Care of
Rocky Mount. Rocky Mount NC 240 1,732 -- 240 1,732 291 1975 1998
Rehab. & Health
Center of
Gastonia Gastonia NC 158 2,359 -- 158 2,359 596 1968 1998
Guardian Care of
Elizabeth City Elizabeth City NC 71 561 -- 71 561 308 1977 1998
Chapel Hill
Rehab. &
Healthcare Ctr. Chapel Hill NC 347 3,029 -- 347 3,029 834 1984 1998
Homestead Health
Care & Rehab
Ctr Lincoln NE 277 1,528 1,178 277 2,706 1,809 1961 1998
Dover Rehab. &
Living Center Dover NH 355 3,797 -- 355 3,797 1,232 1969 1998
Greenbriar
Terrace
Healthcare Nashua NH 776 6,011 -- 776 6,011 1,790 1963 1998
Hanover Terrace
Healthcare Hanover NH 326 1,825 -- 326 1,825 425 1969 1998
Las Vegas
Healthcare &
Rehab. Ctr. Las Vegas NV 454 1,018 -- 454 1,018 156 1940 1998
Torrey Pines
Care Center Las Vegas NV 256 1,324 -- 256 1,324 324 1971 1998
Franklin Woods
Health Care
Center Columbus OH 190 4,712 -- 190 4,712 885 1986 1998
Chillicothe
Nursing &
Rehab. Center Chillecothe OH 128 3,481 -- 128 3,481 1,186 1976 1998
Pickerington
Nursing &
Rehab. Ctr. Pickerington OH 312 4,382 -- 312 4,382 791 1984 1998
Logan Health
Care Center Logan OH 169 3,750 -- 169 3,750 882 1979 1998
Winchester Place
Nsg. & Rehab.
Ctr. Canal Winchestr. OH 454 7,149 -- 454 7,149 1,706 1974 1998
Minerva Park
Nursing &
Rehab. Ctr. Columbus OH 210 3,684 -- 210 3,684 388 1973 1998
West Lafayette
Rehab & Nsg Ctr West Lafayette OH 185 3,278 -- 185 3,278 354 1972 1998
Cambridge Health
& Rehab. Center Cambridge OH 108 2,642 -- 108 2,642 559 1975 1998
Coshocton Health
& Rehab. Center Coshocton OH 203 1,979 -- 203 1,979 423 1974 1998
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. Akron OH 341 5,491 -- 341 5,491 1,367 1970 1998
Lebanon Country
Manor Lebanon OH 105 3,617 -- 105 3,617 995 1984 1998
Sunnyside Care
Center Salem OR 1,519 2,688 -- 1,519 2,688 690 1981 1998
Medford Rehab. &
Healthcare
Center Medford OR 362 4,610 -- 362 4,610 1,084 N/A 1998
Wyomissing Nsg.
& Rehab. Ctr. Reading PA 61 5,095 -- 61 5,095 232 1966 1998
Health Havens
Nursing &
Rehab. Ctr. E. Providence RI 174 2,643 -- 174 2,643 123 1962 1998
Oak Hill Nursing
& Rehab. Ctr. Pawtucket RI 91 6,724 -- 91 6,724 314 1966 1998
Madison
Healthcare &
Rehab Ctr. Madison TN 168 1,445 -- 168 1,445 359 1968 1998
Cordova Rehab. &
Nursing Center Cordova TN 322 8,830 -- 322 8,830 2,699 1979 1998
Primacy
Healthcare &
Rehab Ctr. Memphis TN 1,222 8,344 -- 1,222 8,344 1,646 1980 1998
Masters Health
Care Center Algood TN 524 4,370 -- 524 4,370 1,271 1981 1998
San Pedro Manor San Antonio TX 602 4,178 -- 602 4,178 209 1985 1998
Wasatch Care
Center Ogden UT 373 597 -- 373 597 343 1964 1998
Crosslands
Rehab. & Health
Care Ctr Sandy UT 334 4,300 -- 334 4,300 680 1987 1998
St. George Care
and Rehab.
Center St. George UT 420 4,465 -- 420 4,465 1,161 1976 1998
<CAPTION>
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
<S> <C>
Sunnybrook
Alzheimer's &
HC Spec. 25 years
Blue Ridge
Rehab. &
Healthcare Ctr. 32 years
Raleigh Rehab. &
Healthcare
Center 25 years
Rose Manor
Health Care
Center 26 years
Cypress Pointe
Rehab & HC
Center 28.5 years
Winston-Salem
Rehab & HC
Center 25 years
Silas Creek
Manor 28.5 years
Lincoln Nursing
Center 35 years
Guardian Care of
Roanoke Rapids 25 years
Guardian Care of
Henderson 29 years
Rehab. & Nursing
Center of
Monroe 28 years
Guardian Care of
Kinston 29 years
Guardian Care of
Zebulon 29 years
Guardian Care of
Rocky Mount. 25 years
Rehab. & Health
Center of
Gastonia 29 years
Guardian Care of
Elizabeth City 20 years
Chapel Hill
Rehab. &
Healthcare Ctr. 28 years
Homestead Health
Care & Rehab
Ctr 45 years
Dover Rehab. &
Living Center 25 years
Greenbriar
Terrace
Healthcare 25 years
Hanover Terrace
Healthcare 29 years
Las Vegas
Healthcare &
Rehab. Ctr. 30 years
Torrey Pines
Care Center 29 years
Franklin Woods
Health Care
Center 38 years
Chillicothe
Nursing &
Rehab. Center 34 years
Pickerington
Nursing &
Rehab. Ctr. 37 years
Logan Health
Care Center 30 years
Winchester Place
Nsg. & Rehab.
Ctr. 28 years
Minerva Park
Nursing &
Rehab. Ctr. 45 years
West Lafayette
Rehab & Nsg Ctr 45 years
Cambridge Health
& Rehab. Center 25 years
Coshocton Health
& Rehab. Center 25 years
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. 28 years
Lebanon Country
Manor 43 years
Sunnyside Care
Center 30 years
Medford Rehab. &
Healthcare
Center 34 years
Wyomissing Nsg.
& Rehab. Ctr. 45 years
Health Havens
Nursing &
Rehab. Ctr. 45 years
Oak Hill Nursing
& Rehab. Ctr. 45 years
Madison
Healthcare &
Rehab Ctr. 29 years
Cordova Rehab. &
Nursing Center 39 years
Primacy
Healthcare &
Rehab Ctr. 37 years
Masters Health
Care Center 38 years
San Pedro Manor 45 years
Wasatch Care
Center 25 years
Crosslands
Rehab. & Health
Care Ctr 40 years
St. George Care
and Rehab.
Center 29 years
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ------------------ Capitalized ------------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ------ ----------- ----------- ------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Heights
Rehab. & Nsg.
Ctr. Salt Lake City UT 201 2,322 -- 201 2,322 564 1962 1998
Wasatch Valley
Rehabilitation Salt Lake City UT 389 3,545 -- 389 3,545 722 1962 1998
Nansemond Pointe
Rehab. & HC
Ctr. Suffolk VA 534 6,990 -- 534 6,990 1,580 1963 1998
Harbour Pointe
Med. & Rehab.
Ctr Norfolk VA 427 4,441 -- 427 4,441 1,071 1969 1998
River Pointe
Rehab. &
Healthc. Ctr. Virginia Beach VA 770 4,440 -- 770 4,440 1,415 1953 1998
Bay Pointe
Medical &
Rehab. Centre Virginia Beach VA 805 2,886 -- 805 2,886 663 1971 1998
Birchwood
Terrace
Healthcare Burlington VT 15 4,656 -- 15 4,656 1,438 1965 1998
Arden
Rehabilitation
& Healthcare
Ctr Seattle WA 1,111 4,013 -- 1,111 4,013 944 1950's 1998
Northwest
Continuum Care
Center Longview WA 145 2,563 -- 145 2,563 627 1955 1998
Bellingham
Health Care &
Rehab Svc Bellingham WA 441 3,824 -- 441 3,824 882 1972 1998
Rainier Vista
Care Center Puyallup WA 520 4,780 -- 520 4,780 887 1986 1998
Lakewood
Healthcare
Center Lakewood WA 504 3,511 -- 504 3,511 607 1989 1998
Vencor of
Vancouver HC &
Rehab. Vancouver WA 449 2,964 -- 449 2,964 741 1970 1998
Heritage Health
& Rehab. Center Vancouver WA 76 835 -- 76 835 185 1955 1998
Edmonds Rehab. &
Healthcare Ctr. Edmonds WA 355 3,032 -- 355 3,032 824 1961 1998
Queen Anne
Healthcare Seattle WA 570 2,750 -- 570 2,750 658 1970 1998
San Luis Medical
& Rehab Center Greenbay WI 259 5,299 -- 259 5,299 930 N/A 1998
Eastview Medical
& Rehab. Center Antigo WI 200 4,047 -- 200 4,047 1,129 1962 1998
Colonial Manor
Medical & Rehab
Ctr. Wausau WI 169 3,370 -- 169 3,370 917 1964 1998
Colony Oaks Care
Center Appleton WI 353 3,571 -- 353 3,571 917 1967 1998
North Ridge Med.
& Rehab. Center Manitowoc WI 206 3,785 -- 206 3,785 893 1964 1998
Vallhaven Care
Center Neenah WI 337 5,125 -- 337 5,125 1,275 1966 1998
Kennedy Park
Medical &
Rehab. Ctr. Schofield WI 301 3,596 -- 301 3,596 1,934 1966 1998
Family Heritage
Med. & Rehab.
Ctr. Wisconsin Rapids WI 240 3,350 -- 240 3,350 1,978 1966 1998
Mt. Carmel
Medical &
Rehab. Ctr. Burlington WI 274 7,205 -- 274 7,205 1,578 1971 1998
Mt. Carmel
Medical &
Rehab. Ctr. Milwaukee WI 2,356 22,571 -- 2,356 22,571 5,777 1958 1998
Sheridan Medical
Complex Kenosha WI 282 4,910 -- 282 4,910 1,418 1964 1998
Woodstock Health
& Rehab. Center Kenosha WI 562 7,424 -- 562 7,424 2,256 1970 1998
Mountain Towers
Healthcare &
Rehab Cheyenne WY 342 3,814 -- 342 3,814 812 1964 1998
South Central
Wyoming HC. &
Rehab Rawlins WY 151 1,738 -- 151 1,738 400 1955 1998
Wind River
Healthcare &
Rehab. Ctr Riverton WY 179 1,559 -- 179 1,559 355 1967 1998
Sage View Care
Center Rock Springs WY 287 2,392 -- 287 2,392 575 1964 1998
------ ------- ----- ------ ------- -------
TOTAL VENCOR
NURSING HOMES 74,970 731,661 1,178 74,970 732,839 179,268
<CAPTION>
Life on
LocatiWhichon
- - ------------------Depreciation----------------------
in Income
Statement is
Facility name Computed
- - ----------------- ------------
<S> <C>
Federal Heights
Rehab. & Nsg.
Ctr. 29 years
Wasatch Valley
Rehabilitation 29 years
Nansemond Pointe
Rehab. & HC
Ctr. 32 years
Harbour Pointe
Med. & Rehab.
Ctr 28 years
River Pointe
Rehab. &
Healthc. Ctr. 25 years
Bay Pointe
Medical &
Rehab. Centre 29 years
Birchwood
Terrace
Healthcare 27 years
Arden
Rehabilitation
& Healthcare
Ctr 28.5 years
Northwest
Continuum Care
Center 29 years
Bellingham
Health Care &
Rehab Svc 28.5 years
Rainier Vista
Care Center 40 years
Lakewood
Healthcare
Center 45 years
Vencor of
Vancouver HC &
Rehab. 28 years
Heritage Health
& Rehab. Center 29 years
Edmonds Rehab. &
Healthcare Ctr. 25 years
Queen Anne
Healthcare 29 years
San Luis Medical
& Rehab Center 25 years
Eastview Medical
& Rehab. Center 28 years
Colonial Manor
Medical & Rehab
Ctr. 30 years
Colony Oaks Care
Center 29 years
North Ridge Med.
& Rehab. Center 29 years
Vallhaven Care
Center 28 years
Kennedy Park
Medical &
Rehab. Ctr. 29 years
Family Heritage
Med. & Rehab.
Ctr. 26 years
Mt. Carmel
Medical &
Rehab. Ctr. 30 years
Mt. Carmel
Medical &
Rehab. Ctr. 30 years
Sheridan Medical
Complex 25 years
Woodstock Health
& Rehab. Center 25 years
Mountain Towers
Healthcare &
Rehab 29 years
South Central
Wyoming HC. &
Rehab 29 years
Wind River
Healthcare &
Rehab. Ctr 29 years
Sage View Care
Center 30 years
TOTAL VENCOR
NURSING HOMES
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center MI 291 6,187 - 291 6,187 2,162 N/A 1998
Grayling Health
Care Center MI 76 3,234 -- 76 3,234 1,010 N/A 1998
Clara Barton
Terrace MI 375 2,219 -- 375 2,219 1,902 N/A 1998
Mary Avenue Care
Center MI 162 1,744 -- 162 1,744 1,412 N/A 1998
Woodside
Convalescent
Center MN 639 3,440 56 639 3,496 2,010 N/A 1998
Hillhaven
Convalescent
Center NV 121 1,181 -- 121 1,181 735 N/A 1998
Marigarde-
Sylvania
Nursing Home OH 667 2,428 -- 667 2,428 1,032 N/A 1998
Marietta
Convalescent
Center OH 158 3,266 -- 158 3,266 552 N/A 1998
------ ------- ----- ------ ------- -------
TOTAL NON-VENCOR
SKILLED NURSING
FACILITIES 2,489 23,699 56 2,489 23,755 10,815
------ ------- ----- ------ ------- -------
TOTAL FOR
SKILLED NURSING
FACILITIES 77,459 755,360 1,234 77,459 756,594 190,083
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center J36 years
Grayling Health
Care Center 43 years
Clara Barton
Terrace 21 years
Mary Avenue Care
Center 21 years
Woodside
Convalescent
Center 28 years
Hillhaven
Convalescent
Center 40 years
Marigarde-
Sylvania
Nursing Home 30 years
Marietta
Convalescent
Center 25 years
TOTAL NON-VENCOR
SKILLED NURSING
FACILITIES
TOTAL FOR
SKILLED NURSING
FACILITIES
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close of
Location Company Cost Period
- - --------------------------------------- ------------------- Capitalized -------------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- --------------- ----- ------- ----------- ----------- ------- ----------- ------------ ------------ --------
<CAPTION>
Life on
LocatiWhichon
- - ------------------Depreciation---------------------
in Income
Statement is
Facility name Computed
- - ----------------- ------------
VENCOR HOSPITALS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vencor
Hospital--
Phoenix Phoenix AZ 226 3,359 -- 226 3,359 876 N/A 1998
Vencor
Hospital--
Tucson Tuscon AZ 130 3,091 -- 130 3,091 809 N/A 1998
Vencor
Hospital--
Ontario Ontario CA 523 2,988 -- 523 2,988 572 N/A 1998
Vencor
Hospital--San
Leandro San Leandro CA 2,735 5,870 -- 2,735 5,870 2,500 N/A 1998
Vencor
Hospital--
Orange County Westminster CA 728 7,384 -- 728 7,384 2,043 N/A 1998
THC--Orange
County Orange County CA 3,144 2,611 -- 3,144 2,611 119 1990 1998
Vencor
Hospital--San
Diego San Diego CA 670 11,764 -- 670 11,764 1,877 N/A 1998
Recovery Inn of
Menlo Park Menlo Park CA -- 2,799 -- 2,799 843 1992 1998
Vencor
Hospital--
Denver Denver CO 896 6,367 -- 896 6,367 1,842 N/A 1998
Vencor
Hospital--Coral
Gables Coral Gables FL 1,071 5,348 -- 1,071 5,348 1,705 N/A 1998
Vencor
Hospital--St.
Petersburg St. Petersburg FL 1,418 17,525 7 1,418 17,532 1,793 1968 1998
Vencor
Hospital--Ft.
Lauderdale Ft. Lauderdale FL 1,758 14,080 -- 1,758 14,080 3,617 N/A 1998
Vencor
Hospital--North
Florida Green Cove Spr. FL 145 4,613 -- 145 4,613 744 N/A 1998
Vencor
Hospital--
Central Tampa Tampa FL 2,732 7,676 -- 2,732 7,676 413 1970 1998
Vencor
Hospital--
Hollywood Hollywood FL 605 5,229 -- 605 5,229 401 1937 1998
Vencor
Hospital--
Sycamore Sycamore IL 77 8,549 -- 77 8,549 1,590 N/A 1998
Vencor
Hospital--
Chicago North Chicago IL 1,583 19,980 -- 1,583 19,980 2,739 N/A 1998
Vencor
Hospital--Lake
Shore Chicago IL 1,513 9,525 -- 1,513 9,525 1,438 1995 1998
Vencor
Hospital--
Northlake Northlake IL 850 6,498 -- 850 6,498 1,859 N/A 1998
Vencor
Hospital--
LaGrange LaGrange IN 173 2,330 -- 173 2,330 1,428 N/A 1998
Vencor
Hospital--
Indianapolis Indianapolis IN 985 3,801 -- 985 3,801 1,061 N/A 1998
Vencor
Hospital--
Louisville Louisville KY 3,041 12,330 -- 3,041 12,330 1,743 N/A 1998
Vencor
Hospital--New
Orleans New Orleans LA 648 4,971 -- 648 4,971 1,870 1968 1998
Vencor Hosp--
Boston
Northshore Peabody MA 543 7,568 -- 543 7,568 433 1974 1998
Vencor
Hospital--
Boston Boston MA 1,551 9,796 -- 1,551 9,796 3,319 N/A 1998
Vencor
Hospital--
Detroit Detroit MI 355 3,544 -- 355 3,544 1,110 N/A 1998
Vencor
Hospital--Metro
Detroit Detroit MI 564 4,896 -- 564 4,896 212 1980 1998
Vencor
Hospital--
Minneapolis Golden Valley MN 223 8,120 -- 223 8,120 420 1952 1998
Vencor
Hospital--
Kansas City Kansas City MO 277 2,914 -- 277 2,914 855 N/A 1998
Vencor
Hospital--St.
Louis St. Louis MO 1,126 2,087 -- 1,126 2,087 769 N/A 1998
Vencor
Hospital--
Greensboro Greensboro NC 1,010 7,586 -- 1,010 7,586 1,751 N/A 1998
Vencor
Hospital--
Albuquerque Albuquerque NM 11 4,253 -- 11 4,253 197 1985 1998
THC--Las Vegas
Hospital Las Vegas NV 1,110 2,177 -- 1,110 2,177 119 1980 1998
Vencor
Hospital--
Oklahoma City Oklahoma City OK 293 5,607 -- 293 5,607 1,239 N/A 1998
Vencor
Hospital--
Philadelphia Philadelphia PA 135 5,223 -- 135 5,223 600 N/A 1998
Vencor
Hospital--
Pittsburgh Oakdale PA 662 12,854 -- 662 12,854 1,296 N/A 1998
Vencor
Hospital--
Chattanooga Chattanooga TN 757 4,415 -- 757 4,415 1,262 N/A 1998
Vencor
Hospital--San
Antonio San Antonio TX 249 11,413 -- 249 11,413 2,421 N/A 1998
Vencor
Hospital--Ft.
Worth Southwest Ft. Worth TX 2,342 7,458 -- 2,342 7,458 761 1987 1998
Vencor
Hospital--
Houston
Northwest Houston TX 1,699 6,788 -- 1,699 6,788 643 1986 1998
Vencor
Hospital--
Mansfield Mansfield TX 267 2,462 -- 267 2,462 628 N/A 1998
Vencor
Hospital--Ft.
Worth West Ft. Worth TX 648 10,608 -- 648 10,608 1,662 N/A 1998
Vencor
Hospital--
Houston Houston TX 33 7,062 -- 33 7,062 1,629 N/A 1998
Vencor
Hospital--
Arlington, VA Arlington VA 3,025 3,105 -- 3,025 3,105 669 N/A 1998
Vencor
Hospital--Mt.
Carmel Mt. Carmel WI 322 3,296 -- 322 3,296 468 1989 1998
------- --------- ----- ------- --------- -------
TOTAL FOR VENCOR
HOSPITALS 42,853 301,920 7 42,853 301,927 56,345
PERSONAL CARE
FACILITIES
ResCare--
Tangram--8
sites San Marcos TX 616 6,512 4 616 6,516 81 N/A
------- --------- ----- ------- --------- -------
120,928 1,063,792 1,245 120,928 1,065,037 246,509
======= ========= ===== ======= ========= =======
VENCOR HOSPITALS
<S> <C>
Vencor
Hospital--
Phoenix 30 years
Vencor
Hospital--
Tucson 25 years
Vencor
Hospital--
Ontario 25 years
Vencor
Hospital--San
Leandro 25 years
Vencor
Hospital--
Orange County 20 years
THC--Orange
County 40 years
Vencor
Hospital--San
Diego 25 years
Recovery Inn of
Menlo Park 20 years
Vencor
Hospital--
Denver 20 years
Vencor
Hospital--Coral
Gables 30 years
Vencor
Hospital--St.
Petersburg 40 years
Vencor
Hospital--Ft.
Lauderdale 30 years
Vencor
Hospital--North
Florida 20 years
Vencor
Hospital--
Central Tampa 40 years
Vencor
Hospital--
Hollywood 20 years
Vencor
Hospital--
Sycamore 20 years
Vencor
Hospital--
Chicago North 25 years
Vencor
Hospital--Lake
Shore 20 years
Vencor
Hospital--
Northlake 30 years
Vencor
Hospital--
LaGrange 25 years
Vencor
Hospital--
Indianapolis 30 years
Vencor
Hospital--
Louisville 20 years
Vencor
Hospital--New
Orleans 20 years
Vencor Hosp--
Boston
Northshore 40 years
Vencor
Hospital--
Boston 25 years
Vencor
Hospital--
Detroit 20 years
Vencor
Hospital--Metro
Detroit 40 years
Vencor
Hospital--
Minneapolis 40 years
Vencor
Hospital--
Kansas City 30 years
Vencor
Hospital--St.
Louis 40 years
Vencor
Hospital--
Greensboro 20 years
Vencor
Hospital--
Albuquerque 40 years
THC--Las Vegas
Hospital 40 years
Vencor
Hospital--
Oklahoma City 30 years
Vencor
Hospital--
Philadelphia 35 years
Vencor
Hospital--
Pittsburgh 40 years
Vencor
Hospital--
Chattanooga 22 years
Vencor
Hospital--San
Antonio 30 years
Vencor
Hospital--Ft.
Worth Southwest 20 years
Vencor
Hospital--
Houston
Northwest 40 years
Vencor
Hospital--
Mansfield 40 years
Vencor
Hospital--Ft.
Worth West 34 years
Vencor
Hospital--
Houston 20 years
Vencor
Hospital--
Arlington, VA 28 years
Vencor
Hospital--Mt.
Carmel 20 years
TOTAL FOR VENCOR
HOSPITALS
PERSONAL CARE
FACILITIES
ResCare--
Tangram--8
sites 20 years
</TABLE>
S-6
<PAGE>
VENTAS, INC.
SCHEDULE IV
MORTGAGE ON REAL ESTATE
December 31, 1998
(Dollars in Thousands)
Not Applicable.
S-7
<PAGE>
EXHIBIT 4.1
NUMBER________________ SHARES_______________
[VENTAS, INC. LOGO]
VENTAS, INC.
SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP ________________
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.25 PAR VALUE EACH,
OF
VENTAS, INC. transferable on the books of the Corporation by the holder hereof
in person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
NATIONAL CITY BANK
(________________)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[VENTAS, INC. CORPORATE SEAL 1998 DELAWARE SEAL]
/s/
-------------------------------
/s/
-------------------------------
<PAGE>
<TABLE>
<CAPTION>
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed
as though they were written out in full according to applicable laws or regulations:
<S> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT-________________ Custodian__________________
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with
right of survivorship and under Uniform Gifts to Minors
not as tenants in common
Act____________________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - -------------------------------------------------
__________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE OF ASSIGNEE)
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
___________________________________________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
_________________________________________________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in
the premises.
Dated _________________________________
_________________________________________________________________________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
_________________________________________________________________________________
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANK, STOCKBROKERS. SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF
INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
</TABLE>
<PAGE>
EXHIBIT 10.4
AMENDMENT
TO
PROMISSORY NOTE
THIS AMENDMENT (the "Amendment") is made and entered into as of December
31, 1998, by and between Vencor Realty Limited Partnership, with an address of
3300 Aegon Center, Louisville, Kentucky ("Payee"), and W. Bruce Lunsford (the
"Maker").
RECITALS:
A. The Maker has executed and delivered a Promissory Note (the "Note"),
dated as of June 15, 1998, in the principal amount of $3,750,000, in
favor of the Payee.
B. The Maker and the Payee desire to amend the Note as set forth below.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Note is hereby amended, effective December 31, 1998, as follows:
1. Immediately preceding the paragraph that begins "The occurrence of any
one or more of the following events shall constitute a default under
this Note:", a new paragraph is hereby added to read as follows:
"Notwithstanding anything to the contrary in this Note, if the Maker
resigns as Chairman of Ventas, Inc. at the request of the Board of
Directors of Ventas, Inc. for any reason other than Cause (as defined in
the Employment Agreement, dated as of July 31, 1998, between the Maker and
Ventas, Inc., as amended effective December 31, 1998), any and all unpaid
principal and interest on this Note shall be forgiven and this Note shall
be extinguished."
2. All capitalized terms used in this Amendment shall have the same
definitions as set forth in the Note.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
VENTAS REALTY
LIMITED PARTNERSHIP
_____________________________
By:
Title:
W. BRUCE LUNSFORD
____________________________
W. Bruce Lunsford
2
<PAGE>
EXHIBIT 10.5
PROMISSORY NOTE
---------------
$136,855.68 Louisville, Kentucky
October 22, 1998
FOR VALUE RECEIVED, the undersigned STEVEN T. DOWNEY (hereinafter referred
to as "Maker"), hereby promises and agrees to pay to the order of VENTAS, INC.
(hereinafter referred to as "Payee"), with an address of 3300 Aegon Center,
Louisville, Kentucky, the aggregate principal sum of ONE HUNDRED THIRTY SIX
THOUSAND EIGHT HUNDRED FIFTY FIVE DOLLARS AND SIXTY EIGHT CENTS ($136,855.68) in
lawful money of the United States of America, in the manner set forth herein, on
or before February 15, 2003 (the "Maturity Date").
Principal of this note (the "Note") shall not bear interest; provided that
upon the occurrence of an event of default the outstanding principal balance of
this Note shall bear interest as provided below.
Principal on this Note shall be paid in four (4) equal annual installment
of THIRTY FOUR THOUSAND TWO HUNDRED THIRTEEN DOLLARS AND NINETY TWO CENTS
($34,213.92) each, commencing on the 15th day of February, 2000, and continuing
on the 15th day of February of each successive year thereafter until the
Maturity Date, on which date all of the remaining unpaid principal of this Note
shall be paid. Notwithstanding the above, the unpaid principal balance of this
Note shall be forgiven and this Note shall be extinguished if any of the
following events shall occur on or prior to the Maturity Date: (a) upon a
"Change in Control," as defined in the 1997 Incentive Compensation Plan of the
Payee, (b) if the Payee shall terminate Maker's employment with the Payee for
any reason other than "Cause," as defined below, (c) if the Maker's employment
with the Payee is terminate by reason of death or disability of the Payee, or
(d) if Maker shall terminate his employment with the Payee for "Good Reason," as
defined below. The terms "Cause" and "Good Reason" as used herein shall have the
meaning ascribed to those terms in the Employment Agreement dated September 21,
1998, between the Maker and the Payee. In connection with any such
extinguishment of this Note, the Payee shall pay to the Maker an amount (the
"Gross-Up Payment") equal to all taxes required to be paid by the Maker with
respect to the forgiveness of the principal of this Note under the terms of any
federal, state or local government or taxing authority, including any tax
imposed on the Gross-Up Payment.
All payments of principal and any other sums due under this Note shall be
made to Payee at the address written above or to such other person or at such
other address as may be designated in writing by the holder of this Note. All
payments on this Note shall be applied first to the payment of any expenses or
charges payable hereunder, and then to the principal balance hereof, or in such
other order as Payee may elect in Payee's sole discretion.
The occurrence of any one or more of the following events shall constitute
a default under this Note: (i) the failure of Maker to pay principal or interest
of this Note as and when due, or within five (5) days thereafter; or (ii) the
insolvency of, the appointment of a custodian or trustee
<PAGE>
for, or an assignment for the benefit of creditors by or the filing of a
petition under bankruptcy, insolvency or debtor's relief law by or against,
Maker.
Whenever there is a default under this Note the entire principal balance of
this Note, shall, at the option of the holder hereof, become forthwith due and
payable, without presentment, notice, protest or demand of any kind (all of
which are expressly waived by Maker). Upon the occurrence of any such default,
at the option of the Payee, the entire unpaid principal balance of this Note
shall thereafter bear interest at the highest rate permitted by applicable law
and shall continue to bear interest at such rate until the default is cured or
until this Note is paid in full.
This Note is hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of the maturity hereof, or
otherwise, shall the amount paid or agreed to be paid to Payee for the use,
forbearance or detention of the money loaned hereunder, or advanced for the
performance or payment of any covenant or obligation contained herein or in any
other document evidencing, securing or pertaining to the indebtedness evidenced
hereby, exceed the maximum amount permissible under applicable law. If from any
circumstances whatsoever fulfillment of any provision hereof or of any such
other document, at the time performance of such provisions shall be due, shall
involve transcending the limit of validity prescribed by law, then ipso facto
----------
the obligation to be fulfilled shall be reduced to the limit of such validity,
and if from such circumstance the holder hereof shall ever receive anything of
value deemed by applicable law to be interest in any amount that would exceed
the highest lawful rate payable hereunder, an amount equal to any excessive
interest shall be applied to the reduction of the principal amount owing
hereunder and not to the payment of interest, and if the amount that would be
excessive interest exceeds the principal balance then owing, such excess shall
be refunded to the party paying same.
Failure of the holder of this Note to exercise any of such holder's rights
and remedies shall not constitute a waiver of the right to exercise the same at
that or any other time. All rights and remedies of the holder for default under
this Note shall be cumulative to the greatest extent permitted by law. Time
shall be of the essence in the payment of all amounts under this Note and the
performance of Maker's other obligations under this Note.
If there is any default under this Note, and this Note is placed in the
hands of an attorney for collection, or is collected through any court,
including any bankruptcy court, Maker promises to pay to the holder hereof such
holder's reasonable attorneys' fees and court costs incurred in collecting or
attempting to collect or securing or attempting to secure this Note or enforcing
the holder's rights in any collateral securing this Note, provided the same is
legally allowed by the laws of the Commonwealth of Kentucky or any state where
the collateral or any part thereof is situated.
This Note has been delivered in, and shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky without reference to
its conflict of laws rules. This Note has substantial contacts with the
Commonwealth of Kentucky. All actions, suits or other proceedings with respect
to this Note shall be brought only in a court of competent
2
<PAGE>
jurisdiction in Jefferson County, Kentucky. In any such action, suit or
proceeding, such court shall have personal jurisdiction over all of the parties
hereto, and service of process upon them under any applicable statutes, laws and
rules shall be deemed valid and good.
Maker and any other party who is or may become primarily or secondarily
liable for any of the obligations of Maker hereunder hereby waive presentment,
demand, notice of dishonor, protest, notice of protest and nonpayment, and
further waive all exemptions to which they may now or hereafter be entitled
under the laws of this or any other state or of the United States, and further
agree that the holder of this Note shall have the right without notice, to deal
in any way, at any time, with Maker, or any guarantor of this Note or with any
other party who may become primarily or secondarily liable for any of the
obligations of Maker under this Note without waiving any rights the holder of
this Note may have hereunder or by virtue of the laws of the state of Kentucky
or any other state of the United States.
________________________________
STEVEN T. DOWNEY
ACCEPTED AND AGREED TO:
VENTAS, INC.
______________________________________
THOMAS T. LADT, PRESIDENT
3
<PAGE>
EXHIBIT 10.6
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of this day of 1998, by and between Vencor, Inc., a
Delaware corporation ("Vencor"), and Vencor Healthcare, Inc., a Delaware
corporation ("Healthcare Company").
W I T N E S S E T H:
WHEREAS, the Board of Directors of Vencor has determined that it is
appropriate and desirable to (a) separate Vencor and its subsidiaries into two
publicly-owned companies so that (i) the assets and liabilities relating to
substantially all of the Vencor-owned land, buildings and other improvements
and real estate related assets are allocated to Vencor (the "Real Estate
Business") which will be renamed "Ventas, Inc.," a Delaware corporation,
immediately prior to the Distribution (as defined herein), and (ii) the other
assets and liabilities relating to the historical operations of Vencor,
including the Development Properties (as defined herein), are allocated to
Healthcare Company (the "Healthcare Business"), which will be renamed Vencor,
Inc. immediately prior to the Distribution; and (b) pursuant to a Distribution
Agreement (as defined herein) distribute (the "Distribution"), following such
reorganization, as a dividend to the holders of the issued and outstanding
shares of common stock, par value $.25 per share, of Vencor ("Vencor Common
Stock") all of the issued and outstanding shares of common stock, par value
$.25 per share, of Healthcare Company ("Healthcare Company Common Stock") on
the basis of one share of Healthcare Company Common Stock for each share of
Vencor Common Stock;
WHEREAS, the parties hereto have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
such separation and the Distribution and to set forth other agreements that
will govern certain other matters prior to and following the Distribution;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 General. Unless otherwise defined herein or unless the context
otherwise requires, the following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms
of the terms defined):
"Action" shall mean any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or
mediation tribunal.
"Affiliate" shall mean with respect to any specified Person, a Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person;
provided, however, that for purposes of this Agreement, no member of either
Group shall be deemed to be an Affiliate of any member of the other Group.
"Agreement" shall have the meaning set forth in the preamble to this
Agreement.
"Agreement Disputes" shall have the meaning set forth in Section 6.01 of
this Agreement.
"Ancillary Agreements" shall mean all the written agreements, instruments,
understandings, assignments or other arrangements (other than this Agreement)
entered into by the parties hereto or any other member of
A-1
<PAGE>
their respective Group in connection with the Corporate Restructuring
Transactions, the Distribution and the other transactions contemplated hereby
or thereby, including, without limitation, the following:
(i)the Master Lease Agreement;
(ii)the Development Agreement;
(iii)the Participation Agreement;
(iv)the Employee Benefits Agreement;
(v)the Intellectual Property Agreement;
(vi)the Tax Allocation Agreement;
(vii)the Transition Services Agreement;
(viii)the Conveyance and Assumption Instruments;
(ix)the Debt and Cash Allocation Agreement;
(x)the Distribution Agreement; and
(xi)the Insurance Agreement.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions located in the States of Kentucky, New York or
Delaware are authorized or obligated by law or executive order to close.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor legislation and the regulations promulgated thereunder.
"Conveyancing and Assumption Instruments" shall mean, collectively, the
various written agreements, instruments and other documents to be entered into
to effect the Corporate Restructuring Transactions or otherwise effect the
transfer of assets and the assumption of liabilities in the manner
contemplated by this Agreement, the Ancillary Agreements and the Corporate
Restructuring Transactions.
"Corporate Restructuring Transactions" shall mean, collectively, (a) each of
the mergers, transfers, conveyances, contributions, assignments and other
transactions described and set forth on Exhibit A attached hereto, and (b)
such other mergers, transfers, conveyances, contributions, assignments and
other transactions that may be appropriate or required to be accomplished,
effected or consummated by Vencor or Healthcare Company or any of their
respective Subsidiaries and Affiliates in order to separate and divide, in a
series of transactions, Vencor so that: (i) the Healthcare Company Assets,
Healthcare Company Liabilities and Healthcare Business shall be owned,
directly or indirectly, by Healthcare Company; and (ii) the Vencor Assets,
Vencor Liabilities and Real Estate Business that remain after the separation
and division described in clause (i) above, are, after giving effect to the
Distribution, owned directly or indirectly, by Vencor.
"Debt and Cash Allocation Agreement" shall mean the Debt and Cash Allocation
Agreement by and between Vencor and Healthcare Company, which agreement shall
be entered into on the Distribution Date in the form attached hereto as
Exhibit B.
"Development Agreement" shall mean the Development Agreement by and between
Vencor and Healthcare Company, which agreement shall be entered into on the
Distribution Date in the form attached hereto as Exhibit C.
"Development Properties" shall mean the real property listed on Schedule
1.01(a) of this Agreement.
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<PAGE>
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Distribution" shall have the meaning set forth in the preamble to this
Agreement.
"Distribution Agreement" shall mean the Distribution Agreement by and
between Vencor and Healthcare Company, which agreement shall be entered into
on the Distribution Date in the form attached hereto as Exhibit D.
"Distribution Date" shall mean the date, to be determined by the Board of
Directors of Vencor, or such committee of the Board as shall be designated by
the Board of Directors, as of which the Distribution shall be effected.
"Employee Benefits Agreement" shall mean the Employee Benefits Agreement by
and between Vencor and Healthcare Company, which agreement shall be entered
into on the Distribution Date in the form attached hereto as Exhibit E.
"Environmental Laws" shall mean any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, principles of common
law, judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreements or other governmental restrictions (including without
limitation the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. 9601, et seq.), whether now or hereafter in
existence, relating to the environment, natural resources, human health or
safety, endangered or threatened species of fish, wildlife and plants, or to
emissions, discharges or releases of pollutants, contaminant, petroleum or
petroleum products, chemicals or industrial, toxic or hazardous substances or
wastes into the environment (including without limitation indoor or outdoor
air, surface water, groundwater and surface or subsurface soils), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants,
petroleum or petroleum products, chemicals or industrial, toxic or hazardous
substances or wastes or the investigation, cleanup or other remediation
thereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Financing Transactions" shall mean the Healthcare Company Financing
Transactions and the Vencor Financing Transactions.
"Governmental Authority" shall mean any Federal, state, local, foreign or
international court, government, department, commission, board, bureau,
agency, the NYSE or other regulatory, administrative or governmental
authority.
"Group" shall mean, with respect to Vencor, the Vencor Group and, with
respect to Healthcare Company, the Healthcare Company Group.
"Healthcare Business" shall have the meaning set forth in the preamble to
this Agreement.
"Healthcare Company" shall have the meaning set forth in the preamble to
this Agreement.
"Healthcare Company Assets" shall mean, collectively, all the rights and
assets that are owned by Healthcare Company or any of its Subsidiaries as of
the close of business on the Distribution Date, including without limitation:
(i) the capital stock of the Healthcare Subsidiaries;
(ii) all the assets included on the Healthcare Company Pro Forma Balance
Sheet that are to be owned by Healthcare Company or any of its Subsidiaries
as of the close of business on the Distribution Date, including the
Development Properties;
(iii) all the assets and rights expressly allocated to Healthcare Company
or any of the Healthcare Company Subsidiaries under this Agreement or any
of the Ancillary Agreements; and
(iv) any other asset acquired by Vencor or any of its Subsidiaries from
the date of the Healthcare Company Pro Forma Balance Sheet to the close of
business on the Distribution Date that is owned by
A-3
<PAGE>
Vencor or any of its Subsidiaries as of the close of business on the
Distribution Date and that is of a nature or type that would have resulted
in such asset being included as an asset on the Healthcare Company Pro
Forma Balance Sheet had it been acquired on or prior to the date of the
Healthcare Pro Forma Balance Sheet, determined on a basis consistent with
the determination of the assets included on the Healthcare Company Pro
Forma Balance Sheet.
"Healthcare Company Common Stock" shall have the meaning set forth in the
preamble to this Agreement.
"Healthcare Company Financing Transactions" shall mean the entry into or
issuance by Healthcare Company of (i) a revolving credit facility in the
amount of $300 million, (ii) a term loan in the amount of $300 million, (iii)
a second term loan in the amount of $200 million, (iv) a bridge loan in the
amount of $200 million, (v) $17.7 million proceeds of Healthcare Company
preferred stock and (vi) $300 million of senior subordinated debt or such
other financing transactions approved by the Healthcare Company Board of
Directors.
"Healthcare Company Group" shall mean Healthcare Company, the Healthcare
Company Subsidiaries and the corporation, partnerships, joint ventures,
limited liability companies, investments and other entities that represent
equity investments of Healthcare Company or any of the Healthcare Company
Subsidiaries following the consummation of the Corporate Restructuring
Transactions and the Distribution.
"Healthcare Company Indemnities" shall mean:
(i) Healthcare Company and each Affiliate thereof after giving effect to
the Corporate Restructuring Transactions and the Distribution; and
(ii) each of the respective past, present and future directors, officers,
members, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, members,
employees and agents.
"Healthcare Company Liabilities" shall mean, collectively, all of the
Liabilities of Healthcare Company, the Healthcare Company Subsidiaries and
each of the other members of the Healthcare Company Group after giving effect
to the Corporate Restructuring Transactions, the Distribution and the
transactions contemplated under the Debt and Cash Allocation Agreement,
including, without limitation:
(i) all the Liabilities included on the Healthcare Company Pro Forma
Balance Sheet which remain outstanding as of the close of business on the
Distribution Date;
(ii) all Liabilities associated with the repurchase of Vencor's 8 5/8%
Senior Subordinated Notes Due 2007 and the assumption of such Senior
Subordinated Notes and the indenture relating thereto;
(iii) all other Liabilities that are incurred or which accrue or are
accrued at any time prior to, on or after the date of the Healthcare
Company Pro Forma Balance Sheet and that arise or arose out of, or in
connection with, the Healthcare Company Assets or the Healthcare Business,
determined on a basis consistent with the determination of the Liabilities
of Healthcare Company on the Healthcare Company Pro Forma Balance Sheet;
(iv) all the Liabilities of Healthcare Company, the Healthcare Company
Subsidiaries or any of the other members of the Healthcare Company Group
under, or to be retained or assumed by Healthcare Company, any Healthcare
Company Subsidiary or any of the other members of the Healthcare Company
Group pursuant to this Agreement or any of the Ancillary Agreements; and
(v) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, at or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution Date
of the Healthcare Business, except as otherwise specifically provided
herein.
A-4
<PAGE>
"Healthcare Company Pro Forma Balance Sheet" shall mean the pro forma
balance sheet of Healthcare Company at December 31, 1997, attached hereto as
Exhibit F.
"Healthcare Company Subsidiaries" shall mean all of the subsidiaries listed
on Schedule 1.01(b).
"Holders" shall mean the holders of record of shares of Vencor Common Stock
as of the Record Date.
"Indemnifiable Losses" shall mean all Losses which are subject to being
indemnified by Vencor or Healthcare Company pursuant to Article III.
"Indemnifying Party" shall mean a Person who or which is obligated under
this Agreement to provide indemnification.
"Indemnitee" shall mean a Person who may seek indemnification under this
Agreement.
"Indemnity Payment" shall mean an amount that an Indemnifying Party is
required to pay to an Indemnitee pursuant to Article III.
"Information" shall mean all records, books, contracts, instruments,
computer data and other data and information.
"Insurance Agreement" shall mean the Insurance Agreement by and between
Vencor and Healthcare Company, which Agreement shall be entered into on the
Distribution Date in the form attached hereto as Exhibit G.
"Insurance Proceeds" shall mean, with respect to any insured party, those
monies, net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention or cost of reserve paid or held by or for the
benefit of such insured, which are either: (i) received by an insured from an
insurance carrier; or (ii) paid by an insurance carrier on behalf of an
insured.
"Intellectual Property Agreement" shall mean the Intellectual Property
Agreement by and between Vencor and Healthcare Company or members of their
respective Groups, which agreement will be entered into on the Distribution
Date in the form attached hereto as Exhibit H.
"IRS" shall mean the Internal Revenue Service.
"Law" shall mean all laws, statutes and ordinances and all regulations,
rules and other pronouncements of Governmental Authorities having the effect
of law of the United States, any foreign country, or any domestic or foreign
state, province, commonwealth, city, country, municipality, territory,
protectorate, possession or similar instrumentality, or any Governmental
Authority thereof.
"Liabilities" shall mean any and all debts, liabilities, obligations,
responsibilities, response actions, losses, damages (whether compensatory,
punitive or treble), fines, penalties and sanctions, absolute or contingent,
matured or unmatured, liquidated or unliquidated, foreseen or unforeseen,
joint, several or individual, asserted or unasserted, accrued or unaccrued,
known or unknown, whenever arising, including without limitation those arising
under or in connection with any Law (including any Environmental Law), Action,
threatened Action, order or consent decree of any Governmental Authority or
any award of any arbitration tribunal, and those arising under any contract,
guarantee, commitment or undertaking, whether sought to be imposed by a
Governmental Authority, private party, or party to this Agreement, whether
based in contract, tort, implied or express warranty, strict liability,
criminal or civil statute, or otherwise, and including any costs, expenses,
interest, attorneys' fees, disbursement and expense of counsel, expert and
consulting fees and costs related thereto or to the investigation or defense
thereof.
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"Litigation Matters" shall have the meaning set forth in Section 5.06(a)
hereof.
"Losses" shall mean all losses, liabilities, damages, claims, demands,
judgments or settlements of any nature or kind, known or unknown, fixed,
accrued, absolute or contingent, liquidated or unliquidated, including all
reasonable costs and expenses (legal, accounting or otherwise as such costs
are incurred) relating thereto, suffered by an Indemnitee.
"Master Lease Agreement" shall mean the Master Lease Agreement, which
agreement will be entered into on or prior to the Distribution Date between
Vencor and Healthcare Company or members of their respective Groups in the
form attached hereto as Exhibit I.
"Notices" shall have the meaning set forth in Section 8.05 of this
Agreement.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Participation Agreement" shall mean the Participation Agreement by and
between Vencor and the Healthcare Company, which agreement shall be entered
into on the Distribution Date in the form attached hereto as Exhibit J.
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, a limited liability company, an unincorporated
organization or a government or any department or agency thereof.
"Prime Rate" shall mean the rate which Citibank N.A. (or any successor
thereto or other major money center commercial bank agreed to by the parties
hereto) announces from time to time as its base lending rate, as in effect
from time to time.
"Privileged Information" shall have the meaning set forth in Section 5.06(a)
hereof.
"Properties" shall mean the real property listed on Schedule 1.01(c).
"Proxy Statement" shall mean the Proxy Statement dated March 25, 1998 as
sent to the holders of shares of Vencor Common Stock in connection with the
Corporate Restructuring Transactions and the Distribution including any
amendments or supplements thereto.
"Real Estate Business" shall have the meaning set forth in the preamble to
this Agreement.
"Record Date" shall mean the date determined by the Board of Directors of
Vencor, or such committee of the Board as shall be authorized by the Board of
Directors, as the record date for determining stockholders of Vencor entitled
to receive the Distribution.
"Registration Statement" shall mean the registration statement on Form 10 to
effect the registration of the Healthcare Company Common Stock pursuant to the
Exchange Act.
"Representative" shall mean, with respect to any Person, any of such
Person's directors, officers, employees, agents, consultants, advisors,
accountants, attorneys and representatives.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
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"Subsidiary" shall mean with respect to any specified Person, any
corporation or other legal entity of which such Person or any of its
Subsidiaries controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote on the election of members to
the board of directors or similar governing body; provided, however, that for
purposes of this Agreement, (a) the Healthcare Company Subsidiaries shall be
deemed to be Subsidiaries of Healthcare Company and (b) Healthcare Company and
the Healthcare Company Subsidiaries shall not be deemed to be Subsidiaries of
Vencor or any of Vencor's Subsidiaries.
"Tax" shall have the meaning set forth in the Tax Sharing Agreement.
"Tax Allocation Agreement" shall mean the Tax Allocation Agreement by and
between Vencor and Healthcare Company, which agreement shall be entered into
on the Distribution Date in the form attached hereto as Exhibit K.
"Third Party" shall mean a Person who is not a party hereto or a wholly-
owned Subsidiary thereof.
"Third Party Claim" shall mean any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Third Party.
"Transition Services Agreement" shall mean the Transition Services Agreement
by and between Vencor and Healthcare Company, which agreement shall be entered
into on the Distribution Date in the form attached hereto as Exhibit L.
"Vencor" shall have the meaning set forth in the preamble to this Agreement.
"Vencor Assets" shall mean, collectively, all the rights and assets that are
owned by Vencor or any of its Subsidiaries as of the close of business on the
Distribution Date (other than the Healthcare Company Assets and the capital
stock of Healthcare Company), including without limitation:
(i) the capital stock of the Vencor Subsidiaries;
(ii) all the assets included on the Vencor Pro Forma Balance Sheet which
are owned by Vencor and its Subsidiaries as of the close of business on the
Distribution Date, including the Properties;
(iii) all the assets and rights expressly allocated to Vencor or any of
its Subsidiaries under this Agreement and any of the Ancillary Agreements;
and
(iv) any other asset acquired by Vencor or any of its Subsidiaries from
the date of the Vencor Pro Forma Balance Sheet to the close of business on
the Distribution Date that is owned by Vencor or any of its Subsidiaries
and that is of a nature or type that would have resulted in such asset
being included as an asset on the Vencor Pro Forma Balance Sheet had it
been acquired on or prior to the date of the Vencor Pro Forma Balance
Sheet, determined on a basis consistent with the determination of the
assets included on the Vencor Pro Forma Balance Sheet.
"Vencor Certificate Amendments" shall mean the amendments to the Vencor
Certificate of Incorporation proposed by the Board of Directors of Vencor to
be considered and voted on by the stockholders of Vencor in the Proxy
Statement.
"Vencor Common Stock" shall have the meaning set forth in the preamble to
this Agreement.
"Vencor Financing Transactions" shall mean the entry into by Vencor of (i) a
revolving credit facility in the amount of $250 million, (ii) a term loan in
the amount of $250 million, (iii) a second term loan in the amount of $250
million and (iv) a bridge loan in the amount of $450 million or such other
financing transactions approved by the Vencor Board of Directors.
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"Vencor Group" means Vencor, the Vencor Subsidiaries and the corporations,
partnerships, joint ventures, investments, limited liability companies and
other entities that represent equity investments of Vencor or any of the
Vencor Subsidiaries following consummation of the Corporate Restructuring
Transactions and the Distribution.
"Vencor Indemnitees" means:
(i) Vencor, the Vencor Subsidiaries and each Affiliate thereof after
giving effect to the Corporate Restructuring Transactions and the
Distribution; and
(ii) each of the respective past, present and future directors, officers,
employees and agents of any of the entities described in the immediately
preceding clause (i) and each of the heirs, executors, successors and
assigns of such directors, officers, members, employees and agents.
"Vencor Liabilities" means, collectively, all the Liabilities of Vencor and
the Vencor Subsidiaries and each of the other members of the Vencor Group
remaining after giving effect to the Corporate Restructuring Transactions, the
Distribution and the transactions contemplated under the Debt and Cash
Allocation Agreement, including without limitation:
(i) all the Liabilities included on the Vencor Pro Forma Balance Sheet
which remain outstanding as of the close of business on the Distribution
Date;
(ii) all other Liabilities that are incurred or which otherwise accrue or
are accrued at any time prior to, on or after the date of the Vencor Pro
Forma Balance Sheet and that arise or arose out of, or in connection with,
the Vencor Assets or the Real Estate Business, determined on a basis
consistent with the determination of the Liabilities of Vencor on the
Vencor Pro Forma Balance Sheet;
(iii) all the Liabilities of Vencor, the Vencor Subsidiaries or any of
the other members of the Vencor Group under, or to be retained or assumed
by Vencor, any Vencor Subsidiary or any of the other members of the Vencor
Group pursuant to the Corporate Restructuring Transactions, this Agreement,
or any of the Ancillary Agreements; and
(iv) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising, whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution Date
of the Real Estate Business, except as otherwise specifically provided
herein.
"Vencor Pro Forma Balance Sheet" shall mean the pro forma balance sheet of
Vencor at December 31, 1997, attached hereto as Exhibit M.
"Vencor Subsidiaries" shall mean the Subsidiaries of Vencor set forth on
Schedule 1.01(d) hereto and all other Subsidiaries of Vencor other than
Healthcare Company and the Healthcare Company Subsidiaries.
ARTICLE II
PRE-DISTRIBUTION TRANSACTIONS;
CERTAIN COVENANTS
2.01 Corporate Restructuring Transactions. Each of Vencor and Healthcare
Company shall, and shall cause each of their respective Subsidiaries to, as
applicable, take such action or actions as is necessary to cause, effect and
consummate the Corporate Restructuring Transactions in accordance with the
terms and provisions set forth in Exhibit A hereto. Each of Vencor and
Healthcare Company hereby agrees that any one or more of the Corporate
Restructuring Transactions may be modified, supplemented or eliminated;
provided, however, that such modification, supplement or elimination is
determined to be necessary or appropriate (a) to separate and divide Vencor so
that (i) the Real Estate Business shall be owned directly or indirectly by
Vencor, and (ii) the Healthcare Business shall be owned directly or indirectly
by Healthcare Company, or (b) to distribute the outstanding Healthcare Company
Common Stock pursuant to the Distribution.
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2.02 Charters and Bylaws.
(a) Certificate of Incorporation and By-Laws of Vencor. On or prior to the
Distribution Date (but in all events prior to the Distribution), Vencor shall
take all necessary actions so that, as of the Distribution Date, the
Certificate of Incorporation and By-Laws of Vencor will be substantially in
the forms set forth in Exhibit N-1 and Exhibit N-2, respectively.
(b) Certificate of Incorporation and By-Laws of Healthcare Company. On or
prior to the Distribution Date (but in all events prior to the Distribution),
Vencor and Healthcare Company shall each take all necessary actions so that,
as of the Distribution Date, the Certificate of Incorporation and By-Laws of
Healthcare Company will be substantially in the forms set forth in Exhibit O-1
and Exhibit O-2, respectively.
2.03 Election of Directors of Vencor and Healthcare Company. On or prior to
the Distribution Date, the parties hereto shall and shall cause their
respective Subsidiaries to take all necessary action so that as of the
Distribution Date (a) the directors of Vencor will be as set forth in the
Proxy Statement, subject to stockholder approval, and (b) the directors of
Healthcare Company will be as set forth in the Proxy Statement.
2.04 Transfer and Assignment of Certain Licenses and Permits.
(a) Licenses and Permits Relating to the Real Estate Business. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter,
each of Vencor and Healthcare Company shall (and, if applicable, shall cause
any other Person over which it has direct or indirect control to) duly and
validly transfer or obtain, as applicable, or cause to be duly and validly
transferred or obtained, as applicable, all licenses, permits and
authorizations issued by any Governmental Authority that relate to the Real
Estate Business but which are held in the name of any member of the Healthcare
Company Group or any of its respective employees, officers, members,
directors, stockholders or agents to the Vencor Group.
(b) Licenses and Permits Relating to the Healthcare Business. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter, each
of Vencor and Healthcare Company shall (and, if applicable, shall cause any
other Person over which it has direct or indirect control to) duly and validly
transfer or cause to be duly and validly transferred to the appropriate member
of the Group (as directed by Healthcare Company) all transferable licenses,
permits and authorizations issued by any Governmental Authority that relate to
the Healthcare Business but which are held in the name of any member of the
Vencor Group or any of its respective employees, officers, members, directors,
stockholders or agents.
2.05 Transfer of Assets and Assumption of Liabilities. On or prior to the
Distribution Date, the parties hereto shall and shall cause their respective
Subsidiaries (a) to execute instruments of assignment and transfer and/or
supplemental indentures and to take such other corporate action as is
necessary to transfer to Healthcare Company and its Subsidiaries all of the
right, title and interest of the Vencor Group in the Healthcare Company
Assets; and (b) to take all action necessary to cause Healthcare Company or
its Subsidiaries to assume all of the Healthcare Liabilities.
2.06 Financing Arrangements. Each of the parties hereto agrees that it will
use reasonable efforts to enter into and consummate the Financing Transactions
on terms satisfactory to each of them. Each of the parties hereto agrees that
it will use reasonable efforts to obtain, prior to the Distribution Date, all
necessary consents, waivers or amendments to each bank credit agreement, debt
security or other financing facility to which it or any of its Subsidiaries is
a party or by which it or any of its Subsidiaries is bound, or to assign or
refinance such agreement, security or facility, in each case on terms
satisfactory to Vencor and Healthcare Company, as applicable, and to the
extent necessary to permit the Corporate Restructuring Transactions, the
Financing Transactions, the repurchase of Vencor's 8 5/8% Senior Subordinated
Notes Due 2007 and the assumption of such Senior Subordinated Notes and the
indenture relating thereto by Healthcare Company and the Distribution to be
consummated without any material breach of the terms of such agreement,
security or facility.
2.07 Consents. The parties hereto shall use their best efforts to obtain any
third-party consents or approvals that are required to consummate the
Corporate Restructuring Transactions, the Distribution and the other
transactions contemplated hereby (the "Consents").
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2.08 Other Transactions. On or prior to the Distribution, each of Vencor and
Healthcare Company shall have consummated those other transactions in
connection with the Corporate Restructuring Transactions and the Distribution
that are contemplated by the Proxy Statement and not specifically referred to
in Sections 2.01 through 2.07, subject, however, to the limitations set forth
in Section 2.01 above.
2.09 Election of Officers. On or prior to the Distribution Date, each of
Vencor and Healthcare Company shall, as applicable, take all actions necessary
and desirable so that as of the Distribution Date the officers of Vencor and
Healthcare Company, respectively, will be as set forth in the Proxy Statement.
2.10 Registration Statement. Each of Vencor and Healthcare Company shall
prepare, and shall cause to be filed with the SEC, the Registration Statement
in accordance with the terms of this Section. The Registration Statement shall
set forth appropriate disclosure concerning Healthcare Company, the Corporate
Restructuring Transactions, the Distribution and such other matters as may be
required to be disclosed therein by the provisions of the Exchange Act. The
Registration Statement shall include the Proxy Statement relating to the 1998
Annual Meeting of the Vencor stockholders at which, among other things, the
Vencor stockholders will be asked to vote on the Corporate Restructuring
Transactions and the Distribution. Vencor and Healthcare Company shall take
all such actions as may be reasonably necessary or appropriate in order to
cause the Registration Statement to become effective by order of the SEC
pursuant to the Exchange Act.
2.11 State Securities Laws. Prior to the Distribution Date, Vencor and
Healthcare Company shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States in order to effect the Distribution.
2.12 Listing Application. Prior to the Distribution Date, Vencor and
Healthcare Company shall prepare and file with the NYSE a listing application
and related documents and shall take all such other actions with respect
thereto as shall be necessary or desirable in order to cause the NYSE to list
on or prior to the Distribution Date, subject to official notice of issuance,
the Healthcare Company Common Stock.
2.13 Director, Officer and Employee Resignations. Subject to the provisions
of Sections 2.03 and 2.09:
(a) Resignation by Directors and Employees of the Vencor Group. Vencor shall
cause all the directors and all employees of the Vencor Group to resign,
effective as of the close of business on the Distribution Date, from all
boards of directors or similar governing bodies of each member of the
Healthcare Company Group on which they serve, and from all positions as
officers or employees of any member of the Healthcare Company Group, except as
otherwise set forth in the Proxy Statement or mutually agreed to in writing on
or prior to the Distribution Date by Vencor, on the one hand, and, Healthcare
Company, on the other hand.
(b) Resignations by Directors and Employees of the Healthcare Company
Group. Healthcare Company shall cause all the directors and all employees of
the Healthcare Company Group to resign, effective as of the close of business
on the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Vencor Group on which they serve, and from all
positions as officers or employees of any member of the Vencor Group, except
as otherwise set forth in the Proxy Statement or mutually agreed to in writing
on or prior to the Distribution Date by Healthcare Company, on the one hand,
and Vencor, on the other hand.
2.14 Ancillary Agreements. On or prior to the Distribution Date, each of
Vencor and Healthcare Company shall enter into, and/or where applicable shall
cause such other members of their respective Groups to enter into, (a) the
Ancillary Agreements, and (b) any other agreements in respect of the Corporate
Restructuring Transactions and the Distribution as are reasonably necessary or
appropriate in connection with the transactions contemplated hereby and
thereby.
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ARTICLE III
SURVIVAL, ASSUMPTION AND INDEMNIFICATION
3.01 Survival of Agreements. All covenants and agreements of the parties
hereto contained in this Agreement and all covenants and agreements of the
parties hereto and their respective Subsidiaries contained in the Ancillary
Agreements shall survive the Distribution Date in accordance with their
respective terms and shall not be merged into any deeds or other transfer or
closing instruments or documents.
3.02 Taxes. This Article III shall not be applicable to any Indemnifiable
Losses or Liabilities related to (a) Taxes which shall be governed by the Tax
Allocation Agreement; or (b) which are otherwise expressly provided for in the
Ancillary Agreements.
3.03 Assumption And Indemnification.
(a) Subject to Sections 3.02 and 3.03(c) and except as expressly provided in
the Ancillary Agreements, from and after the Distribution Date, Vencor shall
retain or assume, as the case may be, and shall indemnify, defend and hold
harmless each member of the Healthcare Company Group, and each of their
Representatives and Affiliates, from and against, net of any Tax benefit
accruing to any Indemnified Party relating thereto, (i) all Vencor Liabilities
(ii) the use and operation of the Vencor Assets by Vencor following the
Distribution and (iii) all Losses of any such member of the Healthcare Company
Group, Representative or Affiliate relating to, arising out of or due to the
failure to pay, perform or discharge in due course the Vencor Liabilities by
any member of the Vencor Group who has an obligation with respect thereto.
(b) Subject to Section 3.02 and 3.03(c) and except as expressly provided in
the Ancillary Agreements, from and after the Distribution Date, Healthcare
Company shall retain or assume, as the case may be, and shall indemnify,
defend and hold harmless each member of the Vencor Group, and each of their
Representatives and Affiliates, from and against, (i) all Healthcare Company
Liabilities, (ii) the use and operation of the Healthcare Company Assets by
Healthcare Company following the Distribution, and (iii) any and all Losses of
any such member of the Vencor Group, Representative or Affiliate relating to,
arising out of or due to the failure to pay, perform or discharge in due
course the Healthcare Company Liabilities by any member of the Healthcare
Company Group who has an obligation with respect thereto.
(c) The amount which an Indemnifying Party is required to pay to any
Indemnitee pursuant to Section 3.03(a) or (b) shall be reduced (including,
without limitation, retroactively) by any Insurance Proceeds and other amounts
(including, without limitation, amounts received from Third Parties in respect
of other indemnification or contribution obligations of Third Parties)
actually recovered by such Indemnitee in reduction of the related
Indemnifiable Loss, it being understood and agreed that each member of the
Vencor Group and the Healthcare Company Group shall use its reasonable best
efforts, at the expense of the Indemnifying Party, to collect any such
proceeds or other such amounts to which it or any of its Subsidiaries is
entitled, without regard to whether it is the Indemnified Party hereunder. If
an Indemnitee receives an Indemnity Payment in respect of an Indemnifiable
Loss and subsequently receives Insurance Proceeds or other amounts in respect
of such Indemnifiable Loss, then such Indemnitee shall pay to such
Indemnifying Party an amount equal to the difference between (i) the sum of
the amount of such Indemnity Payment and the amount of such Insurance Proceeds
or other amounts actually received and (ii) the amount of such Indemnifiable
Loss. An insurer or a Third Party (including, without limitation, purchasers
under any assets purchase agreements, real estate agreements or any other
agreements relating to Healthcare Company Liabilities or Vencor Liabilities)
who would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the
indemnification provisions hereof, have any subrogation rights with respect
thereto, it being expressly understood and agreed that no insurer or any other
Third Party shall be entitled to a benefit they would not be entitled to
receive in the absence of the indemnification provisions set forth herein by
virtue of the indemnification provisions hereof.
(d) On the Distribution Date, Healthcare Company shall assume (or shall
cause one of its Subsidiaries to assume) (i) the prosecution of all claims
which relate to the Healthcare Business and are pending on the Distribution
Date; and (ii) the defense against all Third Party Claims which are Healthcare
Company Liabilities and are pending on the Distribution Date. Vencor shall use
reasonable efforts to make available and shall cause
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its Subsidiaries to use reasonable efforts to make available to Healthcare
Company and its Subsidiaries, at Healthcare Company's expense, (i) any
personnel or any books, records or other documents within its control or which
it otherwise has the ability to make available that Healthcare Company or such
Subsidiary reasonably believes are necessary or appropriate for such
prosecution or defense as provided in this Article III; and (ii) such other
assistance in support of the prosecution or defense of such litigation as
Healthcare Company or its Subsidiaries may reasonably request, including
without limitation, the right to assert in the name of Vencor or any of its
Subsidiaries such rights, claims, counterclaims or defenses that Vencor or
Vencor's Subsidiary would be or would have been entitled to assert in such
litigation or in the prosecution of or defense against such claim had the
Distribution not occurred; provided, however, that no member of the Vencor
Group shall be required to take any action, refrain from taking any action or
make available any assistance if doing so would have the effect of increasing
Liabilities of the Vencor Group.
3.04 Procedure For Indemnification.
(a) If any Indemnitee receives notice of the assertion of any Third Party
Claim with respect to which an Indemnifying Party is obligated under this
Agreement to provide indemnification, such Indemnitee shall give such
Indemnifying Party notice thereof promptly after becoming aware of such Third
Party Claim; provided, however, that the failure of any Indemnitee to give
notice as provided in this Section 3.04 shall not relieve any Indemnifying
Party of its obligations under this Article III, except to the extent that
such Indemnifying Party is actually prejudiced by such failure to give notice.
Such notice shall describe such Third Party Claim in reasonable detail and, if
practicable, shall indicate the estimated amount of the Indemnifiable Loss
that has been or may be sustained by such Indemnitee. Thereafter, such
Indemnitee shall deliver to the Indemnifying Party, promptly after the
Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to such Third Party Claim.
(b) An Indemnifying Party, at such Indemnifying Party's own expense and
through counsel chosen by such Indemnifying Party (which counsel shall be
reasonably satisfactory to the Indemnitee), may elect to defend any Third
Party Claim. If an Indemnifying Party elects to defend a Third Party Claim,
then, within fifteen Business Days after receiving notice of such Third Party
Claim or sooner (but in no event less than five Business Days) if the nature
of such Third Party Claim so requires, such Indemnifying Party shall notify
the Indemnitee of its intent to do so. Such Indemnitee shall thereupon use
reasonable efforts to make available to such Indemnifying Party, at such
Indemnifying Party's expense, such assistance in support of the prosecution or
defense of such litigation as the Indemnifying Party may reasonably request,
including without limitation, the right to assert in the name of the
Indemnitee such rights, claims, counterclaims or defenses that such Indemnitee
would be or would have been permitted to assert in such litigation or in the
prosecution of a claim or counterclaim against a Third Party or in defense
against such Third Party Claim had the Distribution not occurred. Such
Indemnifying Party shall pay such Indemnitee's reasonable out-of-pocket
expenses incurred in connection with such cooperation consistent with the
provisions of Article III. Except as provided herein, after notice from an
Indemnifying Party to an Indemnitee of its election to assume the defense of a
Third Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Article III for any legal or other expenses subsequently
incurred by such Indemnitee in connection with the defense thereof. If an
Indemnifying Party elects not to defend against a Third Party Claim, or fails
to notify an Indemnitee of its election as provided in this Section 3.04
within the period of fifteen (or five, if applicable) Business Days described
above, such Indemnitee may defend, compromise and settle such Third Party
Claim; provided, however, that no such Indemnitee may compromise or settle any
such Third Party Claim without the prior written consent of the Indemnifying
Party, which consent shall not be unreasonably withheld or delayed.
(c) Notwithstanding the foregoing, the Indemnifying Party shall not, without
the prior written consent of the Indemnitee, settle or compromise any Third
Party Claim or consent to the entry of any judgment which does not include as
an unconditional term thereof the delivery by the claimant or plaintiff to the
Indemnitee of a written release from all Liability in respect of such Third
Party Claim.
(d) If an Indemnifying Party chooses to defend or to seek to compromise any
Third Party Claim, the related Indemnitee shall make available to such
Indemnifying Party any personnel or any books, records or other
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documents within its control or which it otherwise has the ability to make
available that are necessary or appropriate for such defense.
(e) Any claim on account of an Indemnifiable Loss arising out of or due to
the failure to pay, perform or discharge in due course its respective
Liabilities by any member of the Indemnifying Party's Group who has an
obligation with respect thereto but which does not result from a Third Party
Claim shall be asserted by written notice given by the Indemnitee to the
related Indemnifying Party. Such Indemnifying Party shall have a period of 30
days after the receipt of such notice within which to respond thereto. If such
Indemnifying Party does not respond within such 30-day period, such
Indemnifying Party shall be deemed to have refused to accept responsibility to
make payment. If such Indemnifying Party does not respond within such 30-day
period or rejects such claim in whole or in part, such Indemnitee shall be
free to pursue such remedies as may be available to such party under Article
VI of this Agreement.
(f) If the amount of any Indemnifiable Loss shall, at any time subsequent to
the payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the Indemnitee to the
Indemnifying Party.
(g) In the event of payment by an Indemnifying Party to any Indemnitee in
connection with any Third Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee as to any events
or circumstances in respect of which such Indemnitee may have any right or
claim relating to such Third Party Claim against any claimant or plaintiff
asserting such Third Party Claim. Such Indemnitee shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right or claim, including
without limitation, permitting the Indemnifying Party to bring suit against
such Third Party in the name of the Indemnitee.
ARTICLE IV
CERTAIN ADDITIONAL COVENANTS
4.01 Further Assurances.
(a) In addition to the actions specifically provided for elsewhere in this
Agreement and in the Ancillary Agreements, each of the parties hereto shall
use its reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, all things reasonably necessary, proper or advisable
under applicable laws, regulations and agreements to consummate and make
effective the transactions contemplated by this Agreement, to confirm
Healthcare Company's title to all of the Healthcare Company Assets and
assumption of all Healthcare Company Liabilities, to put Healthcare Company in
actual possession and operating control of the Healthcare Company Assets, and
to permit Healthcare Company to exercise all rights and to perform its
obligations with respect to the Healthcare Business. Without limiting the
foregoing, each party hereto shall cooperate with the other party, and execute
and deliver, or use its reasonable efforts to cause to be executed and
delivered, all instruments, including instruments of conveyance, assignment
and transfer, and to make all filings with, and to obtain all consents,
approvals or authorizations of, any Governmental Authority or any other Person
under any permit, license, agreement, indenture or other instrument, and take
all such other actions as such party may reasonably be requested to take by
any other party hereto from time to time, consistent with the terms of this
Agreement, in order to effectuate the provisions and purposes of this
Agreement, the Corporate Restructuring Transactions, the assumption of
Liabilities and the other transactions contemplated hereby. If the Corporate
Restructuring Transactions or assumption of Liabilities, including but not
limited to, assignments of contracts, is not consummated prior to or at the
Distribution Date for any reason, including but not limited to, the absence of
receipt of any Consents, then the party hereto retaining such asset or
Liability shall thereafter hold such asset in trust for the use and benefit of
the party entitled thereto (at the expense of the party entitled thereto), or
shall retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and shall take
such other action as may be reasonably requested by the party to whom such
asset is to be transferred, or by whom such Liability is to be assumed, as the
case may be, in order to place such party,
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insofar as reasonably possible, in the same position as if such asset or
Liability had been transferred as contemplated hereby. If and when any such
asset or Liability becomes transferable, such transfer shall be effected
forthwith. The parties hereto agree that, as of the Distribution Date, as
between the parties, Healthcare Company shall be deemed to have acquired
complete and sole beneficial ownership of all of the Healthcare Company
Assets, together with all rights, powers and privileges incident thereto, and
shall be deemed to have assumed in accordance with the terms of this Agreement
all of the Healthcare Company Liabilities, and all duties, obligations and
responsibilities incident thereto.
(b) Without limiting the generality of Section 4.01(a), Vencor, as the sole
stockholder of Healthcare Company prior to the Distribution, shall ratify any
actions which are reasonably necessary or desirable to be taken by Healthcare
Company to effectuate the transactions contemplated by this Agreement or the
Ancillary Agreements in a manner consistent with the terms of this Agreement
or such Ancillary Agreements.
(c) In the event any registration, licenses, permits or other rights granted
by Governmental Authorities to the Vencor Group must be transferred, amended
or issued in order to conduct operations of the Healthcare Company Business
after the Distribution Date, and such permit transfer, amendment or issuance
has not been accomplished as of such date, Vencor shall permit Healthcare
Company to use the registration, license or permit of the Vencor Group to
continue to operate the Healthcare Company Business until such transfer,
amendment or issuance is accomplished, at Healthcare Company's expense, if
permitted by Law, until such permit is transferred or issued to Healthcare
Company. Healthcare Company shall use its reasonable efforts to obtain such
registrations, licenses, permits or other rights granted by Governmental
Authorities as soon as reasonably practicable. Healthcare Company shall
indemnify and hold harmless Vencor from and against any and all Third Party
Claims arising from or related to Healthcare Company's use of the
registration, license or permit or other rights granted to the Vencor Group by
Governmental Authorities.
(d) If Healthcare Company elects to pursue any claim or right relating to
the Healthcare Business, Vencor, upon request and at Healthcare Company's
expense, shall use reasonable efforts to make available to Healthcare Company
such assistance in support of the prosecution of such litigation as Healthcare
Company may reasonably request, including without limitation, the right to
assert, as needed, in the name of Vencor or any member of the Vencor Group
such rights and claims that Vencor or such member would be or would have been
permitted to assert in such litigation had the Distribution not occurred;
provided, however, that no member of the Vencor Group shall be required to
take any action, refrain from taking any action or make available any
assistance if doing so would have the effect of increasing Liabilities of the
Vencor Group.
4.02 Receivables Collection And Other Payments. If after the Distribution
Date, either party receives payments belonging to the other party, the
recipient shall promptly account for and remit same to the other party.
ARTICLE V
ACCESS TO INFORMATION
5.01 Provision of Corporate Records. From and after the Distribution Date,
all such books, records and copies (where copies are delivered in lieu of
originals) transferred to Healthcare Company Group whether or not delivered
shall be the property of the Healthcare Company Group; provided, however, that
all such Information contained in such books, records or copies relating to
the Vencor Group, the Real Estate Business, the Vencor Liabilities, or the
Ancillary Agreements shall be subject to the applicable confidentiality
provisions and restricted use provisions, if any, contained in this Agreement
or the Ancillary Agreements and any confidentiality restrictions imposed by
law. Vencor, if it so elects, may retain copies of any original books and
records delivered to Healthcare Company along with those original books and
records of the Vencor Group authorized herein to be retained; provided,
however, that all such Information contained in such books, records or copies
(whether or not delivered by the Vencor Group) relating to the Healthcare
Company Group, the Healthcare Company Business, and the Healthcare Company
Liabilities shall be subject to the applicable confidentiality provisions
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<PAGE>
and restricted use provisions, if any, contained in this Agreement or the
Ancillary Agreements and any confidentiality restrictions imposed by law.
5.02 Access to Information. In addition to the provisions set forth in
Section 5.01 above, from and after the Distribution Date and upon reasonable
notice, each of the Vencor Group and the Healthcare Company Group shall afford
to the other and to the other's Representatives at the expense of the other
party, reasonable access and duplicating rights during normal business hours
to all Information developed or obtained prior to the Distribution Date within
such party's possession relating to the other party or its businesses, its
former businesses, its assets, its Liabilities, or the Ancillary Agreements,
insofar as such access is reasonably requested by such other party, but
subject to the applicable confidentiality provisions and restricted use
provisions, if any, contained in this Agreement or the Ancillary Agreements
and any confidentiality restrictions imposed by law. In addition, without
limiting the foregoing, Information may be requested under this Section 5.02
for audit, accounting, claims, intellectual property protection, litigation
and Tax purposes, as well as for purposes of fulfilling disclosure and
reporting obligations. In each case, the requesting party agrees to cooperate
with the other party to minimize the risk of unreasonable interference with
the other party's business. In the event access to any Information otherwise
required to be granted herein or in the Ancillary Agreements is restricted by
law or otherwise, the parties agree to take such actions as are reasonably
necessary, proper or advisable to have such restrictions removed or to seek an
exemption therefrom or to otherwise provide the requesting party with the
benefit of the Information to the same extent such actions would have been
taken on behalf of the requesting party had such a restriction existed and the
Distribution not occurred.
5.03 Litigation Support And Production of Witnesses. After the Distribution
Date, each member of the Vencor Group and the Healthcare Company Group shall
use reasonable efforts to provide assistance to the other with respect to
Litigation Matters and to make available to the other, upon written request:
(a) such employees who have expertise or knowledge with respect to the other
party's business or products or matters in litigation, for the purpose of
consultation and/or as a witness; and (b) its directors, officers, other
employees and agents, as witnesses, in each case to the extent that the
requesting party believes any such Person may reasonably be useful or required
in connection with any legal, administrative or other proceedings in which the
requesting party may from time to time be involved. The employing party agrees
that such consultant or witness shall be made available to the requesting
party upon reasonable notice to the same extent that such employing party
would have made such consultant or witness available if the Distribution had
not occurred. The requesting party agrees to cooperate with the employing
party in giving consideration to business demands of such Persons.
5.04 Reimbursement. Except to the extent otherwise contemplated by this
Agreement or any Ancillary Agreement, a party providing Information,
consultant, or witness services to the other party under this Article V shall
be entitled to receive from the recipient, upon the presentation of invoices
therefor, payments for such amounts, relating to supplies, disbursements,
travel expenses, and other out-of-pocket expenses (including the direct and
indirect costs of employees providing consulting and expert witness services
in connection with litigation, but excluding direct and indirect costs of
employees who provide Information or are fact witnesses) as may be reasonably
incurred in providing such Information, consulting or witness services.
5.05 Retention of Records. Except as otherwise required by law or agreed in
writing, or as otherwise provided in the Tax Sharing Agreement, each member of
the Vencor Group and the Healthcare Company Group shall retain, for a period
of five years or such longer period as may be required by law, this Agreement
or the Ancillary Agreements, all significant Information in such party's
possession or under its control relating to the business, former business,
assets or Liabilities of the other party or this Agreement or the Ancillary
Agreements and, after the expiration of such applicable period, prior to
destroying or disposing of any of such Information, (a) the party proposing to
dispose of or destroy any such Information shall provide no less than 30 days'
prior written notice to the other party, specifying the Information proposed
to be destroyed or disposed of, and (b) if, prior to the scheduled date for
such destruction or disposal, the other party requests in writing that any of
the Information proposed to be destroyed or disposed of be delivered to such
other party, the party proposing to dispose of or destroy such Information
promptly shall arrange for the delivery of the requested Information to a
location specified by, and at the expense of, the requesting party.
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<PAGE>
5.06 Privileged Information. In furtherance of the rights and obligations of
the parties set forth in this Article V:
(a) Each party hereto acknowledges that (i) each of the Vencor Group on the
one hand, and the Healthcare Company Group on the other hand, has or may
obtain Information regarding a member of the other Group, or any of its
operations, employees, assets or Liabilities (whether in documents or stored
in any other form or known to its employees or agents), as applicable, that is
or may be protected from disclosure pursuant to the attorney-client privilege,
the work product doctrine or other applicable privileges ("Privileged
Information"); (ii) there are a number of actual, threatened or future
litigations, investigations, proceedings (including arbitration proceedings),
claims or other legal matters that have been or may be asserted by or against,
or otherwise affect, each or both of Vencor and Healthcare Company (or members
of either Group) ("Litigation Matters"); (iii) Vencor and Healthcare Company
have a common legal interest in Litigation Matters, in the Privileged
Information, and in the preservation of the confidential status of the
Privileged Information, in each case relating to the Real Estate Business or
the Healthcare Business or any former businesses, the assets or the
Liabilities of each party as it or they existed prior to the Distribution Date
or relating to or arising in connection with the relationship between the
constituent elements of the Groups on or prior to the Distribution Date; and
(iv) Vencor and Healthcare Company intend that the transactions contemplated
by this Agreement and the Ancillary Agreements and any transfer of Privileged
Information in connection herewith or therewith shall not operate as a waiver
of any potentially applicable privilege.
(b) Each of Vencor and Healthcare Company agrees, on behalf of itself and
each member of the Group of which it is a member, not to disclose or otherwise
waive any privilege attaching to any Privileged Information relating to the
Real Estate Business or the Healthcare Business or any former businesses or
assets or Liabilities of either party or relating to or arising in connection
with the relationship between the Groups on or prior to the Distribution Date,
without providing prompt written notice to and obtaining the prior written
consent of the other, which consent shall not be unreasonably withheld and
shall not be withheld if the other party certifies that such disclosure is to
be made in response to a likely threat of suspension or debarment or similar
action; provided, however, that Vencor and Healthcare Company may make such
disclosure or waiver with respect to Privileged Information if such Privileged
Information relates, in the case of Vencor, solely to the Real Estate Business
or the Vencor Liabilities as each existed prior to the Distribution Date or,
in the case of Healthcare Company, solely to the Healthcare Business, its
former businesses (other than the Real Estate Business) or the Healthcare
Company Liabilities, as each existed prior to the Distribution Date. In the
event of a disagreement between any member of the Vencor Group and any member
of the Healthcare Company Group concerning the reasonableness of withholding
such consent, no disclosure shall be made prior to (i) a final, nonappealable
resolution of such disagreement by a court of competent jurisdiction if such
requirement to disclose is part of a pending judicial proceeding; or (ii) a
final determination by an arbitrator appointed pursuant to Article VI if such
requirement to disclose is not part of a pending judicial proceeding.
(c) Upon any member of the Vencor Group or any member of the Healthcare
Company Group receiving any subpoena or other compulsory disclosure notice
from a court, other governmental agency or otherwise which requests disclosure
of Privileged Information, in each case relating to the Real Estate Business
or the Vencor Liabilities (in the case of the Healthcare Company Group) or the
Healthcare Business, its former businesses (other than the Real Estate
Business) or the Healthcare Company Liabilities (in the case of the Vencor
Group), as they or it existed prior to the Distribution Date or relating to or
arising in connection with the relationship between the constituent elements
of the Groups on or prior to the Distribution Date, the recipient of the
notice shall promptly provide to Vencor, in the case of receipt by a member of
the Healthcare Company Group, or to Healthcare Company, in the case of receipt
by a member of the Vencor Group, a copy of such notice, the intended response,
and all materials or information relating to the other Group that might be
disclosed. In the event of a disagreement as to the intended response or
disclosure, unless and until the disagreement is resolved as provided in
paragraph (b) above, Vencor and Healthcare Company shall cooperate to assert
all defenses to disclosure claimed by either Group, at the cost and expense of
the Group claiming such defense to disclosure, and shall not disclose any
disputed documents or information until all legal defenses and claims of
privilege have been finally determined.
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<PAGE>
5.07 Confidentiality. From and after the Distribution Date, each of Vencor
and Healthcare Company shall hold, and shall use its reasonable best efforts
to cause its employees, Affiliates and Representatives to hold, in strict
confidence all Information concerning or belonging to the other party obtained
by it prior to the Distribution Date or furnished to it by such other party
pursuant to this Agreement or the Ancillary Agreements and shall not release
or disclose such Information to any other Person, except its Representatives,
who shall be bound by the provisions of this Section 5.07; provided, however,
that Vencor and Healthcare Company and their respective employees, Affiliates
and Representatives may disclose such Information to the extent that (a)
disclosure is compelled by judicial or administrative process or, in the
opinion of such party's counsel, by other requirements of law, or (b) such
party can show that such Information was (i) available to such party after the
Distribution Date from Third Party sources other than employees or former
employees of either party, their Affiliates, former Affiliates,
Representatives or former Representatives, on a nonconfidential basis prior to
its disclosure to such party after the Distribution Date by the other party,
(ii) in the public domain through no fault of such party, (iii) lawfully
acquired by such party from Third Party sources other than employees or former
employees of either party, their Affiliates, former Affiliates,
Representatives or former Representatives, after the time that it was
furnished to such party pursuant to this Agreement or the Ancillary Agreements
or (iv) is independently discovered or developed after the Distribution Date
by employees of such party. Notwithstanding the foregoing, each of Vencor and
Healthcare Company and their respective Representatives and Affiliates shall
be deemed to have satisfied its obligations under this Section 5.07 with
respect to any Information if it exercises the same care with regard to such
Information as it takes to preserve confidentiality for its own similar
Information.
ARTICLE VI
DISPUTE RESOLUTION
6.01 Mediation. In the event of a controversy, dispute or claim arising out
of, in connection with, or in relation to the interpretation, performance,
nonperformance, validity or breach of this Agreement or of any Ancillary
Agreements or otherwise arising out of, or in any way related to this
Agreement or any Ancillary Agreements or any transaction contemplated hereby
or thereby, including, without limitation, any claim based on contract, tort,
statute or constitution (collectively, "Agreement Disputes"), the general
counsels (or other chief legal officers) of the relevant parties shall
negotiate in good faith for a reasonable period of time to settle such
Agreement Dispute.
6.02 Arbitration. If after a reasonable period of time the relevant general
counsels (or other chief legal officers) are unable to settle an Agreement
Dispute as provided in Section 6.01, such Agreement Dispute shall be settled
by arbitration administered by the American Arbitration Association in
accordance with its applicable Rules for Commercial Arbitration and judgment
on the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. Any such arbitration shall be commenced and all the
proceedings thereof conducted in Louisville, Kentucky.
ARTICLE VII
NO REPRESENTATIONS OR WARRANTIES; EXCEPTIONS
7.01 No Representations or Warranties; Exceptions. Healthcare Company
understands and agrees that no member of the Vencor Group is, in this
Agreement or in any Ancillary Agreement, representing or warranting to the
Healthcare Company Group in any way as to the Healthcare Business, the
Healthcare Company Liabilities, or the Healthcare Company Assets, or as to any
consents or approvals required in connection with the consummation of the
transactions contemplated by this Agreement, it being agreed and understood as
between the Groups, the members of the Healthcare Company Group shall take all
of the Healthcare Business "as is, where is" and that, except as provided in
this Section 7.01 or in Section 4.01, the members of Healthcare
A-17
<PAGE>
Company Group shall bear the economic and legal risk that conveyances of the
Healthcare Business shall prove to be insufficient or that the title of any
member of the Healthcare Company Group to any Healthcare Business shall be
other than good and marketable and free from encumbrances. Real property in
the United States being transferred to Healthcare Company will be conveyed by
Special Warranty Deed, in recordable form and warranting title to be free and
clear from all lawful claims of those claiming by, through or under Vencor,
but not otherwise; provided, however, such Special Warranty Deed shall be
subject to deed restrictions, easements, rights-of-way, and all other matters
of record.
ARTICLE VIII
MISCELLANEOUS
8.01 Conditions to Obligations.
(a) The obligations of the parties hereto to consummate the transactions
which are set forth in this Agreement and the Distribution are subject to the
satisfaction, as determined by Vencor in its sole discretion, of each of the
following conditions:
(i) This Agreement shall have been approved by the holders of a majority
of the outstanding shares of Vencor Common Stock at the Annual Meeting;
(ii) The Distribution shall have been approved by the holders of a
majority of the outstanding shares of Vencor Common Stock at the Annual
Meeting.
(iii) Each of the Vencor Certificate Amendments shall have been approved
by the holders of a majority of the outstanding shares of Vencor Common
Stock;
(iv) The transactions contemplated by Article II shall have been
consummated in all material respects;
(v) The Healthcare Company Common Stock shall have been approved for
listing on the NYSE, subject to official notice of issuance;
(vi) The Registration Statement shall have been filed with the SEC and
shall have become effective, and no stop order with respect thereto shall
be in effect;
(vii) All material authorizations, consents, approvals and clearances of
Federal, state, local and foreign governmental agencies required to permit
the valid consummation by the parties hereto of the transactions
contemplated by this Agreement shall have been obtained; and no such
authorization, consent, approval or clearance shall contain any conditions
which would have a material adverse effect on (A) the Real Estate Business
or the Healthcare Business, (B) the Healthcare Company Assets and Vencor
Assets, results of operations or financial condition of the Vencor Group or
the Healthcare Company Group, in each case taken as a whole, or (C) the
ability of Vencor or Healthcare Company to perform its obligations under
this Agreement; and all statutory requirements for such valid consummation
shall have been fulfilled;
(viii) No preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a government,
regulatory or administrative agency or commission, and no statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, shall be in effect preventing the consummation of this Agreement
or the Distribution; and
(ix) The Financing Transactions shall have occurred and all bank credit
agreements, debt security or other financing facility entered into pursuant
thereto shall be in place and all conditions to borrowing thereunder (other
than any conditions concerning consummation of the Distribution and the
transfers of assets and liabilities described hereunder) shall have been
satisfied, and all necessary consents, waivers or amendments to each bank
credit agreement, debt security or other financing facility to which any
member of the Vencor Group or the Healthcare Company Group is a Party or by
which any such member is bound shall have been obtained, or each such
agreement, security or facility shall have been refinanced, in each case on
terms satisfactory to Vencor and to the extent necessary to permit the
Distribution to be consummated without any material breach of the terms of
such agreement, security or facility.
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(b) The foregoing conditions are for the sole benefit of Vencor and shall
not give rise to any duty on the part of Vencor or its Board of Directors to
waive or not waive any such condition. Any determination made by the Board of
Directors of Vencor in good faith on or prior to the Distribution Date
concerning the satisfaction or waiver of any or all of the conditions set
forth in Section 8.01(a) shall be conclusive.
8.02 Complete Agreement. This Agreement, the Exhibits and Schedules hereto,
the Ancillary Agreements and the agreements and other documents referred to
herein shall constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and shall supersede all previous
negotiations, commitments and writings with respect to such subject matter.
8.03 Expenses. All costs and expenses of any party hereto whether incurred
prior to or after the Distribution Date in connection with the preparation,
execution, delivery and implementation of this Agreement and with the
consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements, including but not limited to legal fees, accounting
fees, investment banking fees, and all such other costs and expenses shall be
allocated among Vencor and the Healthcare Company in accordance with the Debt
and Cash Allocation Agreement and the Tax Allocation Agreement.
8.04 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (other than the laws
regarding choice of laws and conflicts of laws) as to all matters, including
matters of validity, construction, effect, performance and remedies.
8.05 Notices. All notices, requests, claims, demands and other
communications hereunder (collectively, "Notices") shall be in writing and
shall be given (and shall be deemed to have been duly given upon receipt) by
delivery in person, by cable, telegram, facsimile, electronic mail or other
standard form of telecommunications (provided confirmation is delivered to the
recipient the next Business Day in the case of facsimile, electronic mail or
other standard form of telecommunications) or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to Vencor:
Vencor, Inc.
[address]
Telephone:
Facsimile:
with a copy to:
General Counsel
Vencor, Inc.
[address]
Telephone:
Facsimile:
If to Healthcare Company:
President
Vencor Healthcare, Inc.
[address]
Telephone:
Facsimile:
with a copy to:
General Counsel
Healthcare Company
[address]
Telephone:
Facsimile:
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<PAGE>
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section 8.05.
8.06 Amendment And Modification. This Agreement may be amended, modified or
supplemented only by a written agreement signed by both of the parties hereto.
8.07 Successors And Assigns; No Third Party Beneficiaries. This Agreement
and all of the provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted assigns but
neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other party (which consent shall not be unreasonably withheld
or delayed). Except for the provisions of Sections 3.03 and 3.04 relating to
Indemnities, which are also for the benefit of the Indemnitees, this Agreement
is solely for the benefit of the parties hereto and their Subsidiaries and
Affiliates and is not intended to confer upon any other Persons any rights or
remedies hereunder.
8.08 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.09 Interpretation. The Article and Section headings contained in this
Agreement are solely for the purpose of reference, are not part of the
agreement of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
8.10 Legal Enforceability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction. Each party
acknowledges that money damages would be an inadequate remedy for any breach
of the provisions of this Agreement and agrees that the obligations of the
parties hereunder shall be specifically enforceable.
8.11 References; Construction. References to any "Article", "Exhibit",
"Schedule" or "Section", without more, are to Appendices, Articles, Exhibits,
Schedules and Sections to or of this Agreement. Unless otherwise expressly
stated, clauses beginning with the term "including" set forth examples only
and in no way limit the generality of the matters thus exemplified.
8.12 Termination. Notwithstanding any provision hereof this Agreement may be
terminated and the Distribution abandoned at any time prior to the
Distribution Date by and in the sole discretion of the Board of Directors of
Vencor without the approval of any other party hereto or of Vencor's
stockholders. In the event of such termination, no party hereto shall have any
Liability to any Person by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
VENCOR, INC.,
By: _________________________________
VENCOR HEALTHCARE, INC.
By: _________________________________
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EXHIBIT 10.7
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (this "Agreement") is made and entered
---------
into as of this ___ day of April, 1998, by and between Vencor, Inc., a Delaware
corporation ("Vencor"), and Vencor Healthcare, Inc., a Delaware corporation
------
("Healthcare Company").
- - --------------------
W I T N E S S E T H:
WHEREAS, the Board of Directors of Vencor has determined that it is
appropriate and desirable to (a) pursuant to the Reorganization Agreement (as
defined herein), separate Vencor and its subsidiaries into two publicly-owned
companies so that (i) the assets and liabilities relating to substantially all
of the Vencor-owned land, buildings and other improvements and real estate
related assets are allocated to Vencor (the "Real Estate Business"), which will
--------------------
be renamed "Ventas, Inc." immediately prior to the Distribution (as defined
herein), and (ii) the other assets and liabilities relating to the historical
operations of Vencor, including the Development Properties (as defined herein),
are allocated to Healthcare Company (the "Healthcare Business"), which will be
--------------------
renamed Vencor, Inc. immediately prior to the Distribution; and (b) distribute
(the "Distribution"), following such reorganization, as a dividend to the
------------
holders of the issued and outstanding shares of common stock, par value $.25 per
share, of Vencor ("Vencor Common Stock") all of the issued and outstanding
-------------------
shares of common stock, par value $.25 per share, of Healthcare Company
("Healthcare Company Common Stock") on the basis of one share of Healthcare
- - ----------------------------------
Company Common Stock for each share of Vencor Common Stock; and
WHEREAS, the parties hereto have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
the Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement and intending to be legally bound hereby,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 General. Unless otherwise defined herein or unless the context
-------
otherwise requires, the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Action" shall mean any demand, action, suit, countersuit,
------
arbitration, inquiry, proceeding or investigation by or before any federal,
state, local, foreign or international Governmental Authority or any arbitration
or mediation tribunal.
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<PAGE>
"Affiliate" shall mean with respect to any specified Person, a Person
---------
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person; provided,
--------
however, that for purposes of this Agreement, no member of either Group shall be
- - -------
deemed to be an Affiliate of any member of the other Group.
"Agent" shall mean National City Bank, Cleveland, Ohio or such trust
-----
company or bank designated by Vencor, which shall act as agent for the holders
of Vencor Common Stock and the holders of Healthcare Company Common Stock in
connection with the Distribution.
"Agreement" shall have the meaning set forth in the preamble to this
---------
Agreement.
"Ancillary Agreements" shall mean all the written agreements,
--------------------
instruments, understandings, assignments or other arrangements (other than this
Agreement) entered into by the parties hereto or any other member of their
respective Group in connection with the Corporate Restructuring Transactions,
the Distribution and the other transactions contemplated hereby or thereby,
including without limitation, the following:
(i) the Master Lease Agreement;
(ii) the Development Agreement;
(iii) the Participation Agreement;
(iv) the Employee Benefits Agreement;
(v) the Intellectual Property Agreement;
(vi) the Tax Allocation Agreement;
(vii) the Transition Services Agreement;
(viii) the Conveyance and Assumption Instruments;
(ix) the Debt and Cash Allocation Agreement;
(x) the Reorganization Agreement; and
(xi) the Insurance Agreement.
"Annual Meeting" shall mean the 1998 Annual Meeting of Stockholders of
--------------
Vencor to be held on April 27, 1998, or any adjournments or postponements
thereof.
"Corporate Restructuring Transactions" shall mean, collectively, (a)
------------------------------------
each of the mergers, transfers, conveyances, contributions, assignments and
other transactions described and set forth on Exhibit A of this Agreement, and
---------
(b) such other mergers, transfers, conveyances, contributions, assignments and
other transactions that may be appropriate or required to be
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<PAGE>
accomplished, effected or consummated by Vencor or Healthcare Company or any of
their respective Subsidiaries and Affiliates in order to separate and divide, in
a series of transactions, Vencor so that: (i) the Healthcare Company Assets,
Healthcare Company Liabilities and Healthcare Business shall be owned, directly
or indirectly, by Healthcare Company; and (ii) the Real Estate Assets, Real
Estate Liabilities and Real Estate Business that remain after the separation and
division described in clause (i) above, are, after giving effect to the
Distribution, owned directly or indirectly, by Vencor.
"Debt and Cash Allocation Agreement" shall mean the Debt and Cash
----------------------------------
Allocation Agreement by and between Vencor and Healthcare Company, which
agreement shall be entered into prior to or on the Distribution Date in the form
attached to the Reorganization Agreement as Exhibit B.
---------
"Distribution" shall have the meaning set forth in the preamble to
------------
this Agreement.
"Distribution Date" shall mean the date, to be determined by the Board
-----------------
of Directors of Vencor, or such committee of the Board as shall be designated by
the Board of Directors, as of which the Distribution shall be effected.
"Distribution Record Date" shall mean the time and date determined by
------------------------
the Board of Directors of Vencor for purposes of determining the holders of
record of Vencor Common Stock entitled to participate in the Distribution.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, together with the rules and regulations promulgated thereunder.
"Financing Transactions" shall mean the Healthcare Company Financing
----------------------
Transactions and the Vencor Financing Transactions.
"Governmental Authority" shall mean any federal, state, local, foreign
----------------------
or international court, government, department, commission, board, bureau,
agency, the NYSE or other regulatory, administrative or governmental authority.
"Group" shall mean, with respect to Vencor, the Vencor Group and, with
-----
respect to Healthcare Company, the Healthcare Company Group.
"Healthcare Business" shall have the meaning set forth in the preamble
-------------------
to this Agreement.
"Healthcare Company" shall have the meaning set forth in the preamble
------------------
to this Agreement.
"Healthcare Company Assets" shall mean, collectively, all the rights
-------------------------
and assets that are owned by Healthcare Company or any of its Subsidiaries as of
the close of business on the Distribution Date, including without limitation:
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<PAGE>
(i) the capital stock of the Healthcare Company Subsidiaries;
(ii) all the assets included on the Healthcare Company Pro Forma
Balance Sheet that are owned by Healthcare Company or any of its
Subsidiaries as of the close of business on the Distribution Date;
(iii) all the assets and rights expressly allocated to Healthcare
Company or any of the Healthcare Company Subsidiaries under this Agreement
or any of the Ancillary Agreements; and
(iv) any other asset acquired by Vencor or any of its Subsidiaries
from the date of the Healthcare Company Pro Forma Balance Sheet to the
close of business on the Distribution Date that is owned by Vencor or any
of its Subsidiaries as of the close of business on the Distribution Date
and that is of a nature or type that would have resulted in such asset
being included as an asset on the Healthcare Company Pro Forma Balance
Sheet had it been acquired on or prior to the date of the Healthcare
Company Pro Forma Balance Sheet, determined on a basis consistent with the
determination of the assets included on the Healthcare Company Pro Forma
Balance Sheet.
"Healthcare Company Common Stock" shall have the meaning set forth in
-------------------------------
the preamble to this Agreement.
"Healthcare Company Financing Transactions" shall mean the entry into
-----------------------------------------
or issuance by Healthcare Company of (i) a revolving credit facility in the
amount of $300 million, (ii) a term loan in the amount of $300 million, (iii) a
second term loan in the amount of $200 million, (iv) a bridge loan in the amount
of $200 million, (v) $17.7 million proceeds of Healthcare Company preferred
stock and (vi) $300 million of senior subordinated debt or such other financing
transactions approved by the Healthcare Company Board of Directors.
"Healthcare Company Group" shall mean Healthcare Company, the
------------------------
Healthcare Company Subsidiaries and the corporations, partnerships, limited
liability companies, joint ventures, investments and other entities that
represent equity investments of Healthcare Company or any of the Healthcare
Company Subsidiaries following the consummation of the Corporate Restructuring
Transactions and the Distribution.
"Healthcare Company Liabilities" shall mean, collectively, all of the
------------------------------
Liabilities of Healthcare Company, the Healthcare Company Subsidiaries and each
of the other members of the Healthcare Company Group after giving effect to the
Corporate Restructuring Transactions, the Distribution and the transactions
contemplated under the Debt and Cash Allocation Agreement, including, without
limitation:
(i) all the Liabilities included on the Healthcare Company Pro Forma
Balance Sheet which remain outstanding as of the close of business on the
Distribution Date;
(ii) all other Liabilities that are incurred or which accrue or are
accrued at any time prior to, on or after the date of the Healthcare Company Pro
Forma Balance Sheet and that
-4-
<PAGE>
arise or arose out of, or in connection with, the Healthcare Company Assets or
the Healthcare Business, determined on a basis consistent with the determination
of the Liabilities of Healthcare Company on the Healthcare Company Pro Forma
Balance Sheet;
(iii) all the Liabilities of Healthcare Company, the Healthcare
Company Subsidiaries or any of the other members of the Healthcare Company Group
under, or to be retained or assumed by Healthcare Company, any Healthcare
Company Subsidiary or any of the other members of the Healthcare Company Group
pursuant to this Agreement or any of the Ancillary Agreements; and
(iv) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, at or following the
Distribution Data) arising out of or in connection with or otherwise relating to
the management or conduct before or after the Distribution Date of the
Healthcare Business, except as otherwise specifically provided herein.
"Healthcare Company Pro Forma Balance Sheet" shall mean the pro forma
------------------------------------------
balance sheet of Healthcare Company at December 31, 1997 attached hereto as
Exhibit B.
- - ---------
"Healthcare Company Subsidiaries" shall mean all of the subsidiaries
-------------------------------
listed on Schedule 1.01(a) of this Agreement.
----------------
"Law" shall mean all laws, statutes and ordinances and all
---
regulations, rules and other pronouncements of Governmental Authorities having
the effect of law of the United States, any foreign country, or any domestic or
foreign state, province, commonwealth, city, country, municipality, territory,
protectorate, possession or similar instrumentality, or any Governmental
Authority thereof.
"Liabilities" shall mean any and all debts, liabilities, obligations,
-----------
responsibilities, response actions, losses, damages (whether compensatory,
punitive or treble), fines, penalties and sanctions, absolute or contingent,
matured or unmatured, liquidated or unliquidated, foreseen or unforeseen, joint,
several or individual, asserted or unasserted, accrued or unaccrued, known or
unknown, whenever arising, including without limitation those arising under or
in connection with any Law (including any Environmental Law), Action, threatened
Action, order or consent decree of any Governmental Authority or any award of
any arbitration tribunal, and those arising under any contract, guarantee,
commitment or undertaking, whether sought to be imposed by a Governmental
Authority, private party, or party to this Agreement, whether based in contract,
tort, implied or express warranty, strict liability, criminal or civil statute,
or otherwise, and including any costs, expenses, interest, attorneys' fees,
disbursement and expense of counsel, expert and consulting fees and costs
related thereto or to the investigation or defense thereof.
"NYSE" shall mean the New York Stock Exchange, Inc.
----
"Person" shall mean an individual, a partnership, a joint venture, a
------
corporation, a trust, a limited liability company, an unincorporated
organization or a government or any department or agency thereof.
-5-
<PAGE>
"Real Estate Business" shall have the meaning set forth in the
--------------------
preamble to this Agreement.
"Registration Statement" shall mean the registration statement on Form
----------------------
10 to effect the registration of the Healthcare Company Common Stock pursuant to
the Exchange Act.
"Reorganization Agreement" shall mean the Agreement and Plan of
------------------------
Reorganization by and between Vencor and Healthcare Company which shall be
entered into prior to or on the Distribution Date.
"Subsidiary" shall mean with respect to any specified Person, any
----------
corporation or other legal entity of which such Person or any of its
Subsidiaries controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote on the election of members to
the board of directors or similar governing body; provided, however, that for
-------- -------
purposes of this Agreement, (a) the Healthcare Company Subsidiaries shall be
deemed to be Subsidiaries of Healthcare Company and (b) Healthcare Company and
the Healthcare Company Subsidiaries shall not be deemed to be Subsidiaries of
Vencor or any of Vencor's Subsidiaries.
"Tax Allocation Agreement" shall mean the Tax Allocation Agreement by
------------------------
and between Vencor and Healthcare Company, which agreement shall be entered into
prior to or on the Distribution Date in the form attached to the Reorganization
Agreement as Exhibit K.
---------
"Vencor" shall have the meaning set forth in the preamble to this
------
Agreement.
"Vencor Assets" shall mean, collectively, all the rights and assets
-------------
that are owned by Vencor or any of its Subsidiaries as of the close of business
on the Distribution Date (other than the Healthcare Company Assets and the
capital stock of Healthcare Company and the Healthcare Company Subsidiaries),
including without limitation:
(i) the capital stock of the Vencor Subsidiaries;
(ii) all the assets included on the Vencor Pro Forma Balance Sheet
which are owned by Vencor and its Subsidiaries as of the close of business
on the Distribution Date, including the real property to be retained by
Vencor in connection with the Corporate Restructuring Transactions;
(iii) all the assets and rights expressly allocated to Vencor or any
of its Subsidiaries under this Agreement and any of the Ancillary
Agreements; and
(iv) any other asset acquired by Vencor or any of its Subsidiaries
from the date of the Vencor Pro Forma Balance Sheet to the close of
business on the Distribution Date that is owned by Vencor or any of its
Subsidiaries and that is of a nature of type that would have resulted in
such asset being included as an asset on the Vencor Pro Forma Balance Sheet
had it been acquired on or prior to the date of the Vencor Pro Forma
Balance Sheet, determined on a basis consistent with the determination of
the assets included on the Vencor Pro Forma Balance Sheet.
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<PAGE>
"Vencor Certificate Amendments" shall mean the amendments to the
-----------------------------
Vencor Certificate of Incorporation proposed by the Board of Directors of Vencor
to be considered and voted on by the stockholders of Vencor at the Annual
Meeting.
"Vencor Common Stock" shall have the meaning set forth in the preamble
-------------------
to this Agreement.
"Vencor Financing Transactions" shall mean the entry into by Vencor of
-----------------------------
(i) a revolving credit facility in the amount of $250 million, (ii) a term loan
in the amount of $250 million, (iii) a second term loan in the amount of $250
million and (iv) a bridge loan in the amount of $450 million or such other
financing transactions approved by the Vencor Board of Directors.
"Vencor Group" means Vencor, the Vencor Subsidiaries and the
------------
corporations, partnerships, joint ventures, investments and other entities that
represent equity investments of Vencor or any of the Vencor Subsidiaries
following consummation of the Corporate Restructuring Transactions and the
Distribution.
"Vencor Pro Forma Balance Sheet" shall mean the pro forma balance
------------------------------
sheet of Vencor attached hereto as Exhibit C.
---------
"Vencor Subsidiaries" shall mean the Subsidiaries of Vencor set forth
-------------------
on Schedule 1.01(b) of this Agreement and all other Subsidiaries of Vencor other
----------------
than Healthcare Company and the Healthcare Company Subsidiaries.
ARTICLE II
DISTRIBUTION TRANSACTIONS
2.01. Vencor Action Prior to the Distribution. Prior to the
---------------------------------------
Distribution, subject to the terms and conditions set forth herein, Vencor shall
take, or cause to be taken, the following actions in connection with the
Distribution.
(a) Notice to NYSE. Vencor shall, to the extent possible, give
--------------
the NYSE not less than ten days advance notice of the Distribution Record Date
in compliance with Rule 10b-17 under the Exchange Act.
(b) Distribution Transactions. Vencor shall cause all
-------------------------
transactions contemplated by the Reorganization Agreement to have occurred prior
to, or to occur simultaneous with, the consummation of this Agreement.
2.02. The Distribution.
----------------
(a) Duties and Obligations of Vencor. Subject to the conditions
--------------------------------
herein, on or prior to the Distribution Date, Vencor shall:
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<PAGE>
(i) deliver to the Agent the share certificates representing the
Healthcare Company Common Stock, endorsed by Vencor in blank, for the
benefit of the holders of Vencor Common Stock;
(ii) instruct the Agent to distribute, as soon as practicable
following consummation of the Distribution, to the holders of Vencor Common
Stock the following:
(A) one share of Healthcare Company Common Stock for every share
of Vencor Common Stock; and
(B) cash, if applicable, in lieu of fractional shares obtained
in the manner provided in Section 2.03; and
(iii) subject to stockholder approval at the Annual Meeting of
the Vencor Certificate Amendment to change the name of Vencor to "Ventas,
Inc.," instruct the Agent to distribute, as soon as practicable following
consummation of the Distribution, to the holders of certificated shares of
Vencor Common Stock a letter of transmittal providing for such holders to
forward to the Agent all of their certificated shares of Vencor Common
Stock in order to exchange such shares for a corresponding number of new
certificated shares of Vencor Common Stock which reflect such name change.
(b) Duties and Responsibilities of Healthcare Company. Healthcare
-------------------------------------------------
Company shall provide, or cause to be provided, to the Agent sufficient
certificates representing Healthcare Company Common Stock in such denominations
as the Agent may request in order to effect the Distribution. All shares of
Healthcare Company Common Stock issued pursuant to the Distribution will be
validly issued, fully paid and nonassessable and free of any preemptive (or
similar) rights.
2.03. Fractional Shares.
-----------------
(a) No Fractional Shares. Notwithstanding anything herein to the
--------------------
contrary, no fractional shares of Healthcare Company Common Stock shall be
issued in connection with the Distribution, and any such fractional share
interests to which a stockholder would otherwise be entitled will not entitle
such stockholder to vote or to any rights of a stockholder of Healthcare
Company. In lieu of any such fractional shares, each stockholder who, but for
the provisions of this Section, would be entitled to receive a fractional share
interest of Healthcare Company Common Stock pursuant to the Distribution shall
be paid cash without any interest thereon, as hereinafter provided. Vencor
shall instruct the Agent to determine the number of whole shares and fractional
shares of Healthcare Company Common Stock allocable to each stockholder, to
aggregate all such fractional shares into whole shares, to sell the whole shares
obtained thereby in the open market at the then prevailing prices on behalf of
stockholders who otherwise would be entitled to receive fractional share
interests and to distribute to each such stockholder his, her or its ratable
share of the total proceeds of such sale, after making appropriate deductions of
the amount required for Federal income tax withholding purposes and after
deducting any applicable transfer
-8-
<PAGE>
taxes. All brokers' fees and commissions incurred in connection with such sales
shall be paid by Vencor.
(b) Unclaimed Stock or Cash. Any Healthcare Company Common Stock or
-----------------------
cash in lieu of fractional shares and dividends or distributions with respect to
Healthcare Company Common Stock that remain unclaimed by any stockholder 180
days after the Distribution Date shall be returned to Vencor and any such
stockholders shall look only to Vencor for the Healthcare Company Common Stock
and cash, if any, in lieu of fractional share interests and any such dividends
or distributions to which they are entitled, subject in each case to applicable
escheat or other abandoned property laws.
(c) Beneficial Owners. Solely for purposes of computing fractional
-----------------
share interests pursuant to Section 2.03(a), the beneficial owner of shares of
Vencor Common Stock or Healthcare Company Common Stock held of record in the
name of a nominee will be treated as the holder of record of such shares.
ARTICLE III
CONDITIONS TO THE DISTRIBUTION
3.01 Conditions to Obligations.
-------------------------
(a) The obligations of the parties hereto to consummate the
Distribution are subject to the satisfaction, as determined by Vencor in its
sole discretion, of each of the following conditions:
(i) The Reorganization Agreement shall have been approved by
the holders of a majority of the outstanding shares of Vencor Common Stock
at the Annual Meeting;
(ii) The Distribution shall have been approved by the holders
of a majority of the outstanding shares of Vencor Common Stock at the
Annual Meeting and by the Vencor Board of Directors;
(iii) Each of the Vencor Certificate Amendments shall have been
approved by the holders of a majority of the outstanding shares of Vencor
Common Stock;
(iv) The transactions contemplated by Article II of the
Reorganization Agreement, including the Corporate Restructuring
Transactions, shall have been consummated in all material respects;
(v) The Healthcare Company Common Stock shall have been
approved for listing on the NYSE, subject to official notice of issuance;
(vi) The Registration Statement shall have been filed with the
SEC and shall have become effective, and no stop order with respect thereto
shall be in effect;
-9-
<PAGE>
(vii) All material authorizations, consents, approvals and
clearances of Federal, state, local and foreign governmental agencies
required to permit the valid consummation by the parties hereto of the
transactions contemplated by this Agreement and the Reorganization
Agreement shall have been obtained; and no such authorization, consent,
approval or clearance shall contain any conditions which would have a
material adverse effect on (A) the Real Estate Business or the Healthcare
Business, (B) the Healthcare Company Assets and Vencor Assets, results of
operations or financial condition of the Vencor Group or the Healthcare
Company Group, in each case taken as a whole, or (C) the ability of Vencor
or Healthcare Company to perform its obligations under this Agreement and
the Reorganization Agreement; and all statutory requirements for such valid
consummation shall have been fulfilled;
(viii) No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
government, regulatory or administrative agency or commission, and no
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, shall be in effect preventing the consummation of
this Agreement, the Reorganization Agreement or the Distribution;
(ix) The Financing Transactions shall have occurred and all
bank credit agreements, debt security or other financing facility entered
into pursuant thereto shall be in place and all conditions to borrowing
thereunder (other than any conditions concerning consummation of the
Distribution and the transfers of assets and liabilities described
hereunder) shall have been satisfied, and all necessary consents, waivers
or amendments to each bank credit agreement, debt security or other
financing facility to which any member of the Vencor Group or the
Healthcare Company Group is a party or by which any such member is bound
shall have been obtained, or each such agreement, security or facility
shall have been refinanced, in each case on terms satisfactory to Vencor
and to the extent necessary to permit the Distribution to be consummated
without any material breach of the terms of such agreement, security or
facility; and
(x) An officer of Vencor shall have instructed the Agent to
make the Distribution effective.
(b) The foregoing conditions are for the sole benefit of Vencor and
shall not give rise to any duty on the part of Vencor or its Board of Directors
to waive or not waive any such condition. Any determination made by the Board
of Directors of Vencor in good faith on or prior to the Distribution Date
concerning the satisfaction or waiver of any or all of the conditions set forth
in Section 3.01(a) shall be conclusive.
3.02 No Constraints. Notwithstanding the provisions of Section 3.01,
--------------
the fulfillment or waiver of any or all of the conditions precedent to the
Distribution set forth therein shall not:
(a) create any obligation on the part of Vencor or any other party
hereto to effect the Distribution;
-10-
<PAGE>
(b) in any way limit Vencor's right and power under Section 4.12 to
terminate this Agreement or the Reorganization Agreement and the process leading
to the Distribution and to abandon the Distribution; or
(c) alter the consequences of any such termination under Section
4.12 from those specified in such Section.
3.03 Deferral of the Distribution Date. If the Distribution Date
---------------------------------
shall have been established by the Board of Directors of Vencor but all the
conditions precedent to the Distribution set forth in this Agreement have not
theretofore been fulfilled or waived, or Vencor does not reasonably anticipate
that they will be fulfilled or waived, on or prior to the date established as
the Distribution Date, the Distribution shall not occur at the time established
and, Vencor may, by resolution of its Board of Directors (or a committee
thereof, so authorized), defer the Distribution Date to a later date.
3.04 Public Notice of the Deferred Distribution Date. If the
-----------------------------------------------
Distribution Date is deferred in accordance with Section 3.03 and public
announcement of the prior Distribution Date has theretofore been made, Vencor
shall promptly thereafter issue a public announcement with respect to such
deferment and shall take such other actions as may be deemed necessary or
desirable with respect to the dissemination of such information.
ARTICLE IV
MISCELLANEOUS
4.01 Indemnification, Access to Information and Dispute Resolution.
-------------------------------------------------------------
Each of Vencor and Healthcare Company hereby agrees that Articles III, V and VI
of the Reorganization Agreement regarding indemnification, access to information
and dispute resolution shall be applicable in all respects to this Agreement.
4.02 Complete Agreement. This Agreement, the Exhibits and Schedules
------------------
hereto, the Ancillary Agreements and the agreements and other documents referred
to herein shall constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and shall supersede all previous
negotiations, commitments and writings with respect to such subject matter.
4.03 Expenses. All costs and expenses of any party hereto whether
--------
incurred prior to or after the Distribution Date in connection with the
preparation, execution, delivery and implementation of this Agreement and with
the consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements, including but not limited to legal fees, accounting fees,
investment banking fees, and all such other costs and expenses shall be
allocated among Vencor and the Healthcare Company in accordance with the Debt
and Cash Allocation Agreement and the Tax Allocation Agreement.
4.04 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware (other than the
laws regarding choice of laws
-11-
<PAGE>
and conflicts of laws) as to all matters, including matters of validity,
construction, effect, performance and remedies.
4.05 Notices. All notices, requests, claims, demands and other
-------
communications hereunder (collectively, "Notices") shall be in writing and shall
-------
be given (and shall be deemed to have been duly given upon receipt) by delivery
in person, by cable, telegram, facsimile, electronic mail or other standard form
of telecommunications (provided confirmation is delivered to the recipient the
next Business Day in the case of facsimile, electronic mail or other standard
form of telecommunications) or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
If to Vencor:
President
Vencor, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telephone: (502) 596-7300
Facsimile:
with a copy to:
General Counsel
Vencor, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telephone: (502) 596-7300
Facsimile: (502) 596-4075
If to Healthcare Company:
President
Vencor Healthcare, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telephone: (502) 596-7300
Facsimile:
-12-
<PAGE>
with a copy to:
General Counsel
Vencor Healthcare, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telephone: (502) 596-7300
Facsimile: (502) 596-4075
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section 4.05.
4.06 Amendment and Modification. This Agreement may be amended,
--------------------------
modified or supplemented only by a written agreement signed by both of the
parties hereto.
4.07 Successors and Assigns; No Third Party Beneficiaries. This
----------------------------------------------------
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their successors and permitted assigns but
neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other party (which consent shall not be unreasonably withheld or
delayed). This Agreement is solely for the benefit of the parties hereto and
their Subsidiaries and Affiliates and is not intended to confer upon any other
Persons any rights or remedies hereunder.
4.08 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.
4.09 Interpretation. The Article and Section headings contained in
--------------
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
4.10 Legal Enforceability. Any provision of this Agreement which is
--------------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. Each party acknowledges
that money damages would be an inadequate remedy for any breach of the
provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.
4.11 References; Construction. References to any "Article",
------------------------
"Exhibit", "Schedule" or "Section", without more, are to Appendices, Articles,
Exhibits, Schedules and Sections to or of this Agreement. Unless otherwise
expressly stated, clauses beginning with the term "including" set forth examples
only and in no way limit the generality of the matters thus exemplified.
-13-
<PAGE>
4.12 Termination. Notwithstanding any provision hereof, this
-----------
Agreement may be terminated and the Distribution abandoned at any time prior to
the Distribution Date by and in the sole discretion of the Board of Directors of
Vencor without the approval of any other party hereto or of Vencor's
stockholders. In the event of such termination, no party hereto shall have any
Liability to any Person by reason of this Agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
VENCOR, INC.
By:
-------------------------
Name:
Title:
VENCOR HEALTHCARE, INC.
By:
------------------------
Name:
Title:
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<PAGE>
EXHIBIT 10.8
M A S T E R L E A S E A G R E E M E N T
- - --------------------------------------------------------------------------------
G E N E R A L T E R M S A N D C O N D I T I O N S
DATED AS OF APRIL 30, 1998
FOR LEASE EXECUTED BY
VENCOR, INC., FIRST HEALTHCARE CORPORATION,
NATIONWIDE CARE INC. and VENTAS REALTY LIMITED PARTNERSHIP
[and applicable FHC subs]
AS LESSOR
AND
VENCOR HEALTHCARE, INC.
AND
VENCOR OPERATING, INC.,
as TENANT
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Section 1.1. Leased Property; Term..................................1
Section 1.2. Term...................................................2
ARTICLE II
Section 2.1. Definitions............................................2
ARTICLE III
Section 3.1. Rent..................................................10
Section 3.2. Net Lease.............................................12
ARTICLE IV
Section 4.1. Payment of Impositions................................13
Section 4.2. Notice of Impositions.................................13
Section 4.3. Adjustment of Impositions.............................14
ARTICLE V
Section 5.1. No Termination, Abatement, etc........................14
ARTICLE VI
Section 6.1. Ownership of the Leased Property......................14
Section 6.2. Tenant's Personal Property............................15
ARTICLE VII
USE OF THE APPLICABLE LEASED PROPERTY
Section 7.1. Condition of the Leased Property......................15
Section 7.2. Use of the Leased Property............................16
Section 7.3. Lessor to Grant Easements, etc........................17
Section 7.4. Lessor and Tenant to Execute Lease Supplement.........17
i
<PAGE>
ARTICLE VIII
Section 8.1. Compliance with Legal and Insurance Requirements,
Instruments, etc....................................18
Section 8.2. Legal Requirement Covenants..........................18
ARTICLE IX
Section 9.1. Maintenance and Repair...............................19
Section 9.2. Encroachments, Restrictions, etc.....................20
ARTICLE X
Section 10.1. Construction of Capital Additions to the Leased
Property............................................21
Section 10.2. Capital Additions Financed by Tenant.................21
Section 10.3. Capital Additions Financed by Lessor.................22
Section 10.4. Non-Capital Additions................................24
Section 10.5. Salvage..............................................25
Section 10.6. Requirements for all Capital Additions and
Non-Capital Additions...............................25
Section 10.7. Mortgagee's Consent..................................26
ARTICLE XI
Section 11.1. Liens................................................26
ARTICLE XII
Section 12.1. Permitted Contests...................................27
ARTICLE XIII
Section 13.1. General Insurance Requirements.......................27
Section 13.2. Replacement Cost.....................................29
Section 13.3. Additional Insurance.................................29
Section 13.4. Waiver of Subrogation................................30
ii
<PAGE>
Section 13.5. Form Satisfactory, etc...............................30
Section 13.6. Increase in Limits...................................30
Section 13.7. Blanket Policy.......................................30
Section 13.8. No Separate Insurance................................31
ARTICLE XIV
Section 14.1. Insurance Proceeds...................................31
Section 14.2 Reconstruction in the Event of Damage or
Destruction Covered by Insurance....................31
Section 14.3. Reconstruction in the Event of Damage or Destruction
Not Covered by Insurance............................32
Section 14.4. Tenant's Property....................................32
Section 14.5. Restoration of Tenant's Property.....................33
Section 14.6. No Abatement of Rent.................................33
Section 14.7. Restoration..........................................33
Section 14.8. Termination of Rights of First Refusal...............34
Section 14.9. Waiver...............................................34
ARTICLE XV
CONDEMNATION
Section 15.1. Definitions..........................................34
Section 15.2. Parties' Rights and Obligations......................35
Section 15.3. Total Taking.........................................35
Section 15.4. Partial Taking.......................................35
Section 15.5. Restoration..........................................35
Section 15.6. Award-Distribution...................................35
Section 15.7. Temporary Taking.....................................36
ARTICLE XVI
Section 16.1. Events of Default....................................36
Section 16.2. Certain Remedies.....................................38
Section 16.3. Damages..............................................39
Section 16.4. Tenant's Obligation to Purchase......................40
Section 16.5. Waiver...............................................40
Section 16.6. Application of Funds.................................40
Section 16.7. Notice to Lessor.....................................41
iii
<PAGE>
ARTICLE XVII
Section 17.1. Lessor's Right to Cure Tenant's Default..............41
ARTICLE XVIII
Section 18.1. Provisions Relating to Purchase of the Leased
Property............................................41
ARTICLE XIX
Section 19.1. Renewal Terms........................................42
ARTICLE XX
Section 20.1. Holding Over.........................................42
ARTICLE XXI
SUBORDINATION
Section 21.1. Subordination........................................43
Section 21.2. Attornment...........................................43
Section 21.3. Mortgagee Cure Rights................................44
Section 21.4. Modifications........................................44
ARTICLE XXII
Section 22.1. Notice to Lessor.....................................45
Section 22.2. Definitions..........................................45
Section 22.3. Consent of Leasehold Mortgagee Required..............45
Section 22.4. Default Notice.......................................45
Section 22.5. Procedure for Foreclosure on Default.................46
Section 22.6. Assignment or Transfer in Lieu of Foreclosure........46
Section 22.7. New Lease............................................47
Section 22.8. New Lease Properties.................................48
iv
<PAGE>
Section 22.9. Legal Proceedings....................................49
Section 22.10. Future Amendments....................................49
Section 22.11. Estoppel Certificate.................................49
Section 22.12. Notices..............................................49
Section 22.13. Erroneous Payments...................................50
ARTICLE XXIII
Section 23.1. Risk of Loss.........................................50
ARTICLE XXIV
Section 24.1. Indemnification......................................50
ARTICLE XXV
Section 25.1. Subletting and Assignment............................51
Section 25.2. Attornment...........................................54
Section 25.3. Sublease Limitation..................................55
ARTICLE XXVI
Section 26.1. Officer's Certificates and Financial Statements......55
ARTICLE XXVII
Section 27.1. Lessor's Right to Inspect............................56
ARTICLE XXVIII
Section 28.1. No Waiver............................................56
ARTICLE XXIX
Section 29.1. Remedies Cumulative..................................56
v
<PAGE>
ARTICLE XXX
Section 30.1. Acceptance of Surrender..............................57
ARTICLE XXXI
Section 31.1. No Merger of Title...................................57
ARTICLE XXXII
Section 32.1. Conveyance by Lessor.................................57
ARTICLE XXXIII
Section 33.1. Quiet Enjoyment......................................57
ARTICLE XXXIV
Section 34.1. Notices..............................................58
ARTICLE XXXV
Section 35.1. Appraisers...........................................59
ARTICLE XXXVI
Section 36.1. General REIT Provisions..............................60
ARTICLE XXXVII
Section 37.1. First Refusal to Purchase............................61
Section 37.2. Lessor's Option to Purchase the Tenant's Personal
Property............................................62
vi
<PAGE>
ARTICLE XXXVIII
Section 38.1. Lessor May Grant Liens.............................62
ARTICLE XXXIX
Section 39.1. Environmental Indemnity............................63
ARTICLE XL
MISCELLANEOUS
Section 40.1. _________..........................................63
Section 40.2. _________..........................................64
Section 40.3. _________..........................................64
Section 40.4. _________..........................................65
Section 40.5. _________..........................................65
Section 40.6. _________..........................................65
Section 40.7. _________..........................................65
Section 40.8. _________..........................................65
Section 40.9. __________.........................................66
Section 40.10. _________.........................................66
Section 40.11. _________.........................................66
Section 40.12. _________.........................................66
Section 40.13. Louisiana Provisions..............................66
Section 40.14. _________.........................................66
Section 40.15. _________.........................................66
Section 40.16. Lessor Consents...................................66
vii
<PAGE>
ARTICLE XLI
Section 41.1.Memorandum of Lease..................................67
LIST OF EXHIBITS
Exhibit A - Legal Description of the Land
Exhibit B - Lessor/Term/Commencement Date/Expiration Date
Exhibit C - Minimum Rent
Exhibit D - Renewal Groups
Exhibit E - Minimum Repurchase Price
Exhibit F - Basis for Appraisal
Exhibit G - Form of Guaranty
viii
<PAGE>
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT, GENERAL TERMS AND CONDITIONS (hereinafter
this "Lease" or this "Master Lease") is dated as of the 30/th/ day of April,
----- ------------
1998, and is between VENCOR, INC. (which will change its name to "Ventas,
Inc."), a Delaware corporation, FIRST HEALTHCARE CORPORATION, NATIONWIDE CARE,
INC., VENTAS REALTY LIMITED PARTNERSHIP [and applicable subs of FHC]
(collectively, "Lessor"), each having its principal office at 400 West Market
------
Street, Suite 3300, Aegon Center, Louisville, Kentucky 40202, and VENCOR
HEALTHCARE, INC (which will change its name to "Vencor, Inc.") together with its
permitted assigns, including VENCOR OPERATING, INC. ("Tenant"), a Delaware
------
corporation, having its principal offices at 400 West Market Street, Suite 3300,
Aegon Center, Louisville, Kentucky 40202.
RECITALS
Lessor has agreed to lease to Tenant and Tenant has agreed to lease from
Lessor certain parcels of real property and improvements, each for use and
operation for the provision of healthcare services and related uses, which are
identified on Exhibit A hereto.
---------
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Lessor and Tenant hereby agree as follows:
ARTICLE I
---------
Section 1.1. Leased Property; Term
---------------------
Upon and subject to the terms and conditions hereinafter set forth,
Lessor leases to Tenant and Tenant leases from Lessor all of Lessor's rights and
interest in and to each of the parcels of real property described in Exhibit A
---------
attached hereto (each a "Leased Property" and, collectively, the "Leased
--------------- ------
Properties") and, for each Leased Property all of the following:
- - ----------
(i) the tracts, pieces and parcels of land, as more
particularly described in Exhibit A (collectively, the "Land"),
--------- ----
(ii) all buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, but not
limited to, alleyways and connecting tunnels,
1
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sidewalks, utility pipes, conduits and lines (on-site and off-site),
parking areas and roadways appurtenant to such buildings and
structures presently situated upon the Land and Capital Additions
financed by Lessor (collectively, the "Leased Improvements"),
-------------------
(iii) all easements, rights and appurtenances relating to
the Land and the Leased Improvements, and
(iv) all permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all
components thereof, now and hereafter located in, on or used in
connection with, and permanently affixed to or incorporated into the
Leased Improvements, including, without limitation, all furnaces,
boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment,
and built-in oxygen and vacuum systems, all of which to the greatest
extent permitted by law, are hereby deemed by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto, but specifically excluding all
items included within the category of Tenant's Personal Property as
defined in Article II below (collectively the "Fixtures"),
-------
SUBJECT, HOWEVER, to all covenants, conditions, restrictions, easements and
other matters affecting the applicable Leased Property, whether or not of
record, provided, however, that the foregoing will not interfere with the
Primary Intended Use of the applicable Leased Property ("Permitted
---------
Encumbrances").
Section 1.2. Term. To have and to hold for (1) a fixed term (the
----
"Fixed Term") commencing on the Commencement Date set forth in Exhibit B
- - ----------- ---------
opposite the applicable Leased Property and ending at midnight on the Expiration
Date so set forth in Exhibit B, and (2) the Extended Terms provided for in
---------
Article XIX, unless this Master Lease is sooner terminated as hereinafter
provided.
ARTICLE II
----------
Section 2.1. Definitions. For all purposes of this Master Lease,
-----------
except as otherwise expressly provided or unless the context otherwise requires,
(i) the terms defined in this Article have the meanings assigned to them in this
Article and include the plural as well as the singular, (ii) all accounting
terms not otherwise defined herein have
2
<PAGE>
the meanings assigned to them in accordance with generally accepted accounting
principles as at the time applicable, (iii) all references in this Master Lease
to designated "Articles," "Sections" and other subdivisions are to the
designated Articles, Sections and other subdivisions of this Master Lease and
(iv) the words "herein," hereof" and "hereunder" and other words of similar
import refer to this Master Lease as a whole and not to any particular Article,
Section or other subdivision:
Additional Charges: As defined in Article III.
------------------
Affiliate: means, with respect to any Person, any other Person directly
---------
or indirectly controlling (including, but not limited to, all partners,
directors, officers and members of such Person), controlled by or under direct
or indirect common control with any such Person. A Person shall be deemed to
control a corporation, a partnership, a trust, or a limited liability company if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests.
Award: As defined in Article XV.
-----
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday which
------------
is not a day on which national banks in the City of New York, New York are
authorized, or obligated, by law or executive order, to close.
Capital Additions: One or more new buildings, or one or more additional
-----------------
structures annexed to any portion of any of the Leased Improvements with respect
to the applicable Leased Property, or the material expansion of the existing
improvements, which are constructed on any parcel or portion of the Land, during
the Term, including the construction of a new wing or new story, or the repair,
replacement, restoration, remodeling or rebuilding of the existing improvements
on such Leased Property or any portion thereof where the purpose and effect of
such work is to provide a functionally new facility needed to provide services
not previously offered, or any expansion, construction, renovation or conversion
in order to increase the bed capacity of the Facility located at the applicable
Leased Property, to change the purpose for which such beds are utilized or to
materially improve the quality of such Facility.
Capital Additions Cost: The term "Capital Additions Cost" shall mean the
----------------------
cost of any Capital Addition proposed to be made by Tenant at the applicable
Leased Property whether or not paid for by Tenant or Lessor. Such cost shall
include (a) the cost of construction of the Capital Additions including site
preparation and improvement, materials, labor, supervision, and certain related
design, engineering and architectural services, the cost of any fixtures, the
cost of construction financing and miscellaneous costs approved by Lessor, (b)
if agreed to by Lessor in writing, in advance, the cost of
3
<PAGE>
any land contiguous to the Leased Property which is to become part of the Leased
Property purchased for the purpose of placing thereon the Capital Additions or
any portion thereof or for providing means of access thereto, or parking
facilities therefor, including the cost of surveying the same, (c) the cost of
insurance, real estate taxes, water and sewage charges and other carrying
charges for such Capital Additions during construction, (d) the cost of title
insurance, (e) reasonable fees and expenses of legal counsel, (f) filing,
registration and recording taxes and fees, (g) documentary stamp taxes, if any,
and (h) all reasonable costs and expenses of Lessor and Tenant and, if agreed to
in advance by Lessor, any Lending Institution which has committed to finance the
Capital Additions, including, but not limited to, (i) the reasonable fees and
expenses of their respective legal counsel, (ii) all printing expenses, (iii)
the amount of any filing, registration and recording taxes and fees, (iv)
documentary stamp or transfer taxes, if any, (v) title insurance charges,
appraisal fees, if any, (vi) rating agency fees, if any, and (vii) commitment
fees, if any, charged by any Lending Institution advancing or offering to
advance any portion of the financing for such Capital Additions.
Code: The Internal Revenue Code of 1986, as amended.
----
Commencement Date: As to the applicable Leased Property, the date set
-----------------
forth opposite such Leased Property in the column "Commencement Date" on Exhibit
-------
B attached hereto.
- - -
Condemnation, Condemnor: As defined in Article XV.
-----------------------
Consolidated Financials: For any fiscal year or other accounting period
-----------------------
for Tenant or a Guarantor and its consolidated subsidiaries, statements of
earnings and retained earnings and of changes in financial position for such
period and for the period from the beginning of the respective fiscal year to
the end of such period and the related balance sheet as at the end of such
period, together with the notes thereto, all in reasonable detail and setting
forth in comparative form the corresponding figures for the corresponding period
in the preceding fiscal year, and prepared in accordance with generally accepted
accounting principles.
Consolidated Net Worth: At any time, the sum of the following for Tenant
----------------------
or a Guarantor and its consolidated subsidiaries, on a consolidated basis
determined in accordance with generally accepted accounting principles:
(1) the amount of capital or stated capital (after deducting the cost of
any shares held in its treasury), plus
4
<PAGE>
(2) the amount of capital surplus and retained earnings (or, in the case
of a capital surplus or retained earnings deficit, minus the amount of such
deficit), minus
(3) the sum of the following (without duplication of deductions in
respect of items already deducted in arriving at surplus and retained
earnings): (a) unamortized debt discount and expense; and (b) any write-up
in book value of assets resulting from a revaluation thereof subsequent to
the most recent Consolidated Financials prior to the date hereof, except
any net write-up in value of foreign currency in accordance with generally
accepted accounting principles; any write-up resulting from a reversal of a
reserve for bad debts or depreciation and any write-up resulting from a
change in methods of accounting for inventory.
Date of Taking: As defined in Article XV.
--------------
Deferred Properties: As defined in Section 7.4.
-------------------
Encumbrance: As defined in Article XXXVIII.
-----------
Escalation Amount: An amount equal to two percent (2%) of the Minimum
-----------------
Rent for the previous Lease Year.
Event of Default: As defined in Article XVI.
----------------
Extended Term: As defined in Article XIX.
-------------
Facility: The facility being operated or proposed to be operated on the
--------
applicable Leased Property.
Facility Mortgage: As defined in Article XIII.
-----------------
Facility Mortgagee: As defined in Article XIII.
------------------
Fair Market Added Value: The Fair Market Value (as hereinafter defined)
-----------------------
of the applicable Leased Property (including all Capital Additions) less the
Fair Market Value of such Leased Property determined as if no Capital Additions
financed by Tenant had been constructed.
Fair Market Rental: As defined in Article XIX.
------------------
5
<PAGE>
Fair Market Value: The price that a willing buyer not compelled to buy
-----------------
would pay a willing seller not compelled to sell for the applicable Leased
Property, including all Capital Additions, and (a) assuming the same is
unencumbered by this Lease, (b) determined in accordance with the appraisal
procedures set forth in Article XXXV or in such other manner as shall be
mutually acceptable to Lessor and Tenant, and (c) not taking into account any
reduction in value resulting from any indebtedness to which such Leased Property
is subject except as expressly provided hereinbelow. In determining such Fair
Market Value the positive or negative effect on the value of the Leased Property
attributable to the interest rate, amortization schedule, maturity date,
prepayment penalty and other terms and conditions of any encumbrance which is
not removed at or prior to the closing of the transaction as to which such Fair
Market Value determination is being made shall be taken into account.
Fair Market Value Purchase Price: The Fair Market Value of the Leased
--------------------------------
Property less the Fair Market Added Value.
Fiscal Year: The twelve (12) month period from January 1 to December 31.
-----------
Fixed Term: As defined in Article I.
----------
Fixtures: As defined in Article I.
--------
Guarantor: Vencor Operating, Inc., a Delaware corporation.
---------
Impositions: Shall mean for each applicable Leased Property collectively,
-----------
all taxes (including, without limitation, all taxes imposed under the laws of
the State, as such laws may be amended from time to time, and all ad valorem,
sales and use, single business, gross receipts, transaction privilege, rent or
similar taxes as the same relate to or are imposed upon Tenant or its business
conducted upon the applicable Leased Property), assessments (including, without
limitation, all assessments for public improvements or benefits, whether or not
commenced or completed prior to the date hereof and whether or not to be
completed within the Term), ground rents, water, sewer or other rents and
charges, excises, tax levies, fees (including, without limitation, license,
permit, inspection, authorization and similar fees), and all other governmental
charges, in each case whether general or special, ordinary or extraordinary, or
foreseen or unforeseen, of every character in respect of the applicable Leased
Property or the business conducted thereon by Tenant (including all interest and
penalties thereon due to any failure in payment by Tenant), which at any time
prior to, during or in respect of the Term hereof may be assessed or imposed on
or in respect of or be a lien upon (a) Lessor or Lessor's interest in such
Leased Property, (b) such Leased Property or any part thereof or any rent
therefrom or any estate, right, title or interest therein, or (c) any occupancy,
operation, use
6
<PAGE>
or possession of , or sales from, an activity conducted on, or in connection
with such Leased Property or the leasing or use of such Leased Property or any
part thereof by Tenant; provided, however, nothing contained in this Lease shall
be construed to require Tenant to pay (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Lessor or
any other person or (2) any transfer, or net revenue tax of Lessor or any other
person or (3) any tax imposed with respect to the sale, exchange or other
disposition by Lessor of the applicable Leased Property or the proceeds thereof,
except to the extent that any tax, assessment, tax levy or charge, which Tenant
is obligated to pay pursuant to the first sentence of this definition and which
is in effect at any time during the term hereof is totally or partially
repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or
(2) is levied, assessed or imposed expressly in lieu thereof.
Indemnity Agreement: That certain Indemnity Agreement, dated as of the
-------------------
date hereof, from Tenant, Guarantor and any assignee or sublessee of Tenant or a
Guarantor to Lessor.
Insurance Requirements: All terms of any insurance policy required by
----------------------
this Lease with respect to the applicable Leased Property and all requirements
of the issuer of any such policy.
Land: As defined in Article I with respect to the applicable Lease.
----
Lease: As defined in Section 1.1.
-----
Lease Guaranty: A guaranty of the obligations of Tenant under this Lease
--------------
executed and delivered by Guarantor substantially in the form of Exhibit G
---------
annexed hereto.
Lease Supplement: As defined in Section 7.4.
----------------
Lease Year: shall mean May 1 through April 30 of each year of the Term.
----------
Leased Improvements; Leased Property: Each as defined in Section 1.1.
------------------------------------
Leasehold Mortgage: As defined in Section 22.2(a).
------------------
Leasehold Mortgagee: As defined in Section 22.2(b).
-------------------
Legal Requirements: As to the applicable Leased Property, all federal,
------------------
state, county, parish, municipal and other governmental statutes, laws, rules,
orders, regulations, ordinances, judgments, decrees and injunctions affecting
such Leased
7
<PAGE>
Property or the maintenance, construction, use, operation or alteration thereof,
whether now or hereafter enacted and in force, including (i) any licensure
requirements, certification requirements under applicable federal and/or state
cost reimbursement programs, including Medicare and Medicaid (provided the
applicable Facility participates in such reimbursement), building codes and
zoning regulations, (ii) any which may (x) require repairs, modifications or
alterations in or to such Leased Property or (y) in any way adversely affect the
use and enjoyment thereof, (iii) all permits, licenses, certificates of need,
authorizations and regulations necessary to operate such Leased Property for its
Primary Intended Use, and (iv) all covenants, agreements, restrictions and
encumbrances contained in any instruments, either of record or known to Tenant
(other than encumbrances created by Lessor without the consent of Tenant), at
any time in force affecting such Leased Property.
Lending Institution: Any insurance company, federally insured commercial
-------------------
or savings bank, national banking association, savings and loan association,
employees' welfare, pension or retirement fund or system, corporate profit
sharing or pension trust, college or university, or real estate investment
trust, including any corporation qualified to be treated for federal tax
purposes as a real estate investment trust, having a net worth of at least
$50,000,000 acting on its own behalf or as agent on behalf of other Lending
Institutions.
Lessor: Ventas, Inc., a Delaware corporation, and each of the other
------
Lessors listed on the cover page hereof and their successors and assigns.
Litigation Costs: All costs reasonably incurred by Lessor in connection
----------------
with the enforcement of any provision of this Lease, including without
limitation attorney's and legal assistant fees and expenses, court costs and
fees and consultant and witness fees and expenses.
Medicaid: A state program of medical aid established under Title XVIII
--------
of the Social Security Act of 1965, as amended, and any successor statute
thereto and any successor programs.
Medicare: The program of medical care benefits provided under Title
--------
XVIII of the Social Security Act of 1965, as amended, and any successor statute
thereto and any successor programs thereto.
Minimum Rent: As defined in Article III.
------------
Minimum Repurchase Price: As set forth on Exhibit E annexed hereto.
------------------------ ---------
8
<PAGE>
Net Patient Service Revenues: Revenues derived primarily from services
----------------------------
provided to patients that are reported net of contractual adjustments from
governmental and other third party payors and excluding miscellaneous revenues
earned from non-patient sources.
Officer's Certificate: A certificate of Tenant signed by the chairman of
---------------------
the board of directors or the president or any vice president or the secretary
or the treasurer, or a group controller or assistant group controller or another
officer authorized to so sign by the board of directors or by-laws of Tenant, or
the general partner of Tenant or the managing member of Tenant, as applicable,
or any other person whose power and authority to act has been authorized by
delegation in writing by any of the persons holding the foregoing offices.
Overdue Rate: On any date, a rate equal to 2% above the Prime Rate, but
------------
in no event greater than the maximum rate then permitted under applicable law.
Payment Date: Any due date for the payment of the installments of
------------
Minimum Rent, Percentage Rent or any other sums payable under this Lease.
Permitted Alteration: Any Capital Alteration or other alteration or
--------------------
improvement to the applicable Facility or Leased Property that is permitted
pursuant to the terms of this Lease.
Permitted Encumbrances: As defined in Section 1.1.
----------------------
Person: Any individual, sole proprietorship, corporation, general
------
partnership, limited partnership, limited liability company or partnership,
joint venture, association, joint stock company, bank, trust, estate,
unincorporated organization, any federal, state, county or municipal government
(or agency or political subdivision thereof), endowment fund or other form of
entity.
Primary Intended Use: As defined in Section 7.2.2.
--------------------
Prime Rate: On any date, a rate equal to the annual rate on such date
----------
announced by Citibank, N.A., or any successor thereof, to be its prime rate for
90-day unsecured loans to its corporate borrowers of the highest credit
standing.
Rent: Collectively, the Minimum Rent, and Additional Charges.
----
State: The State or Commonwealth in which the applicable Leased Property
-----
is located.
9
<PAGE>
Subsidiaries: the corporations or other entities of which securities or
------------
similar ownership interests representing (i) ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
or (ii) a majority of the economic interest therein, are at the time directly or
indirectly owned by Tenant or Guarantor (individually, a "Subsidiary").
----------
Superior Lessor: The lessor under any ground lease or other lease to
---------------
which the applicable Leased Property is subject.
Superior Mortgage: As defined in Section 21.1.
-----------------
Superior Mortgagee: As defined in Section 21.1.
------------------
Taking: A taking or voluntary conveyance during the Term of all or part
------
of the applicable Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of any condemnation
or other eminent domain proceeding affecting such Leased Property whether or not
the same shall have actually been commenced.
Tenant's Personal Property: All motor vehicles, machinery, equipment,
--------------------------
furniture, furnishings, movable walls or partitions, computers or trade fixtures
or all other personal property, and consumable inventory and supplies, now owned
or hereafter acquired by Tenant and located on the applicable Leased Property or
used or useful in Tenant's business on such Leased Property, including without
limitation all modifications, replacements, alterations and additions to such
personal property installed at the expense of Tenant, except items, if any,
included within the definition of Fixtures.
Term: Collectively for each applicable Leased Property, the Fixed Term
----
and any Extended Terms, to the extent properly exercised pursuant to the
provisions of Article XIX, unless earlier terminated pursuant to the provisions
of this Lease.
Test Rate: The minimum interest rate necessary to avoid imputation of
---------
original issue discount income under Sections 483 or 1272 of the Code or any
similar provision.
Unsuitable for Its Primary Intended Use: A state or condition of the
---------------------------------------
Facility located at the applicable Leased Property such that by reason of damage
or destruction, or a partial taking by condemnation, in the good faith judgment
of Tenant, reasonably exercised, the Facility cannot by operated on a
commercially practicable basis for its Primary Intended Use taking into account,
among other relevant factors, the number of usable beds affected by such damage
or destruction or partial taking.
10
<PAGE>
Unavoidable Delays: Delays due to strikes, lockouts, inability to
------------------
procure materials, power failure, acts of God, governmental restrictions, enemy
action, civil commotion, fire, unavoidable casualty or other causes beyond the
control of the party responsible for performing an obligation hereunder,
provided that lack of funds shall not be deemed a cause beyond the control of
either party hereto unless such lack of funds is caused by the failure of the
other party hereto to perform any obligations of such party, under this Lease,
or any guaranty of this Lease, including any obligation to provide financing
undertaken by Lessor pursuant to Article X below.
ARTICLE III
-----------
Section 3.1. Rent. Tenant will pay to Lessor, in lawful money of the
----
United States of America which shall be legal tender for the payment of public
and private debts, at Lessor's address set forth above or at such other place or
to such other person, firms or corporations as Lessor from time to time may
designate in writing, Minimum Rent (as defined below) and Additional Charges (as
defined below) during the Term, as hereinafter provided.
(a) Minimum Rent: The annual sum of $_______, payable in advance in equal,
------------
consecutive monthly installments, on the first day of each calendar month of the
Fixed Term and each Extended Term; provided, however, that the first monthly
payment of Minimum Rent shall be payable on the Commencement Date and that the
first and last monthly payments of Minimum Rent shall be prorated as to any
partial month (subject to adjustment as provided in Sections 10.3(b)(iv) and
14.6 below). In the event that this Lease is terminated as to a particular
Leased Property, or a substitute master lease is entered into as to a particular
Leased Property pursuant to the provisions of this Lease, the Minimum Rent
payable hereunder shall be reduced by the amount opposite the applicable Leased
Property on Exhibit C annexed hereto. The amount of Minimum Rent payable
---------
hereunder shall increase on each anniversary of the date of this Lease by an
amount equal to the Escalation Amount, provided that the Net Patient Service
Revenues for the previous Lease Year shall be equal to or exceed 75% of the Net
Patient Service Revenues for the 1997 calendar year. In the event that a Lease
Supplement is delivered pursuant to Section 7.4, the Minimum Rent payable
hereunder shall increase by the amount set forth in such Lease Supplement.
(b) Additional Charges. In addition to the Minimum Rent payable with
------------------
respect to the applicable Leased Property, Tenant shall pay and discharge as and
when due and payable the following (collectively "Additional Charges"):
------------------
(1) Impositions. Tenant shall pay all Impositions before
-----------
any fine, penalty, interest or cost may be added for non-
payment, such payments to be made directly to the taxing
authorities where
11
<PAGE>
feasible, and shall promptly upon request, furnish to Lessor
copies of official receipts or other satisfactory proof
evidencing such payments. If any such Imposition may, at the
option of the taxpayer, lawfully be paid in installments
(whether or not interest shall accrue on the unpaid balance
of such Imposition), subject to the terms of any applicable
Facility Mortgage, Tenant may exercise the option to pay
same (and any accrued interest on the unpaid balance of such
Imposition) in installments and, in such event, shall pay
such installments during the Term as the same may become due
and before any fine, penalty, premium, further interest or
cost may be added thereto.
(2) Utility Charges. Tenant shall pay all charges for
---------------
electricity, power, gas, oil, water, sanitary and storm
sewer, refuse collection, medical waste disposal and other
utilities used or consumed in connection with each Leased
Property during the Term.
(3) Insurance Premiums. Tenant shall pay all premiums for
------------------
the insurance coverage required to be maintained pursuant to
Article XIII hereof.
(4) Other Charges. Tenant shall pay all other amounts,
-------------
liabilities and obligations that Tenant assumes or agrees to
pay under this Lease, including, without limitation, all
agreements to indemnify Lessor under Sections 12.1 and 24.1
and any and all fees, costs and expenses incurred by Tenant
in the operation of its business at the Facility.
(5) Late Payment of Rent. If any installment of Minimum
--------------------
Rent, or Additional Charges (but only as to those Additional
Charges which are payable directly to Lessor or Lessor's
agent or assignee) shall not be paid within five (5)
Business Days after its due date, Tenant will pay to Lessor
on demand a late charge (to the extent permitted by law)
computed at the Overdue Rate (or at the maximum rate
permitted by law, whichever is the lesser) on the amount of
such installment, from the due date of such installment to
the date of payment thereof.
To the extent that Tenant pays any Additional Charges to Lessor pursuant to any
requirement of this Lease, Tenant shall be relieved of its obligation to pay
such Additional Charges to the entity to which they would otherwise be due. If
any Facility Mortgagee shall so require, or if any Additional Charges shall not
be paid to a third party
12
<PAGE>
payee within five (5) Business Days after its due date, Lessor may at any time
thereafter, at Lessor's option, require Tenant to deposit into an escrow account
under the sole dominion and control of Lessor (or the applicable Facility
Mortgagee), on the first day of each and every month, an amount sufficient to
insure that such escrow account shall contain an amount sufficient to make such
payment on its next due date, in which event Lessor shall make all future
payments for such expense from the escrow account. In the event of any failure
by Tenant to pay any Additional Charges when due, Tenant shall promptly pay and
discharge, as Additional Charges, every fine, penalty, interest and cost that
may be added for non-payment or late payment of such items. Lessor shall have
all legal, equitable and contractual rights, powers and remedies provided either
in this Lease or by statute or otherwise in the case of non-payment of the
Minimum Rent.
Section 3.2. Net Lease. The Rent shall be paid absolutely net to Lessor,
---------
without any rights of deduction, set-off or abatement, so that this Lease shall
yield to Lessor the full amount of the installments of Minimum Rent and
Additional Charges, throughout the Term, subject to any other provisions of this
Lease which expressly provide for termination of this Lease with respect to a
Leased Property.
ARTICLE IV
----------
Section 4.1. Payment of Impositions. Subject to Article XII relating to
----------------------
permitted contests, Tenant will pay all Impositions as set forth in Section
3.1(b)(1). Tenant's obligation to pay such Impositions shall be deemed
absolutely fixed upon the date such Impositions become a lien upon the Leased
Property or any part thereof. Lessor, at its expense, shall, to the extent
permitted by applicable law, prepare and file all tax returns and reports as may
be required by governmental authorities in respect of Lessor's net income, gross
receipts, franchise taxes and taxes on its capital stock, and Tenant, at its
expense, shall, to the extent permitted by applicable laws and regulations,
prepare and file all other tax returns and reports in respect of any Imposition
as may be required by governmental authorities. If any refund shall be due from
any taxing authority in respect of any Imposition paid by Tenant, the same shall
be paid over to or retained by Tenant if no Event of Default shall have occurred
hereunder and be continuing. Any such funds retained by Lessor due to an Event
of Default shall be applied as provided in Article XVI. Lessor and Tenant
shall, upon request of the other, provide such data as is maintained by the
party to whom the request is made with respect to the Leased Property as may be
necessary to prepare any required returns and reports. In the event governmental
authorities classify any property covered by this Master Lease as personal
property, Tenant shall file all personal property tax returns in such
jurisdictions where it may legally so file. Lessor, to the extent it possesses
the same, and Tenant, to the extent it possesses the same, will provide the
other party, upon request, with cost and depreciation records necessary for
filing returns for any property so classified as personal property. Where
Lessor is legally required to file personal property
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tax returns, Tenant will be provided with copies of assessment notices
indicating a value in excess of the reported value in sufficient time for Tenant
to file a protest. Tenant may, upon notice to Lessor, at Tenant's option and at
Tenant's sole cost and expense, protest, appeal, or institute such other
proceedings as Tenant may deem appropriate to effect a reduction of real estate
or personal property assessments and Lessor, at Tenant's expense as aforesaid,
shall fully cooperate with Tenant in such protest, appeal, or other action.
Billings for reimbursement by Tenant to Lessor of personal property taxes shall
be accompanied by copies of a bill therefor and payments thereof which identify
the personal property with respect to which such payments are made.
Section 4.2. Notice of Impositions. Lessor shall give prompt notice to
---------------------
Tenant of all Impositions payable by Tenant hereunder of which Lessor at any
time has knowledge, but Lessor's failure to give any such notice shall in no way
diminish Tenant's obligations hereunder to pay such Impositions.
Section 4.3. Adjustment of Impositions. Impositions imposed in respect
-------------------------
of the tax-fiscal period during which the Term terminates shall be adjusted and
prorated between Lessor and Tenant, whether or not such Imposition is imposed
before or after such termination, and Tenant's obligation to pay its prorated
share thereof shall survive such termination.
ARTICLE V
----------
Section 5.1. No Termination, Abatement, etc. Except as otherwise
-------------------------------
specifically provided in this Master Lease, Tenant, to the extent permitted by
law, shall remain bound by this Lease in accordance with its terms and shall
neither take any action without the consent of Lessor to modify, surrender or
terminate the same, nor seek nor be entitled to any abatement, deduction,
deferment or reduction of Rent, or set-off against the Rent, nor shall the
respective obligations of Lessor and Tenant be otherwise affected by reason of
(a) any damage to, or destruction of, any Leased Property or any portion thereof
from whatever cause or any Taking of any Leased Property or any portion thereof,
(b) the interruption or discontinuance of any service or utility servicing any
Leased Property (c) the lawful or unlawful prohibition of, or restriction upon,
Tenant's use of any Leased Property, or any portion thereof, the interference
with such use by any person, corporation, partnership or other entity, or by
reason of eviction by paramount title, (d) any claim which Tenant has or might
have against Lessor or by reason of any default or breach of any warranty by
Lessor under this Master Lease or any other agreement between Lessor and Tenant,
or to which Lessor and Tenant are parties, (e) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceedings affecting Lessor or any assignee or transferee of Lessor,
or (f) for any other cause whether similar or dissimilar to any of the foregoing
other than a discharge of Tenant from any such obligations as a matter of law.
14
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Tenant hereby specifically waives all rights, arising from any occurrence
whatsoever, which may now or hereafter be conferred upon it by law to (i)
modify, surrender or terminate this Master Lease or quit or surrender the Leased
Property or any portion thereof, or (ii) entitle Tenant to any abatement,
reduction, suspension or deferment of the Rent or other sums payable by Tenant
hereunder. The obligations of Lessor and Tenant hereunder shall be separate and
independent covenants and agreements and the Rent and all other sums payable by
Tenant hereunder shall continue to be payable in all events unless the
obligations to pay the same shall be terminated by termination of this Lease as
to any Leased Property other than by reason of an Event of Default.
ARTICLE VI
-----------
Section 6.1. Ownership of the Leased Property. Tenant acknowledges that
--------------------------------
the Leased Property is the property of the Lessor listed on Exhibit B and that
Tenant has only the right to the exclusive possession and use of the Leased
Property upon the terms and conditions of this Master Lease.
Section 6.2. Tenant's Personal Property. Tenant may (and shall as
--------------------------
provided hereinbelow), at its expense, install, affix or assemble or place on
any parcels of the Land or in any of the Leased Improvements, any items of
Tenant's Personal Property and Tenant may, subject to the conditions set forth
below, remove the same upon the expiration or any prior termination of the Term.
Tenant shall provide and maintain during the entire Lease Term all such Tenant's
Personal Property as shall be necessary in order to operate each Facility in
compliance with all licensure and certification requirements in compliance with
all applicable Legal Requirements and Insurance Requirements and otherwise in
accordance with customary practice in the industry for the Primary Intended Use.
All of Tenant's Personal Property not removed by Tenant within twenty-one days
following the expiration or earlier termination of this Lease with respect to
the applicable Leased Property where such Tenant's Personal Property is located
shall be considered abandoned by Tenant and may be appropriated, sold, destroyed
or otherwise disposed of by Lessor without first giving notice thereof to Tenant
and without any payment to Tenant and without any obligation to account therefor
or otherwise disposed of in accordance with applicable law. Tenant will, at its
expense, restore such Leased Property to the condition required by Section
9.1(d), including repair of all damage to the Leased Property caused by the
removal of Tenant's Personal Property, whether effected by Tenant or Lessor.
15
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ARTICLE VII
-----------
USE OF THE APPLICABLE LEASED PROPERTY
Section 7.1. Condition of the Leased Property. Tenant acknowledges
--------------------------------
receipt and delivery of possession of each Leased Property and that Tenant has
examined and otherwise has knowledge of the condition of the Leased Property
prior to the execution and delivery of this Lease and has found the same to be
in good order and repair and satisfactory for its purposes hereunder. Tenant is
leasing the Leased Property "as is" in its present condition. Tenant waives any
claim or action against Lessor in respect of the condition of the Leased
Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION EXPRESS OR IMPLIED, IN
RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS
-------
FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE. AS
- - -------
TO QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING
AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT
THE LEASED PROPERTY HAS BEEN INSPECTED BY TENANT AND IS SATISFACTORY TO IT.
Section 7.2. Use of the Leased Property.
--------------------------
Section 7.2.1. [Tenant shall proceed with all due diligence and shall
exercise its best efforts to obtain and]/*/ [Tenant shall] maintain or cause
to be maintained all approvals needed to use and operate each Leased Property
and the Facility located at each Leased Property under applicable local, state
and federal law and all applicable state and federal programs including but not
limited to appropriate certifications for reimbursement and licensure, except
that with respect to the Leased Properties described in Exhibits A-__, A-__, A-
__, the certificate of need issued for the applicable Facility shall be the
property of Lessor.
Section 7.2.2. After the Commencement Date and during the entire
Term, Tenant shall use each Leased Property and the Leased Improvements thereof
as a hospital or a nursing home and each Facility that is being used as a
hospital on the Commencement Date shall continue to be used as a hospital during
the entire Term and each Facility being used as a nursing home on the
Commencement Date shall continue to be used as a nursing home during the entire
Term (such use being the applicable Leased Property's "Primary Intended Use").
--------------------
Tenant shall not use the applicable Leased Property or any portion thereof for
any other use without the prior written consent of Lessor, which
- - ------------
/*/For Leases for Development Properties
16
<PAGE>
consent shall not be unreasonably withheld or delayed. No use shall be made or
permitted to be made of the applicable Leased Property, and no acts shall be
done, that will cause the cancellation of any insurance policy covering such
Leased Property or any part thereof, nor shall Tenant sell or otherwise provide
to residents or patients therein, or permit to be kept, used or sold in or about
such Leased Property any article which may be prohibited by law or by the
standard form of fire insurance policies, or any other insurance policies
required to be carried hereunder, or fire underwriters regulations. Tenant
shall, at its sole cost, comply with all of the requirements pertaining to the
applicable Leased Property or other improvements of any insurance board,
association, organization or company necessary for the maintenance of insurance,
as herein provided, covering the Leased Property and Tenant's Personal Property.
Section 7.2.3. Tenant shall during the Term operate continuously each
Leased Property as a provider of health care services in accordance with its
Primary Intended Use and maintain its certifications for reimbursement and
licensure and its accreditation, if compliance with accreditation standards is
required to maintain the operations of the Facility and if a failure to comply
would adversely affect operations of the Facility.
Section 7.2.4. Tenant shall not commit or suffer to be committed any
waste on any Leased Property, or in any Facility, nor shall Tenant cause or
permit any nuisance thereon. Tenant shall not take or omit to take any action,
the taking or omission of which may materially impair the value or the
usefulness of such Leased Property or any part thereof for its Primary Intended
Use.
Section 7.2.5. Tenant shall neither suffer nor permit any Leased
Property or any portion thereof, including any Capital Addition whether or not
financed by Lessor, or Tenant's Personal Property, to be used in such a manner
as (i) might reasonably tend to impair Lessor's (or Tenant's, as the case may
be) title thereto or to any portion thereof, or (ii) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or of implied dedication of the applicable Leased Property or any
portion thereof.
Section 7.2.6. Nothing contained in this Section 7.2 shall be deemed
to require Tenant to maintain Medicaid certification at any Facility.
Section 7.3. Lessor to Grant Easements, etc. Lessor and Tenant will,
-------------------------------
from time to time so long as no Event of Default has occurred and is continuing,
at the request of the other party and at such requesting party's cost and
expense (but subject to the approval of Lessor, which approval shall not be
unreasonably withheld or delayed, and provided, however, that if Lessor has not
-------- -------
responded to any such request of Tenant within 30 days after receipt thereof,
such request shall be deemed approved), (i) grant
17
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easements and other rights in the nature of easements, (ii) release existing
easements or other rights in the nature of easements which are for the benefit
of the applicable Leased Property, (iii) dedicate or transfer unimproved
portions of the applicable Leased Property for road, highway or other public
purposes, (iv) execute petitions to have the applicable Leased Property annexed
to any municipal corporation or utility district, (v) execute amendments to any
covenants and restrictions affecting the applicable Leased Property and (vi)
execute and deliver to any person any instrument appropriate to confirm or
effect such grants, releases, dedications and transfers (to the extent of its
interests in the applicable Leased Property), but only upon delivery of all
documentation such party reasonably shall deem necessary and an Officer's
Certificate stating that such grant, release, dedication, transfer, petition or
amendment is not detrimental to the proper conduct of the business of Tenant on
the applicable Leased Property and does not materially reduce the value of the
Leased Property.
Section 7.4. Lessor and Tenant to Execute Lease Supplement. Lessor and
----------------------------------------------
Tenant agree that, with respect to certain Leased Properties indicated on
Exhibit A to be "Deferred Leased Properties", from time to time, and as certain
--------------------------
regulatory issues with respect to such properties are resolved, Lessor and
Tenant shall execute a Lease Supplement ("Lease Supplement") to provide that
----------------
this Lease is effective as to such properties. Such Lease Supplement shall set
forth the term of this Lease with respect to each such Deferred Leased Property
(including the applicable Commencement Date for such property). The initial base
rent shall be increased by the amount set forth for such property on Exhibit A
hereto.
ARTICLE VIII
------------
Section 8.1. Compliance with Legal and Insurance Requirements,
-------------------------------------------------
Instruments, etc. Subject to Article XII relating to permitted contests,
- - -----------------
Tenant, at its expense, will promptly (a) comply with all material Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair and restoration of the applicable Leased Property, whether
or not compliance therewith shall require structural changes in any of the
Leased Improvements or interfere with the use and enjoyment of such Leased
Property and (b) procure, maintain and comply with all licenses, certificates of
need and other authorizations required for any use of the applicable Leased
Property and Tenant's Personal Property then being made, and for the proper
erection, installation, operation and maintenance of the applicable Leased
Property or any part thereof, including without limitation any Capital
Additions. In the event that Tenant shall receive notice from any state
authority that Tenant is not in compliance with any license, permit, approval,
certificate of need or certification for reimbursement under medicare or
medicaid (with respect to any Facility that participates in such programs),
Tenant shall promptly send notice to Lessor and Tenant shall remedy any
condition causing such noncompliance no later than thirty (30) days after Tenant
shall have received such notice.
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<PAGE>
In addition, Tenant shall promptly send to Lessor any material deficiency report
Tenant receives from any state or federal licensure board or certification
authority with respect to any Facility if Tenant has not cured such deficiency
within the applicable cure period.
Section 8.2. Legal Requirement Covenants. Tenant covenants and agrees
---------------------------
that none of the Leased Properties nor any of Tenant's Personal Property shall
be used for any unlawful purpose. Tenant shall acquire and maintain all
licenses, certificates, permits, provider agreements and other authorizations
and approvals needed to operate the applicable Leased Property in its customary
manner for the Primary Intended Use, and any other use conducted on such Leased
Property as may be permitted from time to time hereunder. Tenant further
covenants and agrees that Tenant's use of each Leased Property and maintenance,
alteration, and operation of the same, and all parts thereof, shall at all times
conform to all applicable local, state, and federal laws, ordinances, rules and
regulations unless the same are held by a court of competent jurisdiction to be
unlawful. Tenant may, however, upon prior written notice to Lessor, contest the
legality or applicability of any such law, ordinance, rule or regulation, or any
licensure or certification decision if Tenant maintains such action in good
faith, with due diligence, without prejudice to Lessor's rights hereunder, and
at Tenant's own expense. If by the terms of any such law, ordinance, rule or
regulation, compliance therewith pending the prosecution of any such proceeding
may legally be delayed without the occurrence of any lien, charge or liability
of any kind against the applicable Facility or Tenant's leasehold interest
therein and without subjecting Tenant or Lessor to any liability, civil or
criminal, for failure so to comply therewith, Tenant may delay compliance
therewith until the final determination of such proceeding. If any lien, charge
or civil or criminal liability would be incurred by reason of any such delay,
Tenant, on the prior written consent of Lessor, which consent shall not be
unreasonably withheld, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Lessor to criminal
liability and Tenant both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury by reason of such contest or
delay, and (b) prosecutes the contest with due diligence and in good faith.
ARTICLE IX
-----------
Section 9.1. Maintenance and Repair.
----------------------
(a) Tenant, at its expense, shall keep each Leased Property and all
private roadways, sidewalks and curbs appurtenant thereto and which are under
Tenant's control (and Tenant's Personal Property) in good order and repair,
reasonable wear and tear excepted (whether or not the need for such repairs
occurs as a result of Tenant's use, any prior use, the elements or the age of
such Leased Property, Tenant's Personal Property, or any portion thereof), and,
except as otherwise provided in Article XIV, shall promptly make all necessary
and appropriate repairs and replacements thereto,
19
<PAGE>
of every kind and nature, whether interior or exterior, structural or non-
structural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the commencement of the Term (concealed
or otherwise). All repairs shall, to the extent reasonably achievable, be made
in good, workmanlike and first-class manner, in accordance with all applicable
federal, state and local statutes, ordinances, by-laws, codes, rules and
regulations relating to such work. Tenant will not take or omit to take any
action the taking or omission of which might materially impair the value or
usefulness of the applicable Leased Property or any part thereof for its Primary
Intended Use.
(b) Lessor shall not under any circumstances be required to build or
rebuild any improvements on any Leased Property, or to make any repairs,
replacements, alterations, restorations or renewals of any nature or description
to the applicable Leased Property, whether ordinary or extraordinary, structural
or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever
with respect thereto, in connection with this Lease, or to maintain any Leased
Property in any way, except as expressly provided herein. Tenant hereby waives,
to the extent permitted by law, the right to make repairs at the expense of
Lessor pursuant to any law in effect at the time of the execution of this Lease
or thereafter enacted.
(c) Except as expressly set forth in this Lease, nothing contained in
this Lease and no action or inaction by Lessor shall be construed as (i)
constituting the consent or request of Lessor, express or implied, to any
contractor, subcontractor, laborer, materialman or vendor to or for the
performance of any labor or services or the furnishing of any materials or other
property for the construction, alteration, addition, repair or demolition of or
to any Leased Property or any part thereof, or (ii) giving Tenant any right,
power or permission to contract for or permit the performance of any labor or
services or the furnishing of any materials or other property in such fashion as
would permit the making of any claim against Lessor in respect thereof or to
make any agreement that may create, or in any way be the basis for, any right,
title, interest, lien, claim or other encumbrance upon the estate of Lessor in
any Leased Property, or any portion thereof.
(d) Tenant will, upon the expiration or prior termination of the Term,
vacate and surrender the applicable Leased Property to Lessor in the condition
in which such Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Tenant to maintain the Leased Property in good order and repair
during the entire Term).
20
<PAGE>
(e) Tenant shall establish and maintain any reserve accounts
reasonably required by a Superior Mortgagee for deferred maintenance conditions
and for capital expenditures at the Leased Property.
Section 9.2. Encroachments, Restrictions, etc. If any of the Leased
---------------------------------
Improvements on any Leased Property shall, at any time, encroach upon any
property, street or right-of-way adjacent to such Leased Property, or shall
violate the agreements or conditions contained in any lawful restrictive
covenant or other agreement affecting such Leased Property, or any part thereof,
or shall impair the rights of others under any easement or right-of-way to which
the Leased Property is subject, then promptly upon the request of Lessor or at
the behest of any person affected by any such encroachment, violation or
impairment, Tenant shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment and in such case, in the
event of any adverse final determination, either (i) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation or impairment, whether the same shall affect
Lessor or Tenant or (ii) make such changes in the Leased Improvements, and take
such other actions, as Tenant in good faith exercise of its judgment deems
reasonably practicable, to remove such encroachment, and to end such violation
or impairment, including, if necessary, the alteration of any of the Leased
Improvements, and in any event take all such actions as may be necessary in
order to be able to continue the operation of the Leased Improvements for the
Primary Intended Use substantially in the manner and to the extent the Leased
Improvements were operated prior to the assertion of such violation or
encroachment. Any such alteration shall be made in conformity with the
applicable requirements of Article X. Tenant's obligations under this Section
9.2 shall be in addition to and shall in no way discharge or diminish any
obligation of any insurer under any policy of title or other insurance and
Tenant shall be entitled to a credit for any sums recovered by Lessor under any
such policy of title or other insurance.
ARTICLE X
----------
Section 10.1. Construction of Capital Additions to the Leased Property.
--------------------------------------------------------
If no Event of Default shall have occurred and be continuing, Tenant shall have
the right, upon and subject to the terms and conditions set forth below, to
construct or install Capital Additions on any Leased Property. Prior to
commencing construction of any Capital Addition, Tenant shall submit to Lessor
in writing a proposal setting forth in reasonable detail any proposed Capital
Addition and shall provide to Lessor such plans and specifications, permits,
licenses, contracts, construction schedules, construction budgets and other
information concerning the proposed Capital Addition as Lessor may reasonably
request showing in reasonable detail the scope and nature of the Capital
Addition that Tenant desires to construct (collectively the "Plans and
---------
Specifications"). It is the intent of the parties hereto that the level of
- - --------------
detail shall be comparable to that which
21
<PAGE>
is referred to in the architectural profession as "design development drawings"
as opposed to working or biddable drawings. Without limiting the generality of
the foregoing, such proposal shall indicate the approximate projected cost of
constructing such Capital Addition and the use or uses to which it will be put.
Prior to commencing construction of any Capital Addition, Tenant shall first
request Lessor to provide funds to pay for such Capital Addition in accordance
with the provisions of Section 10.3. If Lessor declines or is unable to provide
such financing on terms acceptable to Tenant, Tenant shall provide to Lessor,
prior to commencement of any construction, proof reasonably acceptable to Lessor
that Tenant has sufficient capital to complete the construction. Furthermore, no
Capital Addition shall be made which would tie in or connect any Leased
Improvements on the Leased Property with any other improvements on property
adjacent to the Leased Property (and not part of the land covered by this Master
Lease) including, without limitation, tie-ins of buildings or other structures
or utilities, unless Tenant shall have obtained the prior written approval of
Lessor, which approval in Lessor's sole discretion may be granted, withheld or
conditioned. Tenant shall reimburse Lessor for all costs and expenses incurred
by Lessor in reviewing the proposal and the Plans and Specifications for a
Capital Addition and for inspecting the applicable Leased Property and otherwise
monitoring the construction of the Capital Addition.
Section 10.2. Capital Additions Financed by Tenant. If Tenant provides
------------------------------------
or arranges such financing, there shall be no adjustment in the Minimum Rent by
reason of any such Capital Addition.
Section 10.3. Capital Additions Financed by Lessor.
------------------------------------
(a) Tenant shall request that Lessor provide or arrange financing for
a Capital Addition by providing to Lessor such information about the Capital
Addition as Lessor may request including without limitation all information
referred to in Section 10.1 above. Lessor may, but shall be under no obligation
to, obtain the funds necessary to meet the request. Within sixty (60) days
after receipt of a request, Lessor shall notify Tenant as to whether it will
finance the proposed Capital Addition and, if so, the terms and conditions upon
which it would do so, including the terms of any amendment to this Master Lease.
In no event shall the portion of the projected Capital Additions Cost comprised
of land, if any, materials, labor charges and fixtures be less than ninety
percent (90%) of the total amount of such cost. Tenant may withdraw its request
by notice to Lessor at any time before or after receipt of Lessor's terms and
conditions. If Tenant desires to accept Lessor's offer to finance the proposed
Capital Addition, Tenant shall notify Lessor within thirty (30) days after
Tenant's receipt of Lessor's offer.
22
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(b) If Lessor agrees to finance the proposed Capital Addition, Tenant
shall provide Lessor with the following prior to any advance of funds:
(i) all customary or other reasonably required loan
documentation;
(ii) any information, certificates, licenses, permits or
documents requested by either Lessor or any third party lender with whom
Lessor has agreed or may agree to provide financing which are necessary to
confirm that Tenant will be able to use the Capital Addition upon
completion thereof in accordance with the Primary Intended Use, including
all required federal, state or local government licenses and approvals;
(iii) an Officer's Certificate and, if requested, a certificate
from Tenant's architect, setting forth in reasonable detail the projected
(or actual, if available) cost of the proposed Capital Addition;
(iv) an amendment to this Master Lease, duly executed and
acknowledged, in form and substance satisfactory to Lessor, providing for
any change in the Rent, the legal description of the Land, and other
provisions as may be necessary or appropriate;
(v) a deed (in the customary form used to convey commercial
properties within the relevant jurisdiction) conveying title to Lessor to
any land acquired for the purpose of constructing the Capital Additions
free and clear of any liens or encumbrances except those approved by
Lessor, accompanied by a final as-built survey thereof satisfactory to
Lessor if reasonably required by Lessor;
23
<PAGE>
(vi) endorsements to any outstanding policy of title insurance
covering the applicable Leased Property or commitments therefore
satisfactory in form and substance to Lessor (A) updating the same without
any additional exception except as may be permitted by Lessor; and (B)
increasing the coverage thereof by an amount equal to the Fair Market Value
of the Capital Addition (except to the extent covered by the owner's policy
of title insurance referred to in subparagraph (vii) below);
(vii) if appropriate, (A) an owner's policy of title insurance
insuring fee simple title to any land conveyed to Lessor pursuant to
subparagraph (iv) free and clear of all liens and encumbrances except those
approved by Lessor and (B) a lender's policy of title insurance
satisfactory in form and substance to Lessor and the lending institution
advancing any portion of the Capital Additions Cost;
(viii) if deemed necessary by Lessor, an M.A.I. appraisal of the
Leased Property indicating that the value of the applicable Leased Property
upon completion of the Capital Addition exceeds the Fair Market Value
thereof prior thereto by an amount not less than 95% of the Capital
Additions Cost; and
(ix) such other certificates (including, but not limited to,
endorsements increasing the insurance coverage, if any, at the time
required by Section 13.1), documents, opinions of counsel, appraisals,
surveys, certified copies of duly adopted resolutions of the Board of
Directors of Tenant authorizing the execution and
24
<PAGE>
delivery of the lease amendment and any other instruments as may be
reasonably required by Lessor and any lending institution advancing or
reimbursing Tenant for any portion of the Capital Additions Cost.
(c) Upon making a Request to finance a Capital Addition, if and when
such financing is actually consummated, Tenant shall pay or agree to pay all
reasonable costs and expenses of Lessor and any Lending Institution which has
committed to finance such Capital Addition paid or incurred by them in
connection with the financing of the Capital Additions, including, but not
limited to, (i) the reasonable fees and expenses of their respective counsel,
(ii) all printing expenses, (iii) the amount of any filing, registration and
recording taxes and fees, (iv) documentary stamp taxes, if any, (v) title
insurance and survey charges, appraisal fees, if any, rating agency fees, if
any, (vi) any other applicable consulting fees (including without limitation
engineering and environmental), and (vii) commitment fees, if any.
Section 10.4. Non-Capital Additions. Tenant shall have the right to make
---------------------
additions, modifications or improvements to any Leased Property which are not
Capital Additions from time to time as it, in its discretion, may deem to be
desirable for its uses and purposes, provided that such action will not alter
the character or purpose or detract from the value or operating efficiency
thereof and will not impair the revenue producing capability of the Leased
Property or adversely affect the ability of the Tenant to comply with the
provisions of this Lease. The cost of such non-Capital Additions, modifications
or improvements to the Leased Property shall be paid by the Tenant, and all
such non-Capital Additions, modifications and improvements shall, without
payment by Lessor at any time, be included under the terms of this Lease and
upon expiration or earlier termination of this Lease shall pass to and become
the property of Lessor free and clear of all encumbrances, other than Permitted
Encumbrances. There shall be no adjustment in the Minimum Rent by reason of any
non-Capital Addition.
Section 10.5. Salvage. All materials which are scrapped or removed in
-------
connection with the making of either Capital Additions permitted by Section 10.1
or Non-Capital Additions permitted by Section 10.4 or repairs required by
Article IX shall be or become the property of Lessor or Tenant depending on
which party is paying for, or providing the financing for, such work.
Section 10.6. Requirements for all Capital Additions and Non-Capital
------------------------------------------------------
Additions. Tenant shall comply with all of the following requirements in
- - ---------
connection with all Permitted Alterations:
25
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(a) The Permitted Alteration shall be made substantially in
accordance with the Plans and Specifications submitted to Lessor, to
the extent applicable.
(b) The Permitted Alterations and the installation thereof
shall comply with all applicable Legal Requirements and all Insurance
Requirements.
(c) The Permitted Alterations shall be performed in a good
and workmanlike manner, shall not impair the value or the structural
integrity of the applicable Leased Property, and shall be free and
clear of mechanic's liens.
(d) Intentionally omitted.
(e) Tenant shall, at Tenant's expense, obtain a builder's
completed value risk policy of insurance insuring against the risks of
physical loss, including collapse and transit coverage, in a
nonreporting form, covering the total value of the work performed, and
equipment, supplies and materials, and insuring initial occupancy.
Lessor and any Facility Mortgagee shall be additional named insureds
of such policy. Lessor shall have the right to approve the form and
substance of such policy.
(f) Tenant shall pay the premiums required to increase the
amount of insurance coverages required by Article XIII to reflect the
increased value of the applicable Leased Property resulting from the
Permitted Alterations, and shall deliver to Lessor a certificate
evidencing the increase in coverage.
(g) Tenant shall, not less than sixty (60) days after
completion of the Permitted Alterations, deliver to Lessor a revised
"as-built" set of Plans and Specifications for the Permitted
Alterations in form and substance reasonably satisfactory to Lessor.
(h) Tenant shall, not later than thirty (30) days after
Lessor sends an invoice, reimburse Lessor for any reasonable costs and
expenses, including attorney's fees and architects' and engineer's
fees, incurred in connection with reviewing proposed Permitted
Alterations and ensuring Tenant's compliance with the terms of this
Article X.
26
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Section 10.7. Mortgagee's Consent. Tenant shall not commence
-------------------
construction of any Permitted Alteration until Lessor shall have obtained the
consent of any applicable Facility Mortgagee or Superior Lessor, if such consent
is required. Lessor agrees to use commercially reasonable efforts to obtain
promptly any such consent, if such consent is necessary.
ARTICLE XI
-----------
Section 11.1. Liens. Subject to the provision of Article XII relating to
-----
permitted contests, Tenant will not directly or indirectly create or allow to
remain and will promptly discharge at its expense any lien, encumbrance,
attachment, title retention agreement or claim upon any Leased Property or any
attachment, levy, claim or encumbrance in respect of the Rent, not including,
however, (a) Permitted Encumbrances, (b) restrictions, liens and other
encumbrances which are consented to in writing by Lessor, or any easements
granted pursuant to the provisions of this Lease, (c) liens for those taxes of
Lessor which Tenant is not required to pay hereunder, (d) subleases permitted by
Article XXV, (e) liens for Impositions or for sums resulting from noncompliance
with Legal Requirements so long as (1) the same are not yet payable or are
payable without the addition of any fine or penalty or (2) such liens are in the
process of being contested as permitted by Article XII, (f) liens of mechanics,
laborers, materialmen, suppliers or vendors for sums either disputed in good
faith or not yet due, provided that (1) the payment of such sums shall not be
postponed under any related contract for more than sixty (60) days after the
completion of the action giving rise to such lien and such reserve or other
appropriate provisions as shall be required by law or generally accepted
accounting principles shall have been made therefor or (2) any such liens are in
the process of being contested as permitted by Article XII, and (g) any liens
which are the responsibility of Lessor pursuant to the provisions of Article
XXXVIII. Notwithstanding the foregoing, Tenant shall bond over any lien
affecting the applicable Leased Property if Lessor shall reasonably request, or
if any applicable Facility Mortgagee shall so require.
ARTICLE XII
-----------
Section 12.1. Permitted Contests. Tenant, on its own or on Lessor's
------------------
behalf (or in Lessor's name), but at Tenant's expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Imposition or
any Legal Requirement or any lien, attachment, levy, encumbrance, charge or
claim not otherwise permitted by Article XI, provided that (a) in the case of an
unpaid Imposition, lien, attachment, levy, encumbrance, charge, or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Lessor and from the applicable Leased Property, (b) neither the
applicable Leased Property nor any Rent therefrom nor any part thereof or
27
<PAGE>
interest therein would be reasonably likely to be in danger of being sold,
forfeited, attached or lost, (c) in the case of a Legal Requirement, Lessor
would not be in any immediate danger of civil or criminal liability for failure
to comply therewith pending the outcome of such proceedings, (d) Tenant shall
indemnify and hold harmless Lessor from and against any cost, claim, damage,
penalty or reasonable expense, including reasonable attorneys' fees, incurred by
Tenant in connection therewith or as a result thereof, (e) in the case of a
Legal Requirement and/or Imposition, lien, encumbrance or charge, Tenant shall
give such reasonable security as may be demanded by Lessor to insure ultimate
payment of the same and to prevent any sale or forfeiture of the affected Leased
Property or the Rent by reason of such non-payment or non-compliance, provided,
however, the provisions of this Article XII shall not be construed to permit
Tenant to contest the payment of Rent (except as to contests concerning the
method of computation or the basis of levy of any Imposition or the basis for
the assertion of any other claim) or any other sums payable by Tenant to Lessor
hereunder, (f) in the case of an Insurance Requirement, the coverage required by
Article XIII shall be maintained, and (g) if such contest be finally resolved
against Lessor or Tenant, Tenant shall, as Additional Charges due hereunder,
promptly pay the amount required to be paid, together with all interest and
penalties accrued thereon, or comply with the applicable Legal Requirement or
Insurance Requirement. Lessor, at Tenant's expense, shall execute and deliver
to Tenant such authorizations and other documents as may reasonably be required
in any such contest, and, if reasonably requested by Tenant or if Lessor so
desires, Lessor shall join as a party therein. Tenant shall indemnify and save
Lessor harmless against any liability, cost or expense of any kind that may be
imposed upon Lessor in connection with any such contest and any loss resulting
therefrom.
ARTICLE XIII
-------------
Section 13.1. General Insurance Requirements. Subject to the provisions
------------------------------
of Section 13.9, during the Term, Tenant shall at all times keep each Leased
Property, and all property located in or on any Leased Property, including
Tenant's Personal Property, insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to do
insurance business in the State in which the applicable Leased Property is
located, which companies shall have a rating at least as high as the rating
required by any applicable Facility Mortgagee. The policies must name as loss
payee (i) the holder of any mortgage, deed of trust or other security agreement
("Facility Mortgagee") securing any Encumbrance placed on the applicable Leased
------------------
Property in accordance with the provisions of Article XXXVIII ("Facility
--------
Mortgage") by way of a standard form of mortgagee's loss payable endorsement or
- - --------
(ii) if no such Facility Mortgage encumbers the applicable Leased Property, the
Lessor. Losses shall be payable to Lessor and/or Superior Mortgagee as provided
in Article XIV. Any loss adjustment shall require the written consent of Lessor,
Tenant, Leasehold Mortgagee and Facility Mortgagee whenever the loss exceeds
twenty percent (20%) of the Facility's
28
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Fair Market Value. Evidence of insurance shall be deposited with Lessor and, if
requested, with any Superior Lessor, Leasehold Mortgagee and Facility
Mortgagee(s). If any provision of any Facility Mortgage requires deposits of
insurance premiums to be made with such Facility Mortgagee, Tenant shall either
pay to Lessor monthly the amounts required and Lessor shall transfer such
amounts to each Facility Mortgagee, or, pursuant to written direction by Lessor,
Tenant shall make such deposits directly with such Facility Mortgagee. The
policies on each Leased Property, including the Leased Improvements, and
Fixtures and Tenant's Personal Property, shall insure against the following
risks:
Section 13.1.1. Loss or damage by fire, vandalism and malicious
mischief, extended coverage perils commonly known as "All Risk," earthquake and
all physical loss perils including but not limited to sprinkler leakage in an
amount not less than one hundred percent (100%) of the then full replacement
cost thereof (as defined below in Section 13.2);
Section 13.1.2. Loss or damage by explosion of steam boilers,
pressure vessels or similar apparatus, now or hereafter installed in the
Facility, in such limits with respect to any one accident as may be reasonably
requested by Lessor or any Superior Lessor or Facility Mortgagee from time to
time;
Section 13.1.3. Business Interruption and loss of rental income under
a rental income insurance policy covering risk of loss during the actual
restoration period plus an additional 365 days necessitated by the occurrence of
any of the hazards described in Sections 13.1.1 or 13.1.2 in such amounts as may
be customary for comparable properties in the area and in an amount sufficient
to prevent Lessor from becoming a co-insurer;
Section 13.1.4. Claims for personal injury or property damage under a
policy of comprehensive general accident and public liability insurance (in the
broadest form available, including, without limitation, broad form contractual
liability, independent contractor's hazard and completed operations coverage)
with amounts not less than Fifty Million and No/100 Dollars ($50,000,000.00) per
occurrence in respect of bodily injury and death and Fifty Million No/100
Dollars ($50,000,000.00) for property damage;
Section 13.1.5. Claims arising out of malpractice in an amount not
less than Twenty Five Million and No/100 Dollars ($25,000,000.00)* for each
person and for each occurrence; and
29
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Section 13.1.6. Flood (when the applicable Leased Property is located
in whole or in part within a designated flood _____ area) and such other hazards
and in such amounts as may be customary for comparable properties in the area.
Section 13.1.7. Loss or damage caused by breakage of plate glass, if
any, in commercially reasonable amounts acceptable to Lessor.
Section 13.1.8. Loss or damage commonly covered by blanket crime
insurance including employee dishonesty, loss of money orders or paper currency,
depositor's forgery, and loss of property of patients accepted by Tenant for
safekeeping, in commercially reasonable amounts acceptable to Lessor.
Section 13.2. Replacement Cost. The term "full replacement cost" as used
----------------
herein, shall mean the actual replacement cost of the property requiring
replacement from time to time including an increased cost of construction
endorsement, without reduction or deduction. Tenant shall have the full
replacement cost redetermined by an accredited appraiser approved by Lessor
(which approval shall not be unreasonably withheld or delayed), hereinafter
referred to as "impartial appraiser", every five years during the Term, and at
such other times that either party believes that full replacement cost has
increased or decreased. Tenant shall forthwith, on receipt of such
determination by such impartial appraiser, give written notice thereof to
Lessor. The determination of such impartial appraiser shall be final and
binding on the parties hereto, and Tenant shall forthwith increase, or may
decrease, the amount of the insurance carried pursuant to this Section, as the
case may be, to the amount so determined by the impartial appraiser. Each party
shall pay one-half ( 1/2) of the fee, if any, of the impartial appraiser.
Section 13.3. Additional Insurance. In addition to the insurance
--------------------
described above, Tenant shall maintain such additional insurance as may
reasonably be required from time to time by any Facility Mortgagee and, further,
shall at all times maintain adequate worker's compensation insurance coverage
for all persons employed by Tenant on each Leased Property. Such worker's
compensation insurance shall be in accordance with the requirements of
applicable local, state and federal law.
Section 13.4. Waiver of Subrogation. Lessor and Tenant agree that
---------------------
(insofar as and to the extent that such agreement may be effective without
invalidating or making it impossible to secure insurance coverage from
responsible insurance companies doing business in the State) with respect to any
property loss that is covered by insurance then being carried by Lessor or
Tenant, respectively, the party carrying such insurance and suffering said loss
releases the other of and from any and all claims with respect to such loss; and
they further agree that their respective insurance companies shall have no right
of subrogation against the other on account thereof, even though extra premium
may result therefrom.
30
<PAGE>
Section 13.5. Form Satisfactory, etc. All of the policies of insurance
-----------------------
referred to in this Section shall be written in form satisfactory to Lessor and
any Superior Lessor and Facility Mortgagee and by insurance companies
satisfactory to Lessor and any Superior Lessor and Facility Mortgagee. Lessor
agrees that it will not unreasonably withhold its approval as to the form of the
policies of insurance or as to the insurance companies selected by Tenant.
Tenant shall pay all of the premiums therefor, and deliver such policies or
certificates thereof to Lessor prior to their effective date (and, with respect
to any renewal policy, at least ten (10) days prior to the expiration of the
existing policy), and in the event of the failure of Tenant either to effect
such insurance in the names herein called for or to pay the premiums therefor,
or to deliver such policies or certificates thereof to Lessor and each Superior
Lessor and Facility Mortgagee at the times required, Lessor shall be entitled,
but shall have no obligation, to effect such insurance and pay the premiums
therefor, which premiums shall be repayable to Lessor upon written demand
therefor, and failure to repay the same shall constitute an Event of Default
within the meaning of Section 16.1(c). Each insurer mentioned in this Section
shall agree, by endorsement on the policy or policies issued by it, or by
independent instrument furnished to Lessor and any Superior Lessor and Facility
Mortgagee, that it will give to Lessor thirty (30) days' written notice before
the policy or policies in question shall be materially altered, allowed to
expire or canceled.
Section 13.6. Increase in Limits. In the event that either party shall
------------------
at any time deem the limits of the personal injury or property damage public
liability insurance then carried to be either excessive or insufficient, the
parties shall endeavor to agree on the proper and reasonable limits for such
insurance to be carried; and such insurance shall thereafter be carried with the
limits thus agreed on until further change pursuant to the provisions of this
Section. If the parties shall be unable to agree thereon, the proper and
reasonable limits for such insurance to be carried shall be determined by an
impartial third party selected by the parties. Nothing herein shall permit the
amount of insurance to be reduced below the amount or amounts required by any of
the Facility Mortgages or by any Superior Lessor.
Section 13.7. Blanket Policy. Notwithstanding anything to the contrary
--------------
contained in this Section but subject to any requirements of any applicable
Facility Mortgagee, Tenant's obligations to carry the insurance provided for
herein may be brought within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Tenant; provided, however, that
the coverage afforded Lessor will not be reduced or diminished or otherwise be
different from that which would exist under a separate policy meeting all other
requirements of this Lease by reason of the use of such blanket policy of
insurance, and provided further that the requirements of this Article XIII are
otherwise satisfied. Without limiting the foregoing, the amounts of insurance
that are required to be maintained pursuant to Section 13.1 shall be on a
Facility by Facility basis.
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Section 13.8. No Separate Insurance. Tenant shall not on Tenant's own
---------------------
initiative or pursuant to the request or requirement of any third party, take
out separate insurance concurrent in form of contributing in the event of loss
with that required in this Article, or increase the amounts of any then existing
insurance by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor and all Superior Lessors and Facility Mortgagees,
are included therein as additional insureds, and the loss is payable under said
insurance in the same manner as losses are payable under this Lease. Tenant
shall immediately notify Lessor of the taking out of any such separate insurance
or of the increasing of any of the amounts of the then existing insurance by
securing an additional policy or additional policies.
ARTICLE XIV
------------
Section 14.1. Insurance Proceeds. All proceeds payable by reason of any
------------------
loss or damage to the applicable Leased Property, or any portion thereof, and
insured under any policy of insurance required by Article XIII shall be paid to
Lessor or a third party designated by Lessor and held by Lessor or such third
party in trust and shall be made available for reconstruction or repair, as the
case may be, of any damage to or destruction of the Leased Property, or any
portion thereof, and shall be paid out by Lessor or such third party from time
to time for the reasonable costs of such reconstruction or repair. Any excess
proceeds of insurance remaining after the completion of the restoration or
reconstruction (or in the event neither Lessor nor Tenant is required or elects
to repair and restore, all such insurance proceeds) shall be retained by Lessor
free and clear upon completion of any such repair and restoration except as
otherwise specifically provided below in this Article XIV. All salvage
resulting from any risk covered by insurance shall belong to Lessor except that
any salvage relating to Tenant's Personal Property shall belong to Tenant.
Section 14.2. Reconstruction in the Event of Damage or Destruction
----------------------------------------------------
Covered by Insurance.
--------------------
Section 14.2.1. If during the Term, any Leased Property is totally
or partially destroyed from a risk covered by the insurance described in Article
XIII and the Facility located thereon is rendered Unsuitable for Its Primary
Intended Use, Tenant shall either (A) restore the Facility to substantially the
same condition as existed immediately before the damage or destruction, or (B)
offer to acquire the applicable Leased Property from Lessor for a purchase price
equal to the Fair Market Value Purchase Price of the Leased Property immediately
prior to such damage or destruction. In the event Lessor does not accept
Tenant's offer to so purchase, Tenant may either withdraw its offer to purchase
the Leased Property and proceed to restore the Facility to substantially the
same condition as existed immediately before the damage or destruction
32
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or terminate this Lease as to such Leased Property, in which event Lessor shall
be entitled to retain the insurance proceeds.
Section 14.2.2. If during the Term, any Leased Property is totally or
partially destroyed from a risk covered by the insurance described in Article
XIII, but the Facility located thereon is not thereby rendered Unsuitable for
its Primary Intended Use, Tenant shall restore such Facility to substantially
the same condition as existed immediately before the damage or destruction.
Such damage or destruction shall not terminate this Lease as to such Leased
Property.
Section 14.2.3. If the cost of the repair or restoration of any
Leased Property exceeds the amount of proceeds received by Lessor from the
insurance required under Article XIII, Tenant shall be obligated to contribute
any excess amounts needed to restore such Leased Property. Such difference
shall be paid by Tenant to Lessor prior to the commencement of construction and
shall be held in trust together with any other insurance proceeds for
application to the cost of repair and restoration.
Section 14.2.4. In the event Lessor accepts Tenant's offer to
purchase the applicable Leased Property as provided above, this Lease shall
terminate as to the applicable Leased Property upon payment of the purchase
price and Lessor shall remit to Tenant all insurance proceeds pertaining to such
Leased Property then held in trust by Lessor or any third party designated by
Lessor.
Section 14.3. Reconstruction in the Event of Damage or Destruction Not
--------------------------------------------------------
Covered by Insurance. If during the Term any Leased Property and the Facility
- - --------------------
located thereon is totally or partially destroyed from a risk not covered by the
insurance described in Article XIII, whether or not such damage or destruction
renders the Facility Unsuitable for Its Primary Intended Use, Tenant shall
restore the Facility to substantially the same condition it was in immediately
before such damage or destruction and such damage or destruction shall not
terminate this Lease as to such Leased Property.
Section 14.4. Tenant's Property. All insurance proceeds payable by
-----------------
reason of any loss of or damage to any of the Tenant's Personal Property or
Capital Additions financed by Tenant shall be paid to Tenant and Tenant shall
hold such insurance proceeds in trust to pay the cost of repairing or replacing
damaged Tenant's Personal Property or Capital Additions financed by Tenant.
Section 14.5. Restoration of Tenant's Property. If Tenant is required or
--------------------------------
elects to restore the applicable Leased Property as provided in Section 14.2 or
14.3, Tenant shall also restore all alterations and improvements made by Tenant,
Tenant's Personal Property and all Capital Additions financed by Tenant.
33
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Section 14.6. No Abatement of Rent. This Lease shall remain in full
--------------------
force and effect and Tenant's obligation to make payments of Rent and to pay all
other charges required under this Lease shall remain unabated during the Term
notwithstanding any damage involving any Leased Property (provided that Lessor
shall credit against such payments any amounts paid to Lessor as a consequence
of such damage under any business interruption insurance obtained by Tenant);
provided, however, that, effective upon the purchase of any Leased Property or
- - -------- -------
termination of this Lease as to the applicable Leased Property pursuant to and
in accordance with Section 14.2, this Lease shall terminate as to such Leased
Property. The provisions of this Article 14 shall be considered an express
agreement governing any cause of damage or destruction to the applicable Leased
Property and, to the maximum extent permitted by law, no local or state statute,
law, rule, regulation or ordinance in effect during the Term which provides for
such a contingency shall have any application in such case.
Section 14.7. Restoration. If Tenant is required or elects to restore
-----------
the applicable Leased Property as provided in Section 14.2 or 14.3, Tenant shall
promptly repair, rebuild, or restore the applicable Leased Property, so as to
make such Leased Property at least equal in value to such Leased Property as it
existed immediately prior to such occurrence and as nearly similar to it in
character as is practicable and reasonable. Prior to commencing such repairs or
rebuilding, Tenant shall submit to Lessor for Lessor's approval, which approval
shall not be unreasonably withheld or delayed, Plans and Specifications pursuant
to Section 10.1. Promptly after receiving Lessor's approval of the Plans and
Specifications, Tenant shall commence repairs and rebuilding and will prosecute
the repairs and rebuilding to completion with diligence, subject, however, to
strikes, lockouts, acts of God, embargoes, governmental restrictions, and other
causes beyond Tenant's reasonable control. Subject to the provisions of any
applicable Facility Mortgage, Lessor shall make available to Tenant the
insurance proceeds (net of all administrative and collection costs, including
reasonable attorneys' fees) paid to Lessor for such repair and rebuilding as it
progresses. Payments shall be made against certification of the architect
approved by Lessor (which approval shall not be unreasonably withheld)
responsible for the supervision of the repairs and rebuilding that the work had
been performed substantially in conformance with the Plans and Specifications
and the value of the work in place is equal to not less than 110% of the
aggregate amount advanced by Lessor for the payment of such work. Prior to the
commencing the repairing and rebuilding, Tenant shall deliver to Lessor for
Lessor's approval a schedule setting forth the estimated monthly draws for such
work. Subject to the provisions of any applicable Facility Mortgage, Lessor
shall contribute to such payments out of the insurance proceeds being held in
trust by Lessor an amount equal to the proportion that the total net amount so
held by Lessor bears to the total estimated cost of repairing and rebuilding,
multiplied by the payment by Tenant on account of such work. Lessor may,
however, withhold ten percent (10%) from each payment until the work has been
completed and proof has been furnished to Lessor that no lien or liability
34
<PAGE>
has attached or will attach to the applicable Leased Property or to Lessor in
connection with repairing and rebuilding.
Section 14.8. Termination of Rights of First Refusal. Any termination of
--------------------------------------
this Lease as to the applicable Leased Property pursuant to this Article XIV
shall cause any right of first refusal granted to Tenant under this Lease as to
the applicable Leased Property to be terminated and to be without further force
or effect.
Section 14.9. Waiver. Tenant hereby waives any statutory rights of
------
termination which may arise by reason of any damage or destruction of the
applicable Leased Property which Tenant is obligated to restore or may restore
under any of the provisions of this Lease.
ARTICLE XV
-----------
CONDEMNATION
Section 15.1. Definitions.
-----------
Section 15.1.1. "Condemnation" means, as to any Leased Property, (a)
------------
the exercise of any governmental power, whether by legal proceedings or
otherwise, by a Condemnor, (b) a voluntary sale or transfer by Lessor to any
Condemnor, either under threat of condemnation or while legal proceedings for
condemnation are pending and (c) a taking or voluntary conveyance of all or part
of such Leased Property, or any interest therein, or right accruing thereto or
use thereof, as the result or in settlement of any condemnation or other eminent
domain proceeding affecting such Leased Property.
Section 15.1.2. "Date of Taking" means, as to the applicable Leased
--------------
Property, the date the Condemnor has the right to possession of such Leased
Property, or any portion thereof, in connection with a Condemnation.
Section 15.1.3. "Award" means all compensation, sums or anything of
-----
value awarded, paid or received on a total or partial condemnation.
Section 15.1.4. "Condemnor" means any public or quasi-public
---------
authority, or private corporation or individual, having the power of
condemnation.
Section 15.2. Parties' Rights and Obligations. If during the Term
-------------------------------
there is any taking of all or any part of the applicable Leased Property by
Condemnation, the rights and obligations of the parties shall be determined by
this Article XV.
35
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Section 15.3. Total Taking. If any Leased Property is totally
------------
taken by condemnation, this Lease shall terminate as to such Leased Property on
the Date of Taking.
Section 15.4. Partial Taking. If a portion of any Leased Property
--------------
is taken by Condemnation, this Lease shall remain in effect as to such Leased
Property if the Facility located thereon is not thereby rendered Unsuitable for
Its Primary Intended Use, but if the Facility is thereby rendered Unsuitable for
its Primary Intended Use, this Lease shall terminate as to such Leased Property
on the Date of Taking.
If as a result of any such partial taking by Condemnation, this Lease is
not terminated as provided above, Tenant's obligation to make payments of Rent
and to pay all other charges required under this Lease shall remain unabated
during the Term notwithstanding such Condemnation (provided that Lessor shall
credit against such payments any amount of any Award attributable to Tenant's
business interruption).
Section 15.5. Restoration. If there is a partial taking of the
-----------
applicable Leased Property and this Lease remains in full force and effect
pursuant to Section 15.4, Tenant at its cost shall accomplish all necessary
restoration.
Section 15.6. Award-Distribution. (a) In the event of any partial
------------------
taking of any Leased Property, the entire Award shall belong to and be paid to
Lessor, except that, subject to the rights of the Facility Mortgagees, Tenant
shall be entitled to receive from the Award, if and to the extent such Award
specifically includes such item, the following:
Section 15.6.1. A sum attributable to the Capital Additions paid for
by Tenant; and
Section 15.6.2. A sum specifically attributable to Tenant's Personal
Property and any reasonable removal and relocation costs included in the Award.
(b) In the event of a total taking of any Leased Property, the Award shall
be divided between the Lessor and the Tenant in such proportions relative to the
appraised values of their relative estates determined in accordance with Section
35.1, taking into account the value of improvements owned by the Lessor and
Capital Additions paid for by the Tenant. Tenant shall also receive a sum
specifically attributable to Tenant's Personal Property and any reasonable
removal and relocation costs included in the Award.
36
<PAGE>
Section 15.7. Temporary Taking. The taking of any Leased Property,
----------------
or any part thereof, by military or other public authority shall constitute a
taking by condemnation only when the use and occupancy by the taking authority
has continued for longer than six (6) months. During any such six (6) month
period all the provisions of this Master Lease shall remain in full force and
effect except that the Minimum Rent shall not be abated or reduced during such
period of taking.
ARTICLE XVI
------------
Section 16.1. Events of Default. The occurrence of any one or more
-----------------
of the following events shall constitute an "Event of Default" under this Lease.
----------------
(a) an Event of Default shall occur under the Indemnity Agreement, or
(b) if Tenant shall fail to make payment of the Rent or any other sum
payable under or pursuant to the terms of this Lease when the same becomes due
and payable and such failure is not cured within a period of five (5) days after
receipt of notice from Lessor, or
(c) if Tenant shall fail to observe or perform any term, covenant or
condition of this Lease not specifically provided for in this Section 16.1 and
such failure is not cured within a period of thirty (30) days after receipt of
notice from Lessor, unless such failure cannot with due diligence be cured
within a period of thirty (30) days, in which case such period of time shall be
extended to such period of time (not to exceed 180 days) as may be necessary to
cure such default with all due diligence provided that such cure is completed
within 180 days, or
(d) if Tenant shall fail to observe or perform any term, covenant or
agreement on its part to be performed or observed pursuant to Section 11.1 or
Section 13.1, or
(e) A Guarantor shall fail to observe or perform any term, covenant or
agreement on its part to be performed or observed pursuant to any Guaranty; or
(f) there shall occur a final unappealable determination by applicable
state authorities of the revocation required for the lawful operation of the
Facility located on any Leased Property in accordance with its Primary Intended
Use or the loss under any other circumstances under which Tenant is required to
cease operations of such Facility in accordance with its Primary Intended Use as
currently operated, or
(g) any material representation or warranty made by or on behalf of Tenant
or any Guarantor under or in connection with this Lease or any document,
37
<PAGE>
certificate or agreement delivered in connection with this Lease shall prove to
have been false or misleading in any material respect on the day when made or
deemed made, or
(h) if Tenant or a Guarantor shall:
(i) admit in writing its inability to pay its debts generally as
they become due,
(ii) file a petition in bankruptcy or a petition to take
advantage of any insolvency act,
(iii) make an assignment for the benefit of its creditors,
(iv) consent to the appointment of a receiver of itself or of the
whole or any substantial part of its property, or
(v) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any other applicable
law or statute of the United States of America or any State thereof,
or
(i) any petition shall be filed by or against Tenant or Guarantor or
any subsidiary of either under Federal bankruptcy laws, or any other proceeding
shall be instituted by or against Tenant or Guarantor or such subsidiary seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for Tenant or Guarantor
or such subsidiary, or for any substantial part of the property of Tenant or
Guarantor or such subsidiary, and such proceeding is not dismissed within ninety
(90) days after institution thereof, or Tenant or Guarantor or such subsidiary
shall take any action to authorize or effect any of the actions set forth above
in this paragraph (i), or
(j) if Tenant or Guarantor shall be liquidated or dissolved, or shall
begin proceedings toward such liquidation or dissolution, or
(k) if the estate or interest of Tenant in any Leased Property or any
part thereof shall be levied upon or attached in any proceeding and the same
shall not be vacated or discharged within the later of ninety (90) days after
commencement thereof or 30 days after receipt by Tenant of notice thereof from
Lessor, (unless Tenant shall be contesting such lien or attachment in good faith
in accordance with Article XII hereof), or
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(l) if, except pursuant to the terms hereof, Tenant voluntarily ceases
operations on any Leased Property for a period in excess of thirty (30) days,
or
(m) if any reduction occurs in the number of licensed beds in excess
of ten percent (10%) of the number of licensed beds in the applicable Facility
on the Commencement Date or there shall occur a revocation of certification for
reimbursement under Medicare with respect to any Facility that participates in
such programs, or
(n) if Tenant shall become subject to regulatory sanctions and the
Tenant has failed to cure or satisfy such regulatory sanctions within its
specified cure period in any material respect with respect to any Facility, and
in any such event,
Lessor may terminate this Lease by giving not less than ten (10) days' notice of
such termination and upon the expiration of the time fixed in such notice, if
any, the Term shall terminate and all rights of Tenant under this Lease shall
cease. Lessor shall have all rights at law and in equity available to Lessor as
a result of Tenant's breach of this Lease.
Tenant shall, to the maximum extent permitted by law, pay as
Additional Charges all Litigation Costs as a result of any Event of Default
hereunder.
Section 16.2. Certain Remedies. If an Event of Default shall have
----------------
occurred (and the event giving rise to such Event of Default has not been cured
within the curative period relating thereto as set forth in Section 16.1 above)
and be continuing, whether or not this Lease has been terminated pursuant to
Section 16.1, Tenant shall, to the extent permitted by law, if required by
Lessor so to do, immediately surrender to Lessor the Leased Property pursuant to
the provisions of Section 16.1 and quit the same, and Lessor may enter upon and
repossess the Leased Property by reasonable force, summary proceedings,
ejectment or otherwise, and may remove Tenant and all other persons and any and
all personal property from the Leased Property subject to rights of any
residents or patients and to any requirement of law. Lessor and Tenant hereby
agree that upon the occurrence of an Event of Default under Section 16.1 (f),
(m) or (n), Lessor may, if it so desires, terminate the lease with respect to
the Facility that is the subject of the Event of Default and collect liquidated
damages in an amount equal to the net present value at the time of the
occurrence of the Event of Default of the amount designated in Exhibit C as
attributable to such Facility multiplied by the number of years remaining on the
-------------
lease and discounted at a rate equal to the Prime Rate; provided that after the
--------
occurrence of four (4) Events of Default under Section 16.1 (f), (m) and/or (n),
determined on a cumulative basis (for example two Events of Default under (f)
and one each under (m) and (n)), Lessor shall be permitted, if it so desires, to
exercise all of the rights and remedies hereunder with respect to all Facilities
covered under this Lease, without regard to which Facility from which the Event
of Default emanated.
39
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Section 16.3. Damages. Neither (a) the termination of this Lease
-------
pursuant to Section 16.1, (b) the repossession of the Leased Property or any
portion thereof, (c) the failure of Lessor, notwithstanding reasonable good
faith efforts to relet the Leased Property or any portion thereof, (d) the
reletting of all or any portion thereof, nor (e) the failure of Lessor to
collect or receive any rentals due upon any such reletting, shall relieve Tenant
of its liability and obligations hereunder, all of which shall survive any such
termination, repossession or reletting. In the event of any such termination,
Tenant shall forthwith pay to Lessor, at Lessor's option, as and for liquidated
and agreed current damages, either:
(A) the sum of:
(i) the net present value at the time of award of the unpaid Rent
which had been earned at the time of termination; and
(ii) the net present value at the time of award of the amount of
unpaid Rent for the balance of the Term without any obligation or
deemed obligation on the part of Lessor to mitigate damages.
In making the above determinations, the net present value at the
time of the award shall be determined by the court having
jurisdiction thereof using a discount rate equal to the Prime
Rate,
or (B)
without termination of Tenant's right to possession of the Leased
Property, each installment of Rent and other sums payable by
Tenant to Lessor under this Lease as the same becomes due and
payable, which Rent and other sums shall bear interest at the
maximum annual rate permitted by law from the date when due until
paid, and Lessor may enforce, by action or otherwise, any other
term or covenant of this Lease.
In case of any Event of Default, re-entry, expiration and
dispossession by summary proceedings or otherwise, Lessor may (a) relet any
Leased Property or any part or parts thereof, either in the name of Lessor or
otherwise, for a term or terms which may, at Lessor's option, be equal to, less
than or exceed the period which would otherwise have constituted the balance of
the Term and may grant concessions or free rent to the extent that Lessor
considers advisable and necessary to relet the same, and (b) make such
reasonable alterations, repairs and decorations in the applicable Leased
Property or any portion thereof as Lessor, in its sole judgment, considers
advisable and necessary for the
40
<PAGE>
purpose of reletting the applicable Leased Property; and the making of such
alterations, repairs and decorations shall not operate or be construed to
release Tenant from liability hereunder as aforesaid. Lessor shall in no event
be liable in any way whatsoever for failure to relet any Leased Property, or, in
the event that any Leased Property is relet, for failure to collect the rent
under such reletting. To the fullest extent permitted by law, Tenant hereby
expressly waives any and all rights of redemption granted under any present or
future laws in the event of Tenant's being evicted or dispossessed, or in the
event of Lessor's obtaining possession of the applicable Leased Property, by
reason of the violation by Tenant of any of the covenants and conditions of this
Lease.
Section 16.4. Tenant's Obligation to Purchase. If an Event of
-------------------------------
Default shall have occurred and be continuing, by including such requirement in
the ten (10) day notice of termination of this Lease given to Tenant by Lessor
pursuant to the provisions of Section 16.1 or by separate notice given by Lessor
to Tenant at any time thereafter prior to the time such Event of Default shall
be cured, Lessor may require Tenant to purchase the Facility that is the subject
of the Event of Default or all Leased Properties on the first Minimum Rent
payment date occurring not less than thirty (30) days after the date of receipt
of, or such later date that is specified in, said notice requiring such purchase
for an amount equal to the higher of the then current Fair Market Value Purchase
Price or the Minimum Repurchase Price of the applicable Leased Property plus all
Rent then due and payable (excluding the installment of Minimum Rent due on the
purchase date) as of the date of purchase. If Lessor exercises such right,
Lessor shall convey such Leased Property to Tenant on the date fixed therefor in
accordance with the provisions of Article XVIII upon receipt of the purchase
price therefor and this Lease shall thereupon terminate. Any purchase by Tenant
of any Leased Property pursuant to this Section shall be in lieu of the damages
specified in Sections 16.3 with respect to such Leased Property.
Section 16.5. Waiver. If this Lease is terminated pursuant to
------
Section 16.1, Tenant waives, to the maximum extent permitted by applicable law,
(a) any right of redemption, re-entry or repossession, (b) any right to a trial
by jury in the event of summary proceedings to enforce the remedies set forth in
this Article XVI, and (c) the benefit of any laws now or hereafter in force
exempting property from liability for rent or for debt.
Section 16.6. Application of Funds. Any payments received by Lessor
--------------------
under any of the provisions of this Lease during the existence or continuance of
any Event of Default (and such payment is made to Lessor rather than Tenant due
to the existence of an Event of Default) shall be applied to Tenant's
obligations in the order which Lessor may determine or as may be prescribed by
the laws of the State where the applicable Leased Property is located.
41
<PAGE>
Section 16.7. Notice to Lessor. If Tenant or any subtenant receives
----------------
a notice of any material regulatory deficiency from any regulatory agency,
Tenant shall deliver a copy of such notice to Lessor in accordance with Section
34.1.
ARTICLE XVII
-------------
Section 17.1. Lessor's Right to Cure Tenant's Default. If an Event
---------------------------------------
of Default shall have occurred and be continuing, Lessor, without waiving or
releasing any obligation or Event of Default, may (but shall be under no
obligation to) at any time thereafter make such payment or perform such act for
the account and at the expense of Tenant, and may, to the extent permitted by
law, enter upon any or each Leased Property or any portion thereof for such
purpose and take all such action thereon as, in Lessor's opinion, may be
necessary or appropriate therefor. No such entry shall be deemed an eviction of
Tenant. All reasonable sums so paid by Lessor and all costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses, in each
case, to the maximum extent permitted by law) so incurred, together with
interest thereon (to the maximum extent permitted by law) at the Overdue Rate
from the date on which such sums or expenses are paid or incurred by Lessor,
shall be paid by Tenant to Lessor on demand. The obligations of Tenant and
rights of Lessor contained in this Article shall survive the expiration or
earlier termination of this Master Lease.
ARTICLE XVIII
--------------
Section 18.1. Provisions Relating to Purchase of the Leased Property.
------------------------------------------------------
In the event Tenant purchases any Leased Property from Lessor pursuant to any of
the terms of this Lease, Lessor shall, upon receipt from Tenant of the
applicable purchase price, together with full payment of all Rent due and
payable or other charges due and payable with respect to any period ending on or
before the date of the purchase, deliver to Tenant an appropriate deed or other
conveyance (in the customary form used to convey commercial properties within
the relevant jurisdiction) conveying the entire interest of Lessor in and to
such Leased Property to Tenant free and clear of all encumbrances other than (i)
those that Tenant has agreed hereunder to pay or discharge, (ii) those mortgage
liens, if any, which Tenant has agreed in writing to accept and to take title
subject to and (iii) Permitted Encumbrances. The difference between the
applicable purchase price and the total of the encumbrances assumed or taken
subject to shall be paid in cash to Lessor or as Lessor may direct, in federal
or other immediately available funds except as otherwise mutually agreed by
Lessor and Tenant other than as specifically provided above, such Leased
Property shall be conveyed to Tenant on an "as is" basis, and in its then
physical condition. Closing of any such sale shall be contingent upon and
subject to Tenant obtaining all required governmental consents and approvals for
such transfer and if such sale shall fail to be consummated by reason of the
inability of Tenant to obtain all such approvals and consents, any options to
extend the Term of this Master Lease which
42
<PAGE>
otherwise would have expired during the escrow period to such proposed sale
shall be deemed to remain in effect for 30 days after termination of the escrow
or other arrangement covering the closing of such proposed sale. All expenses of
such conveyance, including, without limitation, the cost of title examination or
standard coverage title insurance, if reasonably required under the
circumstances then existing, attorneys' fees incurred [by Lessor] in connection
with such conveyance and release, and transfer taxes, shall be paid by Lessor,
except that such charges shall be paid by Tenant in case of a sale pursuant to
Section 16.4. Recording fees shall be paid for by Tenant.
ARTICLE XIX
------------
Section 19.1. Renewal Terms. If no Event of Default shall have
-------------
occurred and be continuing at the time Tenant gives notice as set forth below or
at the time of the commencement of the applicable Extended Term, Tenant is
hereby granted the right to renew this Lease, with respect to all, but not less
than all, of the Leased Properties within the applicable group as shown on
Exhibit D annexed hereto, for three (3) 5-year optional renewal terms
- - ---------
(collectively the "Extended Terms" and each an "Extended Term") upon giving
-------------- -------------
written notice to Lessor of each such renewal at least one hundred eighty (180)
days but not more than three hundred sixty (360) days prior to the termination
of the then current Term. Tenant may not exercise its option for more than one
Extended Term at a time. During the first such Extended Term, all of the terms
and conditions of this Lease shall continue in full force and effect, except
that the Minimum Rent for and during such Extended Term shall be equal to the
Minimum Rent in effect on the last day of the Fixed Term, plus the Escalation
Amount. During each of the second Extended Term and the third Extended Term,
all of the terms and conditions of this Lease shall continue in full force and
effect, except that the Rent for and during the Extended Terms shall be the then
current fair market rental ("Fair Market Rental") which unless otherwise
------------------
mutually agreed to by Lessor and Tenant shall be determined by the appraisal
procedure pursuant to the provisions of Article XXXV. If Tenant fails to notify
Lessor of the exercise of any extension option which Tenant has the right to
exercise hereunder prior to the required time, its option or options to extend
shall nevertheless remain in full force and effect for a period of thirty (30)
days after receipt of written notice from Lessor subsequent to the required time
setting forth the expiration date of this Lease and advising Tenant that notice
of extension has not been received.
ARTICLE XX
-----------
Section 20.1. Holding Over. If Tenant shall for any reason remain in
------------
possession of any Leased Property after the expiration of the Term or earlier
termination of the Term, such possession shall be as a month-to-month tenant
during which time Tenant shall pay as rental each month, one and one-half times
the aggregate of (i) one-twelfth of the aggregate Minimum Rent payable with
respect to the last Lease Year of the
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<PAGE>
preceding Term; (ii) all Additional Charges accruing during the month and (iii)
all other sums, if any, payable by Tenant pursuant to the provisions of this
Lease with respect to the applicable Leased Property. During such period of
month-to-month tenancy, Tenant shall be obligated to perform and observe all of
the terms, covenants and conditions of this Master Lease, but shall have no
rights hereunder other than the right, to the extent given by law to month-to-
month tenancies to continue its occupancy and use of the applicable Leased
Property. Nothing contained herein shall constitute the consent, express or
implied, of Lessor to the holding over of Tenant after the expiration or earlier
termination of this Lease.
ARTICLE XXI
------------
SUBORDINATION
Section 21.1. Subordination. This Lease and all rights of Tenant
-------------
hereunder are subject and subordinate to all Facility Mortgages and all Superior
Leases which may now or hereafter affect Lessor's interest in the applicable
Leased Property and any interest of any Superior Lessor (all such leases and
mortgages, collectively, the "Superior Mortgages"), and to all renewals,
------------------
modifications, consolidations, replacements and extensions of the Superior
Mortgages so long as Tenant shall receive a so-called "non-disturbance"
agreement in favor of Tenant from any such Superior Lessor or Superior Mortgagee
on such Superior Lessor's or Superior Mortgagee's commercially reasonable
standard form. This Section shall be self-operative and no further instrument
of subordination shall be required. In confirmation of such subordination,
Tenant agrees to execute and deliver promptly any commercially reasonable form
of instrument (in recordable form, if requested) that Lessor, any Superior
Lessor or the holder of any Superior Mortgage (a "Superior Mortgagee") may
------------------
request to evidence such subordination. Lessor shall use its reasonable efforts
to obtain from each currently existing Superior Lessor and Superior Mortgagee a
so-called "non-disturbance" agreement in favor of Tenant on such Superior
Lessor's or Superior Mortgagee's standard form.
Section 21.2. Attornment. If the interests of Lessor under this
----------
Lease are transferred by reason of, or assigned in lieu of, foreclosure or other
proceedings for enforcement of any such Superior Mortgage, or if any Superior
Lease shall be terminated then Tenant shall, at the option of such purchaser,
assignee or any Superior Lessor, as the case may be, (x) attorn to such party
and perform for its benefit all the terms, covenants and conditions of this
Lease on Tenant's part to be performed with the same force and effect as if such
party were the landlord originally named in this Lease, or (y) enter into a new
lease with such party, as landlord, for the remaining Term and otherwise on the
same terms and conditions of this Lease except that such successor landlord
shall not be (i) liable for any previous act, omission or negligence of Lessor
under this Lease; (ii) subject
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<PAGE>
to any counterclaim, defense or offset which theretofore shall have accrued to
Tenant against Lessor; (iii) bound by any previous modification or amendment of
this Lease or by any previous prepayment of more than one month's rent, unless
such modification, amendment or prepayment shall have been approved in writing
by the Superior Lessor or the Superior Mortgagee through or by reason of which
such successor landlord shall have succeeded to the rights of Lessor under this
Lease; (iv) liable for any security deposited pursuant to this Lease unless such
security has actually been delivered to such successor landlord. Nothing
contained in this Section shall be construed to impair any right otherwise
exercisable by any such owner, holder or lessee.
Section 21.3. Mortgagee Cure Rights. If any act or omission by
---------------------
Lessor would give Tenant the right, immediately or after lapse of time, to
cancel or terminate this Lease or to claim a partial or total eviction, or
abatement of rent, setoff or counterclaim not otherwise expressly permitted by
the terms of this Lease, Tenant will not exercise any such right until (i) it
has given written notice of such act or omission to each Superior Mortgagee and
each Superior Lessor whose name and address shall have previously been furnished
to Tenant, by delivering notice of such act or omission addressed to each such
party at its last address so furnished, (ii) Lessor shall have failed to cure
the same within the time limits set forth in this Lease, and (iii) following the
giving of such notice, no Superior Mortgagee and no Superior Lessor shall have
remedied such act or omission (x) in the case of an act or omission which is
capable of being remedied without possession of this Leased Property, within the
cure period available to Lessor under this Lease plus sixty (60) days and (y) in
the case of any act or omission which is incapable of being remedied without
possession of the applicable Leased Property, within sixty (60) days following
the date on which possession is obtained (either by such Superior Mortgagee or
Superior Lessor or by a receiver in an action commenced by such Superior
Mortgagee or Superior Lessor), provided a Superior Mortgagee or Superior Lessor
--------
has promptly commenced action to obtain possession and shall diligently pursue
such action to completion and provided further that such Superior Mortgagee or
-------- -------
Superior Lessor shall, with reasonable diligence, give Tenant notice of its
intention to, and commence and continue to, remedy such act or omission or cause
the same to be remedied.
[ Section 21.4. Modifications. Tenant shall execute any
-------------
modification of this Lease requested by any prospective Superior Mortgagee to
cause the terms of this Master Lease to conform with standard securitized
mortgage financing requirements, provided that such modifications do not
materially adversely increase the obligations of Tenant hereunder or materially
diminish Tenant's rights under this Lease or materially impair the right of a
Leasehold Mortgagee and provided further that such modifications do not increase
the Minimum Rent payable hereunder. In addition, if any Superior Mortgagee or
prospective Superior Mortgagee shall request modifications of this Lease as a
condition to the provision, continuance or renewal of any such financing, Tenant
will
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<PAGE>
not unreasonably withhold, delay or defer its consent thereto, provided that
such modifications do not adversely increase the obligations of Tenant hereunder
or diminish Tenant's rights under this Lease or materially impair the rights of
a Leasehold Mortgagee and provided further that such modifications do not
increase the Minimum Rent payable hereunder.]/*/
ARTICLE XXII
-------------
Section 22.1. Notice to Lessor. (a) If Tenant shall mortgage
----------------
Tenant's interest in one or more Leased Properties to a Lending Institution in
accordance with the terms of this Lease, and if the holder of the Leasehold
Mortgage shall provide Lessor with a true copy of the Leasehold Mortgage and the
name and address of the Leasehold Mortgagee (as hereinafter defined) and Lessor
shall approve the Leasehold Mortgage, Lessor and Tenant agree that the
provisions of this Section shall apply in respect to each the Leasehold
Mortgage. Lessor hereby approves of the Leasehold Mortgages dated as of the
date hereof in favor of Morgan Guaranty Trust Company of New York, as agent;
provided, however, that such approval shall not constitute an agreement by
- - -------- -------
Lessor to be bound by the terms of such Leasehold Mortgage. In the event of any
assignment of a leasehold or in the event of a change of address of a Leasehold
Mortgagee or of an assignee of the Leasehold Mortgage, notice of the new name
and address shall be provided to Lessor.
Section 22.2. Definitions. (a) The term "Leasehold Mortgage" as used
-----------
in this Section shall include a mortgage, a deed of trust, a deed to secure
debt, or other security instrument by which Tenant's leasehold estate is
mortgaged or otherwise transferred, to secure a debt. "Leasehold Mortgage"
shall be deemed to refer to all of the Leasehold Mortgages delivered to secure a
debt.
(b) The term "Leasehold Mortgagee" as used in this Section shall refer
to a holder of a Leasehold Mortgage approved by Lessor pursuant to the terms
hereof. Lessor hereby approves of Morgan Guaranty Trust Company of New York, as
collateral agent, as the initial Leasehold Mortgagee.
Section 22.3. Consent of Leasehold Mortgagee Required. No
---------------------------------------
cancellation or surrender (other than a termination following the occurrence of
an Event of Default) and no amendment to or modification of, this Lease shall be
effective as to the Leasehold Mortgagee without the prior written consent of
such Leasehold Mortgagee, unless an amendment or modification is not reasonably
likely to result in a material
- - ---------------
/*/ To be included in CMBS lease only.
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<PAGE>
adverse effect on the rights of the Leasehold Mortgagee, the lien of the
Leasehold Mortgages, or the value of the leasehold interest demised hereunder.
Section 22.4. Default Notice. Lessor, upon providing Tenant any
--------------
notice of: (a) default under this Lease or (b) a termination of this Lease,
shall at the same time provide a copy of such notice to the Leasehold Mortgagee.
From and after the time such notice has been given to a Leasehold Mortgagee, the
Leasehold Mortgagee shall have the same period, after the giving of such notice
upon it, for remedying any default or acts or omissions which are the subject
matter of such notice or causing the same to be remedied, as is given Tenant
after the giving of such notice to Tenant, plus 30 days to remedy, commence
remedying or cause to be remedied the defaults or acts or omissions which are
the subject matter of such notice specified in any such notice, provided that
such defaults are capable of being cured by the Leasehold Mortgagee or on behalf
of the Leasehold Mortgagee. Lessor shall accept such performance by or at the
instigation of the Leasehold Mortgagee as if the same had been done by Tenant.
Tenant authorizes each Leasehold Mortgagee to take any such action at the
Leasehold Mortgagee's option and does hereby authorize entry upon the Leased
Properties by the Leasehold Mortgagee for such purpose. If Leasehold Mortgagee
has failed to cure Tenant's default within the above-mentioned time period,
Lessor may exercise its remedies specified in Sections 16.2, 16.3, 16.4 and
17.1.
Section 22.5. Procedure for Foreclosure on Default. (a) If the
------------------------------------
Leasehold Mortgagee has commenced taking steps to acquire or sell Tenant's
interest in this Lease by foreclosure of the Leasehold Mortgage or other
appropriate means, the Leasehold Mortgagee shall provide Landlord notice of the
same and shall prosecute the same to completion with due diligence.
(b) During such period, this Lease shall not then terminate, and the
time for completion by such Leasehold Mortgagee of its proceedings shall
continue so long as such Leasehold Mortgagee is enjoined or stayed and
thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to
acquire or sell Tenant's interest in this Lease by foreclosure of the Leasehold
Mortgage or by other appropriate means with reasonable diligence and continuity.
Nothing in this Section 22.5, however, shall be construed to extend this Lease
beyond the original term thereof as extended by any options to extend the term
of this Lease properly exercised by Tenant or a Leasehold Mortgagee in
accordance with Section 19.1, nor to require a Leasehold Mortgagee to continue
such foreclosure proceedings after the default has been cured. If the default
shall be cured and the Leasehold Mortgagee shall discontinue such foreclosure
proceedings, this Lease shall continue in full force and effect as if Tenant had
not defaulted under this Lease.
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<PAGE>
(c) In addition, during such period, the Leasehold Mortgagee shall
pay or cause to be paid the rent, additional rent and other monetary obligations
of Tenant under this Lease as the same become due, and continue its good faith
efforts to perform, or cause to be performed, all of Tenant's other obligations
under this Lease.
Section 22.6. Assignment or Transfer in Lieu of Foreclosure. (a)
---------------------------------------------
For the purposes of this Section 22.6, the making of a Leasehold Mortgage shall
not be deemed to constitute an assignment or transfer of this Lease or of the
leasehold estate hereby created, nor shall any Leasehold Mortgagee, as such, be
deemed to be an assignee or transferee of this Lease or of the leasehold estate
hereby created so as to require the Leasehold Mortgagee, as such, to assume the
performance of any of the terms, covenants or conditions on the part of the
Tenant to be performed hereunder, but the purchaser at any sale of this Lease
and of the Leasehold Estate hereby created in any proceedings for the
foreclosure of any Leasehold Mortgage, or the assignee or transferee of this
Lease and of the leasehold estate hereby created under any instrument of
assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage,
shall be deemed to be an assignee or transferee within the meaning of this
Section 2264, and shall be deemed to have agreed to perform all of the terms,
covenants and conditions on the part of the Tenant to be performed hereunder
from and after the date of such purchase and assignment.
(b) Prior to any such purchase or assignment pursuant to a foreclosure
or similar proceeding, the Leasehold Mortgagee shall notify Lessor of the
proposed transferee. Subject to any state or other governmental requirements,
Lessor shall not unreasonably withhold its consent to any sale or assignment,
provided that (a) the purchaser or assignee (1) shall be a creditworthy entity
with sufficient financial stability to satisfy its financial obligations under
the Lease, (2) shall have not less than four years experience in operating
health care facilities for the purpose of the applicable Facility's Primary
Intended Use, (3) has a favorable business and operational reputation and
character and (4) shall assume in writing and agree to keep and perform all of
the terms of this Lease on the part of Tenant to be performed hereunder from and
after the date of such purchase and assignment and (b) an original counterpart
of each such purchase and sale agreement or instrument of assignment or transfer
in lieu of foreclosure of any Leasehold Mortgage, duly executed by Tenant and
such purchaser or assignee, as the case may be, in the form and substance
satisfactory to Lessor, shall be delivered promptly to Lessor. Lessor's
obligation to consent to a sale or assignment is subject to any reasonable
approval rights of any Facility Mortgagee and/or the lenders under that certain
Credit Agreement, dated April 30, 1998, by and among the Lessor, NationsBank,
N.A., as administrative agent, Morgan Guaranty Trust Company of New York, as
documentation agent, JP Morgan Securities Inc. and NationsBank Montgomery
Securities LLC as co-arrangers and the banks parties thereto, as the same may be
amended and/or replaced from time to time.
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Section 22.7. New Lease. Lessor agrees to enter into a new lease
---------
("New Lease") of the Leased Properties with the Leasehold Mortgagee or its
- - -----------
designee for the remainder of the term of this Lease, effective as of the date
of termination, at the rent and additional rent, and upon the terms, covenants
and conditions (including all options to renew but excluding requirements which
are not applicable or which have already been fulfilled) identical to this
Lease, provided:
(a) The Leasehold Mortgagee shall make written request upon Lessor for
such New Lease within sixty (60) days after the date the Leasehold
Mortgagee receives Lessor's Notice of Termination of this Lease given
pursuant to this Section 22.7.
(b) The Leasehold Mortgagee or its designee shall pay or cause to be
paid to Lessor at the time of the execution and delivery of such New Lease,
any and all sums which would at the time of execution and delivery thereof
be due pursuant to this Lease but for such termination and, in addition
thereto, all reasonable expenses, including reasonable attorney's fees,
which Lessor shall have incurred by reason of such termination and the
execution and delivery of the New Lease and which have not otherwise been
received by Lessor from Tenant or other party in interest under Tenant.
Upon the execution of such New Lease, Lessor shall allow to the Tenant
named therein as an offset against the sums otherwise due under this
Section 22.7(b) or under the New Lease, an amount equal to the net income
derived by Lessor from the Leased Properties during the period from the
date of termination of this Lease to the date of the beginning of the Lease
term of such New Lease. In the event of a controversy as to the amount to
be paid to Lessor pursuant to this Section 22.7(b), the payment obligation
shall be satisfied if Lessor shall be paid the amount not in controversy,
and the Leasehold Mortgagee or its designee shall agree to pay any
additional sum ultimately determined to be due plus interest at the Overdue
Rate and such obligation shall be adequately secured.
(c) The Leasehold Mortgagee or its designee shall agree to remedy any
of Tenant's defaults of which said Leasehold Mortgagee was notified by Lessor's
Notice of Termination and which are reasonably susceptible of being so cured by
Leasehold Mortgagee or its designee.
(d) The Tenant under such New Lease shall have the same right, title
and interest in and to the Leased Properties and the buildings and improvements
thereon as Tenant had under this Lease.
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(e) The Tenant under any such New Lease shall be liable to perform the
obligations imposed on the Tenant by such New Lease only during the period such
person has ownership of such leasehold estate.
Section 22.8. New Lease Properties. If more than one Leasehold
--------------------
Mortgagee shall request a New Lease pursuant to Section 22.7(a), Lessor shall
enter into such New Lease with the Leasehold Mortgagee whose mortgage is prior
in lien, or with the designee of the Leasehold Mortgagee. Lessor, without
liability to Tenant or any Leasehold Mortgagee with an adverse claim, may rely
upon a mortgagee title insurance policy or policies issued by a responsible
title insurance company as the basis for determining the appropriate Leasehold
Mortgagee who is entitled to such New Lease.
Section 22.9. Legal Proceedings. Lessor shall give each Leasehold
-----------------
Mortgagee prompt notice of any legal proceedings between Lessor and Tenant
involving obligations under this Lease. Each Leasehold Mortgagee shall have the
right to intervene in any such proceedings and be made a party to such
proceedings, and the parties hereto do hereby consent to such intervention. In
the event that any Leasehold Mortgagee shall not elect to intervene or become a
party to any such proceedings, Lessor shall give the Leasehold Mortgagee notice
of, and a copy of any decision made in any such proceedings, which shall be
binding on all Leasehold Mortgagees not intervening after receipt of notice of
such proceedings.
Section 22.10. Future Amendments. In the event on any occasions
-----------------
hereafter Tenant seeks to mortgage the leasehold estate created hereby, Lessor
agrees to amend this Lease from time to time to the extent reasonably requested
by a Lending Institution proposing to make Tenant a loan secured by a first lien
upon Tenant's leasehold estate, provided that such proposed amendments do not
adversely affect the rights of Lessor or its interest in the Leased Properties.
All reasonable expenses incurred by Lessor in connection with any such amendment
shall be paid by Tenant.
Section 22.11. Estoppel Certificate. Lessor and Tenant shall,
--------------------
without charge, at any time and from time to time hereafter, within then (10)
days after written request of the other party to do so, certify by written
instrument duly executed and acknowledged to any mortgagee or purchaser, or
proposed Leasehold Mortgagee or proposed purchaser, or any other person, firm or
corporation specified in such request: (a) as to whether this Lease has been
supplemented or amended, and if so, the substance and manner of such supplement
or amendment; (b) as to the validity and force and effect of this Lease; (c) as
to the existence of any Event of Default hereunder; (d) as to the existence of
any offsets, counterclaims or defenses hereto on the part of the either party;
(e) as to the commencement and expiration dates of the term of this Lease; and
(f) as to any other matters as may be reasonably so requested. Any such
certificate may be relied upon by the other party and any other person, firm or
corporation to whom the same may
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be exhibited or delivered, and the contents of such certificate shall be binding
on the party so certifying.
Section 22.12. Notices. Notices from Lessor to the Leasehold
-------
Mortgagee shall be mailed to the address furnished Lessor pursuant to Section
22.1 and those from the Leasehold Mortgagee to Lessor shall be mailed to the
address designated pursuant to the provisions of Section 34.1 hereof. Such
notices, demands and requests shall be given in the manner described in Section
34.1 and shall in all respects be governed by the provisions of that section.
Section 22.13. Erroneous Payments. No payment made to Lessor by a
------------------
Leasehold Mortgagee shall constitute agreement that such payment was, in fact,
due under the terms of this Lease; and a Leasehold Mortgagee having made any
payment to Lessor pursuant to Lessor's wrongful, improper or mistaken notice or
demand shall be entitled to the return of any such payment or portion thereof
provided he shall have made demand therefor not later than one year after the
date of its payment.
ARTICLE XXIII
--------------
Section 23.1. Risk of Loss. During the Term of this Lease, the risk
------------
of loss or of decrease in the enjoyment and beneficial use of each Leased
Property in consequence of the damage or destruction thereof by fire, the
elements, casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures, attachments, levies or executions (other than by Lessor and those
claiming from, through or under Lessor) is assumed by Tenant, and, in the
absence of gross negligence, willful misconduct or breach of this Lease by
Lessor pursuant to Section 38.3, Lessor shall in no event be answerable or
accountable therefor nor shall any of the events mentioned in this Section
entitle Tenant to any abatement of Rent.
ARTICLE XXIV
-------------
Section 24.1. Indemnification. Notwithstanding the existence of any
---------------
insurance provided for in Article XIII, and without regard to the policy limits
of any such insurance, Tenant will protect, indemnify, save harmless and defend
Lessor from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and reasonable expenses (including, without
limitation, Litigation Costs), to the maximum extent permitted by law, imposed
upon or incurred by or asserted against Lessor by reason of: (a) any accident,
injury to or death of persons or loss of or damage to property occurring on or
about any Leased Property or adjoining sidewalks, including without limitation
any claims of malpractice, (b) any use, misuse, non-use, condition, maintenance
or repair by Tenant or anyone claiming under Tenant, including agents,
contractors, invitees or visitors of any Leased Property or Tenant's Personal
Property, (c)
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any Impositions (which are the obligations of Tenant to pay pursuant to the
applicable provisions of this Lease), (d) any failure on the part of Tenant or
anyone claiming under Tenant to perform or comply with any of the terms of this
lease, and (e) the non-performance of any of the terms and provisions of any and
all existing and future subleases of any Leased Property to be performed by the
Tenant thereunder. Any amounts which become payable by Tenant under this Section
shall be paid within ten (10) days after liability therefor on the part of
Tenant is determined by litigation or otherwise, and if not timely paid, shall
bear interest (to the extent permitted by law) at the Overdue Rate from the date
of such determination to the date of payment. Tenant, at its expense, shall
contest, resist and defend any such claim, action or proceeding asserted or
instituted against Lessor or may compromise or otherwise dispose of the same as
Tenant sees fit. Nothing herein shall be construed as indemnifying Lessor
against its own negligent acts or omissions or willful misconduct. If at any
time Lessor shall have notice of a claim, Lessor shall give reasonably prompt
written notice of such claim to Tenant; provided that (i) Lessor shall have no
-------- ----
liability for a failure to give notice of any claim of which Tenant has
otherwise been notified or has knowledge and (ii) the failure of Lessor to give
such a notice to Tenant shall not limit the rights of Lessor or the obligations
of Tenant with respect to such claim except to the extent that Tenant incurs
actual expenses or suffers actual monetary loss as a result of such failure.
Tenant shall have the right to control the defense or settlement of any Claim,
provided that (A) Tenant shall first confirm in writing to the Lessor that such
claim is within the scope of this indemnity and that Tenant shall pay any and
all amounts required to be paid in respect of such claim and (B) if the
compromise or settlement of any such claim shall not result in the complete
release of Lessor from the claim so compromised or settled, the compromise or
settlement shall require the prior written approval of Lessor. Lessor shall have
the right to approve counsel engaged to defend such claim and, at its election
and sole cost and expense, shall have the right, but not the obligation, to
participate in the defense of any claim.
Lessor shall indemnify, save harmless and defend Tenant from and
against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses imposed upon or incurred by or asserted against
Tenant as a result of the gross negligence or wilful misconduct of Lessor.
Tenant's or Lessor's liability for a breach of the provisions of this
Article arising during the Term hereof shall survive any termination of this
Lease.
ARTICLE XXV
------------
Section 25.1. Subletting and Assignment.
-------------------------
Section 25.1.1. Except as expressly provided herein, Tenant shall
not, without the prior written consent of Lessor, which consent shall not be
unreasonably
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withheld or delayed, assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer any interest in this Lease or sublease all or any part of any
Leased Property or suffer or permit this Lease or the leasehold estate created
hereby or thereby or any other rights arising under this Lease to be assigned,
transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in
part, whether voluntarily or involuntarily or by operation of law, or permit the
use or occupancy of any Leased Property to be offered or advertised for
assignment or subletting except as hereinafter provided. For purposes of this
Section 25.1, an assignment of this Lease shall be deemed to include any change
in control of Tenant, as if such change in control or transaction were an
assignment of this Lease. Changes in control of Tenant shall include, without
limitation, (a) a change in the composition of the board of directors of Tenant
or a Guarantor such that at the end of any period of twelve (12) consecutive
months the persons constituting a majority of such board of directors are not
the same as the persons constituting a majority at the start of such period (or
persons appointed by such majority), (b) the sale or other disposition by a
Guarantor of (i) any part of its interest in Tenant or (ii) all or substantially
all of the assets of a Guarantor or Tenant (other than a bona fide pledge in
connection with a financing approved by Lessor), and (c) a merger or
consolidation involving a Guarantor or Tenant, which results in the stockholders
of a Guarantor or Tenant immediately prior to such event owning less than 50% of
the capital stock of the surviving entity or any public parent of the surviving
entity.
Section 25.1.2. Subject to the provisions of Section 25.3 below and
any other express conditions or limitations set forth herein, Tenant may,
without the consent of Lessor, (i) assign this Lease or sublet all or any part
of any Leased Property to any Affiliate of Tenant, or (ii) sublet up to an
aggregate of 20% of the rentable square footage of any Facility (a) in the
normal course of the Primary Intended Use such as but not limited to leasing of
space for major moveable equipment or functional departments such as pathology,
pharmacy and radiology, or (b) to concessionaires or other third party users or
operators of portions of the Leased Property. Lessor shall not unreasonably
withhold its consent to any other subletting or assignment, provided that (a) in
the case of a subletting, the subtenant shall comply with the provisions of
Section 25.2, (b) in the case of an assignment, the assignee (1) shall be a
creditworthy entity with sufficient financial stability to satisfy its
obligations under the Lease, (2) shall have not less than four years experience
in operating health care facilities for the purpose of the applicable Facility's
Primary Intended Use, (3) has a favorable business and operational reputation
and character and (4) shall assume in writing and agree to keep and perform all
of the terms of this Lease on the part of Tenant to be kept and performed and
shall be, and become, jointly and severally liable with Tenant for the
performance thereof, (c) an original counterpart of each such sublease and
assignment and assumption, duly executed by Tenant and such subtenant or
assignee, as the case may be, in the form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor, and (d) in case of either an assignment
or subletting, Tenant shall remain primarily liable, as principal rather than as
53
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surety, for the prompt payment of the Rent and for the performance and
observance of all of the covenants and conditions to be performed by Tenant
hereunder. Lessor's obligation to consent to a subletting or assignment is
subject to any reasonable approval rights of any Facility Mortgagee and/or the
lenders under that certain Credit Agreement, dated April 30, 1998, by and among
the Lessor, NationsBank, N.A., as administrative agent, Morgan Guaranty Trust
Company of New York, as documentation agent, JP Morgan Securities Inc. and
NationsBank Montgomery Securities LLC as co-arrangers and the banks parties
thereto, as the same may be amended and/ or replaced from time to time..
Section 25.1.3. If this Lease is assigned or if any Leased Property
or any part thereof is sublet (or occupied by any entity other than Tenant and
its employees), Lessor, after an Event of Default occurs and so long as it is
continuing, may collect the rents from such assignee, subtenant or occupant, as
the case may be, and apply the net amount collected to the Rent herein reserved,
but no such collection shall be deemed a waiver of the provisions set forth in
Section 25.1.1, the acceptance by Lessor of such assignee, subtenant or
occupant, as the case may be, as a tenant or release of Tenant from the future
performance of its covenants, agreements or obligations contained in this Lease.
Section 25.1.4. No subletting or assignment shall in any way impair
the continuing primary liability of Tenant hereunder, and no consent to any
subletting or assignment in an particular instance shall be deemed a waiver of
the prohibition set forth in this Section 25.1. No assignment, subletting or
occupancy shall affect the Primary Intended Use. Any subletting, assignment or
other transfer of Tenant's interest in this Lease in contravention of this
Section 25.1 shall be void at Lessor's option.
Section 25.1.5. If Tenant shall desire to assign this Lease or sublet
all (but not a portion) of any Leased Property other than an assignment or
sublease to an Affiliate, it shall first submit in writing to Lessor a notice
("Tenant's Notice") indicating (a) the name of the proposed assignee or
- - -----------------
subtenant, (b) the material terms of the proposed assignment or sublease, (c)
the nature and character of the business which the proposed assignee or
subtenant will conduct at the applicable Leased Property, (d) reasonable
financial data concerning the proposed assignee or subtenant, and (e) the
effective date of the proposed assignment or the commencement date and
expiration date of the proposed sublease. Tenant shall additionally submit to
Lessor any other information concerning the proposed sublease which Lessor may
reasonably request. If such notice is given, Lessor may, at its option
terminate this Lease in the case of an assignment or terminate this Lease as to
the applicable Leased Property in the case of a sublease. Lessor shall exercise
its option by notice to Tenant within 30 days after Tenant's Notice (or receipt
by Lessor of all information reasonably requested by Lessor pursuant to this
Section 21.1.5),
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<PAGE>
and during such 30-day period, Tenant shall not have the right to assign this
Lease or sublet such space.
Section 25.1.6. If Lessor exercises its option under Section 21.1.5
to terminate this Lease, this Lease shall terminate (either as to each Leased
Property or as to the applicable Leased Property, whichever is applicable) on
the date which is 60 days following Tenant's Notice or on such later date as may
be specified in Tenant's Notice, and all Rent shall be paid and apportioned to
the date of such termination. If Lessor shall exercise its options under
Section 21.1.5, Lessor may, and shall have no liability to Tenant if Lessor
shall, lease to Tenant's prospective subtenant or assignee.
Section 25.1.7. If Lessor shall give its consent to any assignment or
subletting, Tenant shall, in consideration therefor, pay to Lessor, as
Additional Charges as and when payable to Tenant, 20% of any consideration
received on account of the assignment and (ii) 20% of the excess of (x) any
rents, additional charges, or other consideration payable under the sublease by
the subtenant to Tenant, after deducting therefrom brokerage commissions, legal
fees incurred in connection with such subletting over (y) Rent accruing during
----
the term of the sublease pursuant to the terms hereof (such excess, the
"Sublease Profits").
----------------
Section 25.1.8. Any assignment and/or sublease must provide that (a)
it shall be subject and subordinate to all of the terms and conditions of this
Lease, (b) the use of the applicable Leased Property shall be restricted to the
applicable Primary Intended Use and shall not conflict with any Legal
Requirement, Insurance Requirement or any other provision of this Lease, (c) no
sublessee or assignee shall be permitted to further sublet all or any part of
the applicable Leased Property or assign this Lease or its sublease except as
expressly provided in this Lease and (d) in the event of cancellation or
termination of this Lease for any reason whatsoever or of the surrender of this
Lease whether voluntary, involuntary or by operation of law, prior to the
expiration date of such sublease, including extensions and renewals granted
thereunder, at Lessor's option, the subtenant shall make full and complete
attornment to Lessor for the balance of the term of the sublease, which
attornment shall be evidenced by an agreement in form and substance satisfactory
to Lessor and which the subtenant shall execute and deliver within 5 days after
request by Lessor, its successors or assigns and the subtenant shall waive the
provisions of any law now or hereafter in effect which may give the subtenant
any right of election to terminate the sublease or to surrender possession in
the event any proceeding is brought by Lessor to terminate this Lease.
Section 25.1.9. Any assignment of this Lease or sublease of the
applicable Leased Property in contravention of the express terms of this Article
XXI shall be voidable at Lessor's option and the acceptance of rent by Lessor
from any such
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unauthorized assignee or subtenant shall not constitute a recognition or
acceptance of the tenancy of such unauthorized assignee or subtenant.
Section 25.1.10. Tenant shall pay to Lessor, within ten (10) business
days after request therefor, all costs and expenses, including without
limitation reasonable attorney's fees, incurred by Lessor in connection with
any request by Tenant to assign this Lease or sublet the applicable Leased
Property.
Section 25.2. Attornment. Tenant shall insert in each sublease
----------
permitted under Section 25.1 provisions to the effect that (a) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and to
the rights of Lessor hereunder, (b) in the event this Lease shall terminate
before the expiration of such sublease, the subtenant thereunder will, at
Lessor's option, attorn to Lessor and waive any right the subtenant may have to
terminate the sublease or to surrender possession thereunder, as a result of the
termination of this Lease, and (c) in the event the subtenant receives a written
notice from Lessor or Lessor's assignees, if any, stating that Tenant is in
Default under this Lease, the subtenant shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct. All rentals received from the subtenant by Lessor
or Lessor's assignees, if any, as the case may be, shall be credited against the
amounts owing by Tenant under this Lease.
Section 25.3. Sublease Limitation. Anything contained in this Lease
-------------------
to the contrary notwithstanding, Tenant shall not sublet the Leased Property on
any basis such that the rental to be paid by the subtenant thereunder would be
based, in whole or in part, on either (i) the income or profits derived by the
business activities of the subtenant, or (ii) any other formula such that any
portion of the sublease rental received by Lessor would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the Code, or
any similar or successor provision thereto.
ARTICLE XXVI
-------------
Section 26.1. Officer's Certificates and Financial Statements.
-----------------------------------------------
(a) At any time and from time to time upon Tenant's receipt of not
less than twenty (20) days prior written request by Lessor, Tenant will furnish
to Lessor an Officer's Certificate certifying that this Lease is unmodified and
is in full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifica tions) and the dates to which the Rent
has been paid, that Tenant is not in default in the performance or observance of
any of the terms of this Lease and that no event exists which with the giving of
notice, lapse of time, or both would constitute an Event of Default, or if an
Event of Default exists, specifying in reasonable detail such Event of Default
and the steps being taken to remedy the same, and such additional information as
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Lessor may reasonably request. Any such certificate furnished pursuant to this
Section may be relied upon by Lessor and any prospective purchaser or mortgagee
of any Leased Property.
(b) Tenant will furnish or cause Guarantor to furnish the following
financial statements to Lessor:
(i) Annual audit of Tenant and its consolidated Subsidiaries;
(ii) All facility-specific information reasonably required or
requested by any Facility Mortgagee;
(iii) Such information regarding the operations at the applicable
Facility that is required by a Superior Mortgagee;
(iv) Such information as Lessor shall reasonably request following the
occurrence of an Event of Default.
(v) Such financial and other information as Lessor shall reasonably
request during the final year of the Term with respect to any Facility.
ARTICLE XXVII
--------------
Section 27.1. Lessor's Right to Inspect. Tenant shall permit Lessor
-------------------------
and its authorized representatives to inspect any Leased Property during usual
business hours upon not less than three (3) Business Days' notice, subject to
any security, health, safety or confidentiality requirements of Tenant or any
governmental agency or insurance requirement relating to the Leased Property, or
imposed by law or applicable regulations.
ARTICLE XXVIII
---------------
Section 28.1. No Waiver. No failure by Lessor or Tenant to insist
---------
upon the strict performance of any term hereof or to exercise any right, power
or remedy consequent upon a breach thereof, and no acceptance of full or partial
payment of Rent during the continuance of any such breach, shall constitute a
waiver of any such breach or of any such term. To the extent permitted by law,
no waiver of any breach shall affect or alter this Lease, which shall continue
in full force and effect with respect to any other then existing or subsequent
breach.
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ARTICLE XXIX
-------------
Section 29.1. Remedies Cumulative. To the extent permitted by law,
-------------------
each legal, equitable or contractual right, power and remedy of Lessor or Tenant
now or hereafter provided either in this Lease or by statute or otherwise shall
be cumulative and concurrent and shall be in addition to every other right,
power and remedy and the exercise or beginning of the exercise by Lessor or
Tenant or any one or more of such rights, powers and remedies shall not preclude
the simultaneous or subsequent exercise by Lessor or Tenant of any or all of
such other rights, powers and remedies.
ARTICLE XXX
------------
Section 30.1. Acceptance of Surrender. No surrender to Lessor of
-----------------------
this Lease or of any Leased Property or any part of any thereof, or of any
interest herein or therein, shall be valid or effective unless agreed to and
accepted in writing by Lessor and no act by Lessor or any representative or
agent of Lessor, other than such a written acceptance by Lessor, shall
constitute an acceptance of any such surrender.
ARTICLE XXXI
-------------
Section 31.1. No Merger of Title. There shall be no merger of this
------------------
Lease or of the leasehold estate created thereby by reason of the fact that the
same person, firm, corporation or other entity may acquire, own or hold,
directly or indirectly, (a) this Lease or the leasehold estate created hereby or
any interest in this Lease or such leasehold estate and (b) the fee estate in
any Leased Property.
ARTICLE XXXII
--------------
Section 32.1. Conveyance by Lessor. If Lessor or any successor owner
--------------------
of any Leased Property shall convey such Leased Property in accordance with the
terms hereof other than as security for a debt, and the grantee or transferee of
the Leased Property shall expressly assume all obligations of Lessor hereunder
with respect to such Leased Property arising or accruing from and after the date
of such conveyance or transfer, and shall be reasonably capable of performing
the obligations of Lessor hereunder, Lessor or such successor owner, as the case
may be, shall thereupon be released from all future liabilities and obligations
of Lessor under this Lease with respect to such Leased Property arising or
accruing from and after the date of such conveyance or other transfer as to such
Leased Property and all such future liabilities and obligations with respect to
such Leased Property shall thereupon be binding upon the new owner.
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ARTICLE XXXIII
---------------
Section 33.1. Quiet Enjoyment. So long as Tenant shall pay all Rent
---------------
as the same becomes due and shall fully comply with all of the terms of this
Lease and fully perform its obligations hereunder and thereunder, Tenant shall
peaceably and quietly have, hold and enjoy each Leased Property for the Term
hereof, free of any claim or other action by Lessor or anyone claiming by,
through or under Lessor, but subject to all liens and encumbrances of record as
of the date hereof or otherwise permitted to be created by Lessor hereunder,
liens as to the obligations of Lessor that are either not yet due or which are
being contested in good faith and by proper proceedings, and liens hereafter
consented to by Tenant. No failure by Lessor to comply with the foregoing
covenant shall give Tenant any right to cancel or terminate this Lease or abate,
reduce or make a deduction from or offset against the Rent or any other sum
payable under this Lease, or to fail to perform any other obligation of Tenant
hereunder. Notwithstanding the foregoing, Tenant shall have the right, by
separate and independent action, to pursue any claim it may have against Lessor
as a result of a breach by Lessor of the covenant of quiet enjoyment contained
in this Section.
ARTICLE XXXIV
--------------
Section 34.1. Notices. All notices, demands, requests, consents,
-------
approvals and other communications hereunder shall be in writing and delivered
or mailed (by registered or certified mail, return receipt requested or
reputable nationally recognized overnight courier service and postage prepaid),
addressed to the respective parties, as follows:
(a) if to Tenant:
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
Attention: Chief Financial Officer
with a copy to:
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
Attention: General Counsel
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<PAGE>
(b) if to Lessor:
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
Attention: President
with a copy to:
400 West Market Street
Suite 3300
Aegon Center
Louisville, Kentucky 40202
Attention: General Counsel
or to such other address as either party may hereunder designate, and shall be
effective upon receipt.
ARTICLE XXXV
-------------
Section 35.1. Appraisers. In the event that it becomes necessary to
----------
determine the Fair Market Value, Fair Market Value Purchase Price or Fair Market
Rental of any property for any purpose of this Lease, and the parties cannot
agree amongst themselves on such value, the party required or permitted to give
notice of such required determination shall include in the notice the name of a
person selected to act as appraiser on its behalf. Within 10 days after receipt
of any such notice, Lessor (or Tenant, as the case may be) shall by notice to
Tenant (or Lessor, as the case may be) appoint a second person as appraiser on
its behalf. The appraisers thus appointed, each of whom must be a member of the
American Institute of Real Estate Appraisers (or any successor organization
thereto), shall, within 45 days after the date of the notice appointing the
first appraiser, proceed to appraise the applicable Leased Property to determine
the Fair Market Value, Fair Market Value Purchase Price, Fair Market Rental,
thereof as of the relevant date (giving effect to the impact, if any, of
inflation from the date of their decision to the relevant date); provided,
--------
however, that if one appraiser shall have been so appointed, or if two
- - -------
appraisers shall have been so appointed but only one such appraiser shall have
made such determination within 50 days after the making of Tenant's or Lessor's
request, then the determination of such appraiser shall be final and binding
upon the parties. To the extent consistent with sound appraisal practice as then
existing at the time of any such appraisal, such appraisal shall be made on a
basis consistent with the basis on which the applicable Leased Property was
appraised for
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purposes of determining its Fair Market Value at the time such Leased Property
was acquired by Lessor, which basis is described on Exhibit F annexed hereto.
---------
If two appraisers shall have been appointed and shall have made their
determinations within the respective requisite periods set forth above and if
the difference between the amounts so determined shall not exceed ten percent
(10%) of the lesser of such amounts, then the Fair Market Value, Fair Market
Value Purchase Price or Fair Market Rental shall be an amount equal to 50% of
the sum of the amounts so determined. If the difference between the amounts so
determined shall exceed ten percent (10%) of the lesser of such amounts, then
such two appraisers shall have 20 days to appoint a third appraiser, but if such
appraisers fail to do so, then either party may request the American Arbitration
Association or any successor organization thereto to appoint an appraiser within
20 days of such request, and both parties shall be bound by any appointment so
made within such 20 day period. If no such appraiser shall have been appointed
within such 20 days or within 90 days of the original request for a
determination of Fair Market Value, Fair Market Value Purchase Price or Fair
Market Rental, whichever is earlier, either Lessor or Tenant may apply to any
court having jurisdiction to have such appointment made by such court. Any
appraiser appointed by the original appraisers, by the American Arbitration
Association or by such court shall be instructed to determine the Fair Market
Value, Fair Market Value Purchase Price or Fair Market Rental within 30 days
after appointment of such Appraiser. The determination of the appraiser which
differs most in terms of dollar amount from the determination of the other two
appraisers shall be excluded, and 50% of the sum of the remaining two
determinations shall be final and binding upon Lessor and Tenant as the Fair
Market Value, Fair Market Value Purchase Price or Fair Market Rental for such
interest. This provision for determination by appraisal shall be specifically
enforceable to the extent such remedy is available under applicable law, and any
determination hereunder shall be final and binding upon the parties except as
otherwise provided by applicable law. Lessor and Tenant shall each pay the fees
and expenses of the appraiser appointed by it and each shall pay one-half of the
fees and expenses of the third appraiser and one-half of all other cost and
expenses incurred in connection with each appraisal.
ARTICLE XXXVI
--------------
Section 36.1. General REIT Provisions.
-----------------------
Section 36.1.1. Tenant understands that, in order for Lessor to
qualify as a real estate investment trust ("REIT"), the following requirements
----
(the "REIT Requirements") must be satisfied:
(i) The average of the adjusted tax bases of Lessor's personal
property that is leased to Tenant under a lease at the beginning and end
of a calendar year cannot exceed 15% of the average of the aggregate
adjusted tax
61
<PAGE>
bases of all of Lessor's property that is leased to Tenant under such lease
at the beginning and end of such calendar year.
(ii) Tenant cannot sublet the property that is leased to it by
Lessor, or enter into any similar arrangement, on any basis such that the
rental or other amounts paid by the sublessee thereunder would be based, in
whole or in part, on either (i) the net income or profits derived by the
business activities of the sublessee or (ii) any other formula such that
any portion of the rent paid by Tenant to Lessor would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the
Code.
(iii) Tenant cannot sublease the property leased to it by Lessor
to, or enter into any similar arrangement with, any person in which Lessor
owns, directly or indirectly, a 10% or more interest, within the meaning of
Section 856(d)(2)(B) of the Code.
(iv) Lessor cannot own, directly or indirectly, a 10% or more
interest in Tenant, within the meaning of Section 856(d)(2)(B) of the Code.
Section 36.1.2. Tenant agrees, and agrees to use reasonable efforts
to cause its Affiliates, to use their best efforts to permit the REIT
Requirements to be satisfied. Tenant agrees and agrees to use reasonable
efforts to cause its Affiliates, to cooperate in good faith with Lessor or to
ensure that the REIT Requirements are satisfied, including but not limited to,
providing Lessor with information about the ownership of Tenant, and its
Affiliates to the extent that such information is reasonably available. Tenant
agrees, and agrees to use reasonable efforts to cause its Affiliates, upon
request by to take reasonable action necessary to ensure compliance with the
REIT Requirements. Immediately after becoming aware that the REIT Requirements
are not, or will not be, satisfied, Tenant shall notify, or use reasonable
efforts to cause its Affiliates to notify Lessor of such noncompliance.
ARTICLE XXXVII
---------------
Section 37.1. First Refusal to Purchase. During the first three
-------------------------
years of the Initial Term, Tenant shall have a first refusal option to purchase
any and each Leased Property upon the same terms and conditions as Lessor shall
propose to sell the applicable Leased Property, or upon the same terms and
conditions of any offer from a third party to purchase the applicable Leased
Property which Lessor intends to accept (or has accepted subject to Tenant's
right of first refusal herein). If, during the first three years of the Initial
Term, Lessor reaches such agreement with a third party or proposes to offer any
Leased Property for sale, Lessor shall promptly notify Tenant of the purchase
price and all other material terms and conditions of such agreement or proposed
sale and
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<PAGE>
Tenant shall have thirty (30) days after receipt of such notice from Lessor
within which time to exercise Tenant's option to purchase. If Tenant exercises
its option, then such transaction shall be consummated within sixty (60) days
after the date of receipt by Lessor of notice of such exercise in accordance
with the terms and conditions of such agreement, as to price and the other
conditions set forth therein and in accordance with the provisions of Article
XVIII hereof to the extent not inconsistent therewith, on the first day of the
first month after all permits for owning or operating the Facility on the Leased
Property have been obtained by Tenant, but in no event later than 120 days after
the date of receipt by Lessor of notice of the exercise by Tenant of this
option. If Tenant shall not exercise Tenant's option to purchase within said
thirty (30) day period after receipt of said notice from Lessor, Lessor shall be
free for a period of one year after the expiration of said 30 day period to sell
the applicable Leased Property to any third party at a price and upon terms no
less favorable to Lessor than those so offered to Tenant. Whether or not such
sale is consummated, Tenant shall be entitled to exercise its right of first
refusal as provided in this section, as to any subsequent sale of the applicable
Leased Property during the first three (3) years of the Term of this Lease. The
provisions of this Section 37.1 shall not apply to any transaction involving (i)
the sale of stock of Lessor, (ii) the sale of all or substantially all of
Lessor's assets, (iii) any transfer of the applicable Leased Property to a
Facility Mortgagee in connection with the financing of such Leased Property, or
(iv) the transfer of any Leased Property to an Affiliate of Lessor.
Section 37.2. Lessor's Option to Purchase the Tenant's Personal
-------------------------------------------------
Property. Effective on not less than ninety (90) days prior written notice
- - --------
given at any time within one hundred eighty (180) days prior to the expiration
of the Term, but not later than ninety (90) days prior to such expiration, or
such shorter notice as shall be appropriate if this Lease is terminated prior to
the expiration of the Term, Lessor shall have the option to purchase all (but
not less than all) of Tenant's Personal Property located at any Leased Property,
if any, at the expiration or termination of the Term, for an amount equal to (i)
the book value thereof if such termination is due to an Event of Default or (ii)
the then net value thereof (current replacement cost less accumulated
depreciation on the books of Tenant pertaining thereto) if such termination is
not caused by an Event of Default, subject to, and with appropriate price
adjustments for, all equipment leases, conditional sale contracts, UCC-1
financing statements (including their financial statements filed in connection
with the Leasehold Mortgage) and other encumbrances to which such Personal
Property is subject.
ARTICLE XXXVIII
---------------
Section 38.1. Lessor May Grant Liens. Without the consent of Tenant,
----------------------
Lessor may, subject to the terms and conditions set forth below in this Section
38.1, from time to time, directly or indirectly, create or otherwise cause to
exist any lien, encumbrance or title retention agreement ("Encumbrance") upon
-----------
any Leased Property or
63
<PAGE>
any portion thereof or interest therein, whether to secure any borrowing or
other means of financing or refinancing. Any such Encumbrance may provide that
Tenant's right of first refusal to purchase the Leased Property shall not be
applicable upon a foreclosure sale or transfer in lieu thereof; provided,
--------
however, that any such purchaser or transferee shall take title subject to
- - -------
Tenant's rights to acquire the applicable Leased Property. Any lender, which
takes an interest in the applicable Leased Property pursuant to this Article
XXXVIII, (a) shall agree to give Tenant the same notice, if any, given to Lessor
of any default or acceleration of any obligation underlying any such mortgage or
any sale in foreclosure under such mortgage, (b) shall agree to permit Tenant to
cure any such default on Lessor's behalf within any applicable cure period, and
Tenant shall be reimbursed by Lessor for any and all out-of-pocket costs
incurred to effect any such cure (including reasonable attorneys' fees), (c)
shall agree to permit Tenant to appear by its representative and to bid at any
sale in foreclosure made with respect to any such mortgage and (d) shall agree
not to disturb Tenant's possession so long as Tenant is not in default in
performing its obligations hereunder.
ARTICLE XXXIX
-------------
Section 39.1. Environmental Indemnity. Tenant hereby agrees to hold
-----------------------
harmless Lessor, any successors to Lessor's interest in this Lease and in any
Leased Property, and Lessor's and such successors' directors, officers,
partners, members, employees and agents from and against any losses, claims,
damages (including consequential damages), penalties, fines, liabilities
(including strict liability), costs (including cleanup and recovery costs), and
expenses (including expenses of litigation and reasonable attorneys' fees)
incurred by Lessor or any other indemnitee or assessed against the Leased
Property by virtue of any claim or lien by any governmental or quasi-
governmental unit, body, or agency, or any third party, for cleanup costs or
other costs pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, all as amended from time to time, and
all state laws and federal and state regulations pursuant to the foregoing
(collectively "Environmental Laws"). Tenant's indemnity shall survive the
termination of this Lease. Provided, however, Tenant shall have no indemnity
obligation with respect to (i) Hazardous Materials first introduced to the
Leased Property subsequent to the date that Tenant's occupancy of the applicable
Leased Property shall have fully terminated or (ii) Hazardous Material first
introduced to the Leased Property prior to the date hereof, except to the extent
arising from any deterioration after the date hereof in any condition existing
prior to the date hereof. "Hazardous Materials" means any substance the presence
of which poses a hazard to the health or safety of persons on or about the
Leased Property or which requires removal or remediation under any Environmental
Law, including without limitation, any substance which is toxic, explosive,
flammable, radioactive, or otherwise hazardous or is included within the meaning
of "hazardous substance", "hazardous waste", "toxic substance", or
64
<PAGE>
"pollutant" as defined in any Environmental Law. At any time during the Term of
this Lease, Lessor may require one or more environmental audits of the Leased
Premises, in such form, scope and substance as specified by Lessor, at Tenant's
expense. Tenant shall, within thirty (30) days after receipt of an invoice from
Lessor, reimburse Lessor for all costs and expenses incurred in reviewing any
environmental audit, including without limitation, reasonable attorneys' fees
and costs.
ARTICLE XL
-----------
MISCELLANEOUS
-------------
Section 40.1. _________. Anything contained in this Lease to the
contrary notwithstanding, all claims against, and liabilities of, the Tenant or
Lessor arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application hereof
shall be invalid or unenforceable, the remainder of this Lease and any other
application of such term or provision shall not be affected thereby. If any
late charges provided for in any provision of this Lease are based upon a rate
in excess of the maximum rate permitted by applicable law, the parties agree
that such charges shall be fixed at the maximum permissible rate. Neither this
Lease nor any provision hereof may be changed, waived, discharged or terminated
except by an instrument in writing and in recordable form signed by Lessor and
Tenant. All the terms and provisions of this Lease shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. The headings in this Lease are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
Section 40.2. ___________. Tenant specifically agrees to look solely
to Lessor's assets for recovery of any judgment from Lessor, it being
specifically agreed that no constituent partner in Lessor, shall ever be
personally liable for any such judgment or for the payment of any monetary
obligation to Tenant. The provision contained in the foregoing sentence is not
intended to, and shall not, limit any right that Tenant might otherwise have to
obtain injunctive relief against Lessor or Lessor's successors in interest, or
any action not involving the personal liability of Lessor (original or
successor).
Furthermore, except as otherwise expressly provided herein, in no
event shall Lessor (original or successor) ever be liable to Tenant for any
indirect or consequential damages suffered by Tenant from whatever cause.
Section 40.3. __________. Upon the expiration or earlier termination
of the Term, Tenant shall transfer, to the extent permitted by applicable law,
to Lessor or Lessor's nominee and cooperate with Lessor or Lessor's nominee in
connection with the
65
<PAGE>
processing by Lessor or Lessor's nominee of any applications for all licenses,
operating permits, certificates of need, certificates of exemption and other
governmental authorizations, including licenses, permits, certificates of need
and certificates of exemption with quasi-governmental entities any of which may
be necessary for the operation of the Leased Property and the Facility located
thereon for its Primary Intended Use; provided that the costs and expenses of
--------
any such transfer or the processing of any such application shall be paid by
Lessor or Lessor's nominee unless such termination results from an Event of
Default, in which event the costs and expenses of any such transfer or the
processing of any such application shall be paid by Tenant. It is the express
intention of the parties that at the expiration or earlier termination of the
Term, any and all certificates of need, certificates of exemption and similar
governmental authorizations (collectively, a "CON") needed to operate the
applicable Leased Property for its Primary Intended Use shall remain with the
Leased Property and shall be transferred into the name of Lessor or Lessor's
nominee, regardless of whether such CON is in the name of Tenant at any time
during the Term. Moreover, upon the expiration or earlier termination of this
Lease, Tenant shall cooperate with Lessor in the orderly transfer of operations
at the applicable Facility.
Section 40.4. __________. Lessor and Lessor's agent shall have the
right to enter the applicable Leased Property at all reasonable times for the
purpose of entering exhibiting the Leased Property to others (i) if Tenant has
not exercised its right with respect to any applicable Extended Term within the
time period set forth in this Lease, or (ii) during the last eighteen (18)
months of the final Extended Term.
Section 40.5. _________. This Lease contains the entire agreement
between Lessor and Tenant with respect to the subject matter hereof. No
representations, warranties or agreements have been made by Lessor except as set
forth in this Lease.
Section 40.6. ____________. If any term or provision of this Lease
is held or deemed by Lessor to be invalid or unenforceable, such term or
provision shall be modified as slightly as possible so as to render it valid and
enforceable; if such term or provision, as modified, shall be held or deemed
invalid or unenforceable, such holding shall not affect the remainder of this
Lease and same shall remain in full force and effect, unless such holding
substantially deprives Tenant of the use of the Leased Property or Lessor of the
rents herein reserved, in which event this Lease shall forthwith terminate as if
by expiration of the Term.
Section 40.7. ____________. (a) All rights, powers and remedies
provided herein may be exercised only to the extent that the exercise thereof,
including those which do not require the giving of notice, does not violate any
applicable law, and are intended to be limited to the extent necessary so that
they will not render this Lease invalid or unenforceable under any applicable
law. All waivers, consents, confessions
66
<PAGE>
and releases provided for in this Lease are effective only to the extent
permitted by applicable law.
(b) This Lease was negotiated in the State of New York, which State
the parties agree has a substantial relationship to the parties and to the
underlying transaction embodied hereby. In all respects, the law of the State
of New York shall govern the validity of and enforceability of the obligations
of the parties set forth herein, but all provisions hereof relating to the
creation of the leasehold estate and remedies set forth in Article XVI shall be
governed by the laws of the State in which each applicable Leased Property that
is the subject of dispute is located and the parties hereto will submit to
jurisdiction and the laying of venue for any suit on this Lease in the
Commonwealth of Kentucky.
Section 40.8. ____________. No waiver of any condition or covenant
herein contained, or of any breach of any such condition or covenant, shall be
held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach thereof
or of any condition or covenant herein construed as a waiver of such default, or
of Lessor's right to terminate this Lease or exercise any other remedy granted
herein on account of such existing default.
Section 40.9. ____________. This Lease shall be binding upon and
shall inure to the benefit of the heirs, successors, personal representatives,
and permitted assigns of Lessor and Tenant.
Section 40.10. ___________. This Lease may be only be modified by a
writing signed by both Lessor and Lessee.
Section 40.11. ____________. No delay or omission by either party
hereto to exercise any right or power accruing upon any noncompliance or default
by the other party with respect to any of the terms hereof shall impair any such
right or power or be construed to be a waiver thereof.
Section 40.12. _____________. In the event of an assignment of this
Lease or any sublease to an Affiliate of Vencor, Inc. pursuant to the terms of
this Lease, the payment of Minimum Rent and Additional Charges and the
performance of Tenant's obligations under this Lease are guaranteed by
Guarantor, pursuant to a Lease Guaranty.
Section 40.13. Louisiana Provisions. Notwithstanding anything to the
--------------------
contrary contained herein, with respect to any Leased Property located in
Louisiana, for all purposes of this Master Lease the word "servitude" shall be
substituted for the word "easement," the word "servitudes" shall be substituted
for the word "easements," the term "immovable property" shall be substituted for
the terms "real property" and "real estate"
67
<PAGE>
and the term "movable property" shall be substituted for the term "personal
property" wherever such terms appear in this Master Lease.
Section 40.14. ______________________________. Tenant hereby
acknowledges that Ventas, Inc. intends to transfer, after the date of this
Lease, its ownership interest in the Leased Properties to one or more limited
partnerships or limited liability companies, each of which will be a direct or
indirect Subsidiary of Ventas, Inc. Lessor will notify Tenant and Leasehold
Mortgagee of the identity of the transferee.
Section 40.15. ______________________________. Lessor shall have the
right, at any time and from time to time during the Term, to require Tenant to
execute an amendment to this Lease whereby this Lease is terminated as to one or
more Leased Properties and to simultaneously execute a substitute lease in the
same form as this Lease with respect to such Leased Properties.
Section 40.16. Lessor Consents. For all purposes of this Lease, the
---------------
term "Lessor" shall be deemed to mean the record owner of a Leased Property;
provided, however, the consent of Vencor, Inc. shall be sufficient for all
- - -------- -------
Leased Properties.
ARTICLE XLI
------------
Section 41.1. Memorandum of Lease. Lessor and Tenant shall, promptly
-------------------
upon the request of either enter into a short form memorandum of this Lease, in
form suitable for recording under the laws of the state in which each Leased
Property is located, in which reference to this Lease, and all options contained
herein, shall be made. Tenant shall pay all costs and expenses of recording such
Memorandum of Lease.
68
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be executed
and their respective corporate seals to be hereunto affixed and attested by
their respective officers hereunto duly authorized.
Witness VENCOR, INC.
By:
- - --------------------------------------- -----------------------------------
Name: Name:
Title:
- - ---------------------------------------
Name:
FIRST HEALTHCARE CORPORATION
By:
- - --------------------------------------- -----------------------------------
Name: Name:
Title:
- - ---------------------------------------
Name:
NATIONWIDE CARE, INC.
By:
- - --------------------------------------- -----------------------------------
Name: Name:
Title:
- - ---------------------------------------
Name:
VENCOR HEALTHCARE, INC.
By:
- - --------------------------------------- -----------------------------------
Name: Name:
Title:
- - ---------------------------------------
Name:
69
<PAGE>
VENCOR OPERATING, INC.
By:
- - --------------------------------------- -----------------------------------
Name: Name:
Title:
- - ---------------------------------------
Name:
70
<PAGE>
ALL-PURPOSE ACKNOWLEDGMENT
STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
On April __, 1998 before me, a notary public, personally appeared ____________,
[_] personally known to me-OR-
[_] proved to me on the basis of satisfactory evidence to be the person(s)
whose name(s) is/are subscribed to the within instrument and acknowledged
to me that he/she/they executed the same in his/her/their authorized
capacity(ies), and that by his/her/their signature(s) on the instrument
the person(s), or the entity upon behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
-----------------------
SIGNATURE OF NOTARY
CAPACITY CLAIMED BY SIGNER: SIGNER IS REPRESENTING
NAME OF PERSON(S) OR ENTITY(IES)
[_] INDIVIDUALS(S)
[_] CORPORATE OFFICER(S) (Company/Other Data)
--------------------
TITLE
--------------------
TITLE
[_] PARTNER(S)
[_] ATTORNEY-IN-FACT
[_] TRUSTEE(S)
[_] OTHER
----------------
---------------------
---------------------
71
<PAGE>
Exhibit A
---------
[Legal Descriptions]
72
<PAGE>
Exhibit B
---------
Term/Commencement Date/Expiration Date
73
<PAGE>
Exhibit C
---------
Minimum Rent
74
<PAGE>
Exhibit D
---------
Renewal Groups
75
<PAGE>
Exhibit E
---------
Minimum Repurchase Price
76
<PAGE>
Exhibit F
---------
Basis for Appraisal
77
<PAGE>
EXHIBIT 10.9
FIRST AMENDMENT TO MASTER LEASE AGREEMENT
This FIRST AMENDMENT TO MASTER LEASE AGREEMENT, dated as of December
31, 1998, but effective as of April 30, 1998 (this "Amendment"), is entered into
by and among Ventas, Inc., formerly known as Vencor, Inc., a Delaware
corporation ("Ventas") and Ventas Realty, Limited Partnership, a Delaware
limited partnership ("Ventas LP", and together with Ventas, "Lessor") and Vencor
Operating, Inc. ("Current Tenant"), a Delaware corporation and Vencor, Inc.,
formerly known as Vencor Healthcare, Inc., a Delaware corporation ("Vencor").
WHEREAS, First Healthcare Corporation, a Delaware corporation,
Nationwide Care, Inc., an Indiana Corporation, Northwest Health Care, Inc., an
Idaho corporation, Hillhaven of Central Florida, Inc., a Delaware corporation,
Vencor Hospitals East, Inc., a Delaware corporation, Hahnemann Hospital, Inc., a
Delaware corporation, Hillhaven/Indiana Partnership, a Washington general
partnership, Carrollwood Care Center, a Tennessee general partnership, New Pond
Village Associates, a Massachusetts general partnership, St. George Nursing Home
Limited Partnership, an Oregon limited partnership, San Marcos Nursing Home
Partnership, a California general partnership, Vencor Hospitals Illinois, Inc.,
a Delaware corporation, Windsor Woods Nursing Home Partnership, a Washington
general partnership, Health Haven Associates, L.P. a Rhode Island limited
partnership, Oak Hill Nursing Associates, L.P., a Rhode Island limited
partnership (collectively, the "Subsidiaries") and Lessor (the Subsidiaries
together with Lessor referred to herein as "Original Lessor"), as lessor, and
Vencor, together with its permitted assigns, including Current Tenant (Vencor
together with Current Tenant referred to herein as "Original Tenant"), as
tenant, entered into that certain Master Lease Agreement, dated April 30, 1998
(the "Master Lease Agreement") pursuant to which, inter alia, Original Lessor
leased to Original Tenant and Original Tenant leased from Original Lessor the
Leased Properties (as defined in the Master Lease Agreement) (capitalized terms
used herein but not defined herein shall have the meanings assigned to them in
the Master Lease Agreement); and
WHEREAS, pursuant to that certain Assignment and Assumption of Master
Lease, dated April 30, 1998, by and between Vencor, as assignor, and Current
Tenant, as assignee, Vencor assigned all of its right, title and interest in, to
and under the Master Lease Agreement to Current Tenant; and
WHEREAS, Ventas is the successor by merger to each of the
Subsidiaries; and
WHEREAS, Lessor and Current Tenant desire to amend the Master Lease
Agreement in the manner set forth herein.
<PAGE>
NOW THEREFORE, in consideration of the mutual agreements contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Article III of the Master Lease Agreement is hereby amended by
inserting in the first line of Section 3.1(a), immediately after the phrase
"$86,391,000" the following "("Minimum Rent")."
------------
2. Article VII of the Master Lease Agreement is hereby amended by
deleting the text of Section 7.4 in its entirety and substituting therefor the
following new Section 7.4:
"Section 7.4. Lessor and Tenant to Execute Lease Supplement. Lessor
---------------------------------------------
and Tenant agree that, with respect to those certain Leased Properties indicated
on Exhibit B hereto by the placement of a "Y" opposite the name of the Leased
Property under the column "Mgd" ("Deferred Leased Properties"), from time to
--------------------------
time, and as certain regulatory issues with respect to such properties are
resolved, Lessor and Tenant shall execute a Lease Supplement ("Lease
-----
Supplement") to provide that this Lease is effective as to such properties.
- - ----------
Such Lease Supplement shall set forth the term of this Lease with respect to
each such Deferred Leased Property (including the applicable Commencement Date
for such Property). The Minimum Rent payable under this Lease shall be
increased, as of each such Commencement Date, by the amount set forth opposite
the name of such Leased Property under the column marked "Annual Rent" on
Exhibit C hereto."
- - ---------
3. Except as set forth herein the Master Lease Agreement is
unmodified and remains in full force and effect. The Master Lease Agreement, as
amended hereby and each and every provision, covenant, representation, warranty,
condition and right contained therein, as amended by this Amendment, is hereby
ratified and affirmed as of the date hereof, and shall continue in full force
effect.
4. Vencor acknowledges that it has been fully informed of, consented
to and approved all of the amendments to the Master Lease Agreement set forth in
this Amendment.
5. This Amendment is binding upon the parties hereto and their
respective successors, executors, administrators, legal representatives, heirs
and legal assigns.
-2-
<PAGE>
6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
7. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
[remainder of page intentionally left blank]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their authorized representatives, all as of the day and year
first above written.
LESSOR:
------
Witnesses: VENTAS, INC., formerly known as
Vencor Inc.
_______________________________________ By:________________________________
Name: Name:
Title:
_______________________________________
Name:
VENTAS REALTY, LIMITED PARTNERSHIP
_______________________________________
Witnesses: By: Ventas, Inc., its general
partner
_______________________________________
Name: By:_____________________________
Name:
Title:
- - ---------------------------------------
Name:
CURRENT TENANT:
--------------
-4-
<PAGE>
Witnesses: VENCOR OPERATING, INC.
_______________________________________ By:_____________________________
Name: Name:
Title:
_______________________________________
Name:
Acknowledged and agreed to as of this 31st
day of December, 1998 by:
VENCOR, INC., formerly known as Vencor
Healthcare, Inc.
By:____________________________________
Name:
Title:
-5-
<PAGE>
EXHIBIT 10.10
DEVELOPMENT AGREEMENT
---------------------
THIS DEVELOPMENT AGREEMENT (this "Agreement") is made and entered into
---------
as of the ___ day of ________, 1998, by and between Vencor, Inc., a Delaware
corporation ("Vencor") and Vencor Healthcare, Inc., a Delaware corporation
------
("Healthcare Company").
- - --------------------
RECITALS
--------
WHEREAS, Healthcare Company and Vencor are parties to an Agreement and
Plan of Reorganization, dated as of the date hereof (the "Reorganization
--------------
Agreement"),which provides for certain reorganization transactions (the
- - ---------
"Reorganization Transactions"), including but not limited to, (i) certain
- - ----------------------------
internal mergers and stock and asset transfers that allocate the assets and
liabilities relating to substantially all of the Vencor-owned land, buildings
and other improvements and real estate related assets (the "Real Estate
-----------
Business") to Vencor, which will change its name immediately prior to the
Distribution (as defined herein) to "Ventas, Inc." and allocate the other assets
and liabilities relating to the historical operations of Vencor, including the
properties listed on Exhibit A which are properties under development or to be
---------
developed (the "Development Properties") by Healthcare Company (the "Healthcare
---------------------- ----------
Business"), to Healthcare Company, which will change its name immediately prior
- - --------
to the Distribution to "Vencor, Inc.", (ii) Vencor leasing to Healthcare Company
pursuant to a master lease agreement (the "Master Lease Agreement") 46 long-term
----------------------
acute care hospitals and 210 nursing centers, and (iii) the completion by
Healthcare Company of the development of the Development Properties pursuant to
a development agreement and thereafter, at the option of Vencor, the sale to,
and lease back from, Vencor of the Development Properties;
WHEREAS, Healthcare Company and Vencor will be parties to a
Distribution Agreement, dated as of the date hereof (the "Distribution
------------
Agreement"), which provides for the distribution (the "Distribution") by Vencor
------------
to the holders of common stock, par value $.25 per share, of Vencor ("Vencor
------
Common Stock") of all the outstanding shares of common stock, par value $.25 per
- - ------------
share, of Healthcare Company ("Healthcare Company Common Stock") on the basis of
-------------------------------
one share of Healthcare Company Common Stock for every share of Vencor Common
Stock;
WHEREAS, Healthcare Company desires to complete, or cause to be
completed, the development of the Development Properties and thereafter, at the
option of Vencor, sell to, and lease back from, or cause to be sold to and
leased back from, Vencor, the Development Properties on the terms set forth in
this Agreement; and
WHEREAS, upon completion of development of the Development Properties,
Vencor or a subsidiary of Vencor may at the option of Vencor purchase from,
<PAGE>
and lease to, Healthcare Company, or a consolidated subsidiary of Healthcare
Company, the Development Properties on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and subject to and on the terms and conditions
herein set forth, the parties hereto agree as follows:
Section 1. Development in Accordance with Development Plans.
------------------------------------------------
Healthcare Company agrees to use reasonable efforts to develop, or
cause its subsidiaries to develop, each Development Property (each, a "Project")
-------
substantially in accordance with the Development Plan (as defined below) for
such Project. For the Projects identified in Exhibit B which are currently
---------
under construction or renovation, Healthcare Company shall use reasonable
efforts to adhere to (i) the plans and specifications (each, a "Plan"), (ii)
----
the construction schedule (each, a "Schedule") and (iii) the construction
--------
budgets (each, a "Budget") for each applicable Project as such Plans, Schedules
------
and Budgets exist on the date hereof. As soon as reasonably practical after the
date hereof, and in any event within 60 days after the date hereof, Healthcare
Company shall deliver to Vencor the Plan, Schedule and Budget for each Project
under construction or renovation on the date hereof. For the Projects scheduled
for future construction or renovation, Healthcare Company agrees to submit
Plans, Schedules and Budgets for each Project to Vencor no later than 30 days
prior to commencement of construction of the Project. Each applicable Plan,
Schedule and Budget for each such Project together constitute the "Development
-----------
Plan" for such Project. Healthcare Company will not make any material
- - ----
modifications to the Development Plan for any Project without providing prior
written notice to Vencor.
Section 2. Development Guidelines.
----------------------
Healthcare Company agrees that in connection with each Project
it will:
(a) (i) make all governmental filings and submissions
necessary to obtain those approvals, permits and authorizations which are
required in order for Healthcare Company to develop the Project and operate the
Project upon completion as a healthcare facility, and (ii) use its good faith
efforts to secure or cause to be secured all such necessary governmental
approvals, permits and authorizations;
(a) select and hire, where appropriate, reputable and (to the
extent applicable) licensed architects, engineers, designers, traffic
consultants, surveyors, attorneys and other consultants (the "Consultants") for
-----------
the development of the Project;
-2-
<PAGE>
(c) coordinate, monitor and inspect all phases of development of the
Project to ensure that the Project is being developed substantially in
accordance with its Development Plan;
(e) stablish administrative and control procedures and reporting for
the Project, including cost accounting, budgeting and scheduling, to
facilitate completion of the Project in accordance with its Development Plan
and promptly notify Vencor of any occurrence or circumstance that is
reasonably likely to materially delay or prevent completion of each Project
in accordance with its Development Plan;
(e) maintain accurate books and records, including operating
instructions, manuals, warranties, field record information, as-built
drawings, samples, shop-drawings and data with respect to the Project; and
(f) from the date hereof, permit Vencor to inspect the Project and the
books and records relating to the Project upon reasonable advance notice and
during reasonable business hours; and
(g) furnish to Vencor, when requested, but in no event more frequently
then on a quarterly basis, a detailed report which shall contain a statement
of costs incurred to date and any anticipated delay or material information
relating to each Project, or any significant phase of each Project, or any
significant deviation from the Development Plan for each Project for ensuing
periods.
Section 3. Option to Purchase and Lease-Back Development Properties.
--------------------------------------------------------
Section 3.1 Option to Purchase. Upon completion of development
-------------------
of a Project, Vencor shall have an option (the "Option") to purchase the
------
Project from Vencor and thereafter lease such Project back to Healthcare Company
in accordance with this Section 3.
Section 3.2 Purchase and Lease-Back of Development Properties.
--------------------------------------------------
(a) Upon substantial completion of development of a Project, Healthcare Company
shall deliver to Vencor notice of the costs for such Project (the "Cost
----
Schedule") which sets forth in reasonable detail the actual cost incurred by
- - --------
Healthcare Company in acquiring and developing such Project (the "Actual Cost").
-----------
Healthcare Company shall provide Vencor with full access to any information,
including the books and records of Healthcare Company relating to such Project,
necessary for Vencor to review the costs reflected on the Cost Schedule. Within
30 days following the delivery by Healthcare Company of the Cost Schedule,
Vencor shall deliver a notice (the "Option Notice") to Healthcare Company,
-------------
stating whether Vencor will or will not exercise its
-3-
<PAGE>
Option to purchase such Development Property from Healthcare Company at Actual
Cost through the date of closing and lease such Development Property back to
Healthcare Company in accordance with this Agreement.
(b) If Vencor delivers an Option Notice stating that it will exercise
the option with respect to the Development Property, Healthcare Company and
Vencor shall execute and deliver a Purchase and Sale Agreement (the "Purchase
--------
Agreement") with respect to such Project substantially in the form of Exhibit C
- - --------- ---------
hereto, which sets forth the terms and conditions for the sale by Healthcare
Company to Vencor of such Project.
(c) If Vencor delivers an Option Notice stating that it will not
exercise the Option with respect to a Development Property, Healthcare Company
shall be under no obligation to sell the completed Project to Vencor and may
solicit offers relating to the completed Project and may sell or retain the
same; provided, however, that Healthcare Company shall not sell the completed
Project to a third party for less than the Actual Cost.
Section 3.3 Lease of Development Properties. Simultaneously with the
-------------------------------
execution of the Purchase Agreement, Healthcare Company and Vencor shall execute
and deliver a Lease Agreement with respect to such Project substantially in the
form of Exhibit F hereto, which sets forth the terms and conditions for the
lease by Healthcare Company from Vencor of such Project. The commencement date
of such Lease Agreement shall be the date upon which the purchase and sale is
consummated pursuant to the Purchase Agreement. The initial annual base rent for
the lease of a Project will be 10% of the Actual Cost.
Section Third Party Developers.
----------------------
Upon completion of the Projects identified on Exhibit A as being
developed by a third party developer and leased to Healthcare Company by such
developer, the following procedure will apply:
If Healthcare Company exercises its right to purchase any such Project
from the third party developer, Healthcare Company must give notice to
Vencor that it has exercised such right. Vencor then shall have the
option to purchase such property on the same terms as Healthcare
Company.
Section 5. Healthcare Company's Obligation to Develop the Development
----------------------------------------------------------
Properties. Notwithstanding anything to the contrary in this Agreement,
- - ----------
Healthcare Company is under no obligation to develop the Development Properties.
However, if Healthcare Company determines to develop the Development Properties,
each such Project shall be completed pursuant to the terms and conditions of
this Agreement.
-4-
<PAGE>
Section 6. Termination.
-----------
Section 6.1 Automatic Termination; Right to Terminate. (a) This
-----------------------------------------
greement shall terminate automatically with respect to a particular Project (i)
if Vencor does not exercise the Option for that Project, or (ii) if Vencor
exercises the Option for that Project, upon the completion of the sale of such
Project to Vencor and the lease by Vencor to Healthcare Company of such Project
in accordance with the terms of this Agreement.
(b) Either Healthcare Company or Vencor may terminate this Agreement
if (i) the other party materially breaches any of its covenants or obligations
contained in this Agreement and all of such breaches shall not have been cured
to the reasonable satisfaction of the nonbreaching party, within 30 days after
notice of such material breach shall have been given by the nonbreaching party
to the breaching party, (ii) there is a Change of Control (as defined below) of
the other party, or (iii) if a Bankruptcy Event (as defined below) has occurred
with respect to the other party; provided, however, that a party shall not be in
-------- -------
breach of this Agreement pursuant to clause (i) if its failure to perform or
fulfill its obligations under this Agreement is due to a Force Majeure event (as
defined herein).
(c) A "Change of Control" of a party shall include, without
-----------------
limitation, (i) a change in the composition of the board of directors of such
party such that at the end of any period of 12 consecutive months the persons
constituting a majority of such board of directors are not the same as the
persons constituting a majority at the start of such period (or persons
appointed by such majority), (ii) the sale or other disposition by such party of
(A) any part of its interest in such party or (B) all or substantially all of
the assets of such party (other than a bona fide pledge in connection with a
financing), or (iii) a merger, consolidation or other business combination
involving such party, which results in the stockholders of such party
immediately prior to such event owning less than 50% of the capital stock of the
surviving entity. A "Bankruptcy Event" with respect to a party shall occur upon
----------------
the filing of an involuntary petition in bankruptcy or similar proceeding
against such party seeking its reorganization, liquidation or the appointment of
a receiver, trustee or liquidator for it or for all or substantially all of its
assets, whereupon such petition shall not be dismissed within 90 days after the
filing thereof, or if such party shall (i) apply for or consent in writing to
the appointment of a receiver, trustee or liquidator of all or substantially all
of its assets, (ii) file a voluntary petition or admit in writing its
inability to pay its debts as they become due, (iii) make a general assignment
for the benefit of creditors, (iv) file a petition or an answer seeking
reorganization or an arrangement with creditors or take advantage of any
insolvency law, or (v) file an answer admitting the material allegations of a
petition filed against it in any bankruptcy, reorganization or insolvency
proceedings.
-5-
<PAGE>
Section 6.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement in accordance with Section 6.1, (a) this Agreement shall
thereafter become void and have no effect, and no party hereto shall have any
liability to the other party hereto or their respective affiliates, directors,
officers or employees; provided, however, that the termination of this Agreement
-------- -------
pursuant to Section 6.1 shall not (i) affect the liability of a party for breach
of this Agreement, (ii) discharge any of either party's obligations to pay any
amount owing on the date of termination, (iii) discharge or affect either
party's rights or obligations arising out of or in connection with any Purchase
Agreement or Lease Agreement entered into pursuant to this Agreement, or (iv)
affect this Section 6.2 or Sections 8.2, 8.3, 10.4, 10.10 and Article 9, which
shall survive, and (b) Vencor shall cease to have the Option with respect to any
of the Development Properties which are completed following such termination.
Section 7. Representations and Warranties.
------------------------------
(a) Healthcare Company hereby represents and warrants to
Vencor as of the date hereof, that:
(1) Healthcare Company is a corporation duly organized and
validly existing and in good standing under the laws
of its jurisdiction of incorporation;
(2) Healthcare Company has the requisite corporate power
and authority to execute and deliver this Agreement
and to consummate the transactions contemplated
hereby; and
(3) this Agreement constitutes a valid and legally binding
obligation of Healthcare Company, enforceable in
accordance with its terms, subject to bankruptcy,
insolvency, reorganization and similar laws of general
applicability relating to or affecting creditors'
rights and to general equity principles.
Vencor hereby represents and warrants to Healthcare Company
as of the date hereof, that:
(b) (1) Vencor is a corporation duly organized and validly
existing and in good standing under the laws of its
jurisdiction of incorporation;
-6-
<PAGE>
(2) Vencor has the requisite corporate power and authority
to execute and deliver this Agreement and to
consummate the transactions contemplated hereby; and
(3) this Agreement constitutes a valid and legally binding
obligation of Vencor, enforceable in accordance with
its terms, subject to bankruptcy, insolvency,
reorganization and similar laws of general
applicability relating to or affecting creditors'
rights and to general equity principles.
Section 8. Limitation of Liability.
-----------------------
Section 8.1 Force Majeure. (a) Healthcare Company shall
-------------
not be held responsible for failure of or delay in completion of development,
nor shall Vencor be held responsible for failure or delay in the purchasing and
leasing to Healthcare Company, of a Project hereunder, if such failure or delay
is due to an act of God or public enemy, war, government acts or regulations,
fire, flood, embargo, quarantine, epidemic, labor strike, inability to acquire
raw materials, accident, unusually sever weather or other cause similar to the
foregoing, beyond their control (each such event, a "Force Majeure").
-------------
(b) If the performance of this Agreement by either party or any
obligation hereunder is prevented, restricted or interfered with by reason of a
Force Majeure event, the party whose performance is so affected, upon giving
prompt notice to the other party, shall be excused from such performance to the
extent of such Force Majeure event; provided, however, that the party so
-------- -------
affected shall take all reasonable steps to avoid or remove such causes of
nonperformance and shall continue performance hereunder with dispatch whenever
such causes are removed.
Section 8.2 Concealed Conditions; Change in Law. Healthcare Company
-----------------------------------
shall have no liability hereunder resulting from failure of or a delay in
completion of development of a Project; provided, however, that Healthcare
-------- -------
Company shall not be permitted to delay or cancel a Project if the reason for
such delay or cancellation is the purchase or development of another facility by
Healthcare Company in the same market, in which event Vencor shall have the
option to purchase such substitute facility at Healthcare Company's cost. If
Vencor exercises such option to purchase a substitute facility, it shall lease
such facility to Healthcare Company in accordance with Section 3.3 hereof.
Section 8.3 Contractors. Neither Healthcare Company, any of its
-----------
affiliates nor any of their respective present or former directors, officers,
partners,
-7-
<PAGE>
employees or agents shall have any liability to Vencor or any person asserting
claims on behalf of or in right of Vencor in connection with or as a result of
any obligation of Healthcare Company under this Agreement except to the extent
that any Losses (as defined herein) incurred by Vencor result from the bad
faith, gross negligence or wilful misconduct of Healthcare Company in performing
its obligations under this Agreement. Healthcare Company shall not have any
liability for any failure of performance or refusal to perform by a Contractor,
and Healthcare Company shall not have any liability for any defects in the work
performed by a Contractor; provided, that Healthcare Company was not grossly
--------
negligent or acting in bad faith in selecting such Contractor or in monitoring
the performance of such Contractor.
Section 9. Indemnification.
---------------
(a) Healthcare Company hereby agrees that it shall indemnify,
defend and hold harmless Vencor, its affiliates, and, if applicable, their
respective present and former directors, officers, partners, employees and
agents (collectively, the "Vencor Indemnified Parties") from, against and in
--------------------------
respect of, any damages, claims, losses, actions, suits, proceedings,
liabilities, and reasonable costs and expenses (including reasonable attorney's
fees and expenses of investigation) (collectively, "Losses") directly relating
-----
to or arising from the bad faith, gross negligence or wilful misconduct of
Healthcare Company in the performance of its obligations under this Agreement.
(b) Vencor shall give prompt notice to Healthcare Company of a claim
under this Section 7, and shall provide to Healthcare Company as soon as
practicable thereafter all information and documentation necessary to support
and verify, any Losses that the Vencor Indemnified Parties shall have determined
to have given or give rise to a claim for indemnification under this Section 7.
Failure by Vencor to give prompt notice of a claim under this Section 7 shall
affect the rights of Vencor hereunder only to the extent that such failure has a
prejudicial effect on the defenses or other rights available to Healthcare
Company with respect to such claim. Vencor shall have a right to consult in the
defense of a claim and to employ counsel, at Vencor's expense, separate from the
counsel employed by Healthcare Company to the extent such claim involves
potential conflicts of interest between or different defenses for Healthcare
Company and Vencor and Vencor reasonably determines that separate representation
would be appropriate.
Section 10.1 Miscellaneous.
-------------
Section 10.1 Notices. All notices or other communications
-------
under this Agreement shall be in writing and shall be deemed duly given,
effective (a) three business days later, if sent by registered or certified
mail, return receipt requested, postage prepaid, (b) when sent, if sent by
telecopier or facsimile; provided, that the telecopy or facsimile is promptly
confirmed by telephone confirmation thereof, and (c) one business day later, if
-8-
<PAGE>
sent by overnight delivery via a national courier service, in each case (a)
through (c), addressed to the intended recipient at the address set forth below.
If to Healthcare Company:
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Attention: General Counsel
Facsimile: (502) 596-4075
If to Vencor:
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Attention: President
with a copy to General Counsel
Facsimile: (502) 596-4075
Any party shall have the right to change its address for purposes of notice by
giving notice to the other parties in accordance with the provisions hereof.
Section 10.2 Parties In Interest. This Agreement shall be binding
-------------------
upon and shall accrue to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Agreement, express or implied, is
intended to confer upon any other person (except the Vencor Indemnified
Parties), any rights or remedies under or by reason of this Agreement.
Section 10.3 Amendments. This Agreement shall not be amended or
----------
changed except by changed except by written instrument signed by all undersigned
parties.
Section 10.4 Severability. If any term or provision of this
------------
Agreement, or the application thereof to any person or circumstance, shall to
any extent be held invalid or unenforceable by a court of competent
jurisdiction, such result shall not affect the other terms and provisions of
this Agreement or applications thereof which can be given effect without the
relevant term, provision or application, and to this end the parties agree that
the provisions of this Agreement are and shall be severable.
Section 10.5 Remedies. All rights, privileges and remedies afforded
--------
the parties by this Agreement shall be deemed cumulative and not exclusive. In
the event of a breach or other failure to perform as required under this
Agreement, the party not
-9-
<PAGE>
breaching or defaulting shall, in addition to all rights and remedies herein
provided, have all rights and remedies available at law or in equity.
Section 10.6 Variance of Pronouns. The use herein of a singular
--------------------
number shall be deemed to mean the plural, the masculine gender shall be deemed
to mean the feminine or the neuter gender shall be deemed to mean the masculine
or feminine, whenever the sense of this Agreement so requires.
Section 10.7 GOVERNING LAW. THE PARTIES HERETO AGREE THAT THIS
-------------
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF KENTUCKY, WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW.
Section 10.8 No Implied Consent or Waiver. No consent or waiver,
----------------------------
express or implied, by either party to this Agreement to, of or for any breach
or default by the other party in performance of its obligations hereunder shall
be deemed or construed to be a consent or waiver to or for any other breach or
default in performance by such party of the same or any other obligation of such
party hereunder. Failure on the part of either party to complain of any act or
failure of the other party to this Agreement or to declare the other party in
default, irrespective of whether such failure continues, shall not constitute a
waiver by the non-defaulting party of its rights hereunder.
Section 10.9 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
Section 10.10 Confidentiality. From and after the date hereof,
---------------
Vencor shall keep, and shall make its respective officers, directors, employees,
agents and subsidiaries (each a "Related Party") to keep, confidential all
-------------
information proprietary to Healthcare Company that has been acquired by Vencor
or any Related Party through participation in the performance of this Agreement;
provided, that the foregoing restriction shall not apply to information that (i)
- - --------
is or hereafter becomes generally available to the public other than by reason
of any default with respect to its confidentiality obligation under this
Agreement or any other agreement, (ii) is hereafter disclosed to Vencor or any
Related Party by a third party who is not in default of any
confidentiality obligation to Healthcare Company, or (iii) is required to be
disclosed in compliance with applicable laws or regulations or order by a court
or other governmental or regulatory agency or body having competent
jurisdiction; provided, that reasonable measures shall be taken to assure
--------
confidential treatment of such information.
Section 10.10 Entire Agreement. Except as provided in Article VI of
----------------
the Reorganization Agreement regarding dispute resolution, this Agreement and
the exhibit
-10-
<PAGE>
hereto supersede all prior agreements among the parties with respect to the
subject matter hereof and contain the entire agreement among the parties with
respect to such subject matter. This instrument may not be amended, supplemented
or discharged, and no provisions hereof may be modified or waived, except
expressly by an instrument in writing signed by both Healthcare Company and
Vencor. No waiver of any provision hereof by any party hereto shall be deemed a
waiver by any other party nor shall any such waiver by any party be deemed a
continuing waiver of any matter by such party. No amendment, modification,
supplement, discharge or waiver hereof or hereunder shall require the consent of
any person not a party to this Agreement.
Section 10.11 Assignment. Each party hereby acknowledges and agrees
----------
that it will not without the prior written consent of the other party (which
consent shall not be unreasonably withheld) transfer any portion of its interest
in this Agreement. Notwithstanding the foregoing or anything else contained in
this Agreement, either party may, without any consent or approval, transfer its
interest in this Agreement to a consolidated subsidiary of such party; provided,
--------
that the transferring party guarantees the subsidiary's performance of such
transferring party's obligations hereunder.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly signed this Agreement
as of the day and year first above written,
VENCOR, INC.
By: _________________________
Name:
Title:
VENCOR HEALTHCARE, INC.
By: _________________________
Name:
Title:
-12-
<PAGE>
EXHIBIT 10.11
PARTICIPATION AGREEMENT
-----------------------
THIS PARTICIPATION AGREEMENT ("Agreement") is made and entered into as
---------
of the ___ day of ________, 1998, by and between Vencor, Inc. , a Delaware
corporation ("Vencor"), and Vencor Healthcare, Inc., a Delaware corporation
------
("Healthcare Company," and together with Vencor, the "Parties").
- - -------------------- -------
RECITALS
--------
WHEREAS, Healthcare Company and Vencor are parties to an Agreement and
Plan of Reorganization, dated as of the date hereof (the "Reorganization
--------------
Agreement"), which provides for certain reorganization transactions (the
- - ---------
"Reorganization Transactions"), including but not limited to, (i) certain
- - ----------------------------
internal mergers and stock and asset transfers that allocate the assets and
liabilities relating to substantially all of the Vencor-owned land, buildings
and other improvements and real estate related assets (the "Real Estate
-----------
Business") to Vencor, which will change it's name immediately prior to the
Distribution (as defined herein) to "Ventas, Inc." and the other assets and
liabilities relating to the historical operations of Vencor, including the
properties listed on Exhibit A which are properties under development or to be
---------
developed (the "Development Properties") by Healthcare Company (the "Healthcare
---------------------- ----------
Business"), to Healthcare Company, which will change it's name immediately prior
- - --------
to the Distribution to "Vencor, Inc.," (ii) Vencor leasing to Healthcare Company
pursuant to a master lease agreement (the "Master Lease Agreement") 46 long-term
----------------------
acute care hospitals and 210 nursing centers, and (iii) the completion by
Healthcare Company of the development of the Development Properties pursuant to
a development agreement (the "Development Agreement") and thereafter, at the
---------------------
option of Vencor, the sale to, and lease back from, Vencor of the Development
Properties;
WHEREAS, Healthcare Company and Vencor will be parties to a
Distribution Agreement, dated as of the date hereof (the "Distribution
------------
Agreement"), which provides for the distribution (the "Distribution") by Vencor
------------
to the holders of common stock, par value $.25 per share, of Vencor ("Vencor
------
Common Stock") of all the outstanding shares of common stock, par value $.25 per
- - ------------
share, of Healthcare Company ("Healthcare Company Common Stock") on the basis of
-------------------------------
one share of Healthcare Company Common Stock for every share of Vencor Common
Stock;
WHEREAS, in addition to the Development Properties, Healthcare Company
has or may have an ownership interest in certain other existing healthcare
related facilities and may develop or acquire additional healthcare related
facilities in the future;
<PAGE>
WHEREAS, Healthcare Company desires to grant Vencor a right of first
offer to purchase or finance certain real properties that Healthcare Company
decides to sell or mortgage; and
WHEREAS, Vencor desires to grant Healthcare Company a right of first
offer to become the lessee of certain real property acquired or developed by
Vencor.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and subject to and on the terms and conditions herein set
forth, the parties hereto agree as follows:
Section 1. Vencor's Purchase Right of First Offer. (a) Vencor and any
--------------------------------------
Vencor subsidiary (including partnerships in which Vencor holds a majority
interest) (together with Vencor, the "Vencor Entities", and each, a "Vencor
--------------- ------
Entity") shall have a right of first offer (a "Purchase Right of First Offer")
- - ------ -----------------------------
to purchase any healthcare related real property (a "Sale Property") currently
-------------
owned by Healthcare Company or its consolidated subsidiaries (together with
Healthcare Company, the "Healthcare Company Entities", and each, a "Healthcare
--------------------------- ----------
Company Entity") (other than the Development Properties) or acquired by a
- - --------------
Healthcare Company Entity in the future when such Healthcare Company Entity
determines to sell the Sale Property to a third party subject to the terms and
conditions hereof. If a Healthcare Company Entity determines to sell a Sale
Property, it must provide written notice (the "Sale Opportunity Notice") to the
-----------------------
Vencor Entities of the purchase opportunity. A Vencor Entity shall exercise its
Purchase Right of First Offer, if at all, by sending written notice (the "Sale
----
Acceptance Notice") to the Healthcare Company Entity within thirty (30) days
- - -----------------
following such Vencor Entity's receipt of the Sale Opportunity Notice. Upon the
Healthcare Company Entity's receipt of the Sale Acceptance Notice, the
Healthcare Company Entity and the Vencor Entity shall commence negotiating in
good faith, on an exclusive basis regarding the terms and conditions of such
purchase. During such negotiation period, the Healthcare Company Entity shall
permit the Vencor Entity to inspect the Sale Property and the books and records
relating to the Sale Property upon reasonable advance notice and during
reasonable business hours. If the Parties fail to reach a mutually satisfactory
agreement as to the terms for such purchase within the 30-day period (or such
longer period as may be mutually agreed upon by the Parties) the Vencor Entity's
Purchase Right of First Offer shall be deemed to extinguish. Thereafter, the
Healthcare Company Entity may offer the Sale Property to third parties and is
free to negotiate with such third parties for a period of one hundred eighty
(180) days with no further obligations hereunder; provided, however, that no
-------- -------
Healthcare Company Entity may sell a Sale Property to a third party for less
than the Vencor Entity's final offer for such property without such Vencor
Entity first being given an opportunity to match such third party offer. The
Vencor Entity's Purchase Right of First Offer shall revive in the event that
the Healthcare Company Entity fails to sell or otherwise transfer the Sale
Property to a third party within said 180-day period. If
-2-
<PAGE>
a Vencor Entity elects to exercise its Purchase Right of First Offer, it shall
in all events have not less than thirty (30) days to close its acquisition of
the Sale Property.
Notwithstanding the foregoing provisions, the Purchase Right of First Offer
shall not be applicable to any property for which a Healthcare Company Entity
determines to (i) retain ownership or (ii) sell the operations of the facility
related to the real property.
(b) If the Healthcare Company Entities determine to sell a number of Sale
Properties as a group (a "Sale Group"), and a Vencor Entity elects to exercise
----------
its Purchase Right of First Offer with respect to such Sale Group, such Vencor
Entity must purchase all of the Sale Properties in the Sale Group.
Section 2. Vencor's Mortgage Right of First Offer. (a) The Vencor
--------------------------------------
Entities shall have a right of first offer (a "Mortgage Right of First Offer")
-----------------------------
to finance any healthcare related real property (a "Mortgage Property")
-----------------
currently owned by a Healthcare Company Entity (other than the Development
Properties) or acquired by a Healthcare Company Entity in the future when such
Healthcare Company Entity determines to mortgage the Mortgage Property to a
third party subject to the terms and conditions hereof. If a Healthcare Company
Entity determines to mortgage a Mortgage Property, it must provide written
notice (the "Mortgage Opportunity Notice") to the Vencor Entities of the
---------------------------
mortgage opportunity. A Vencor Entity shall exercise its Mortgage Right of
First Offer, if at all, by sending written notice (the "Mortgage Acceptance
-------------------
Notice") to such Healthcare Company Entity within thirty (30) days following
- - ------
such Vencor Entity's receipt of the Mortgage Opportunity Notice. Upon the
Healthcare Company Entity's receipt of the Mortgage Acceptance Notice, the
Healthcare Company Entity and the Vencor Entity shall commence negotiating in
good faith, on an exclusive basis regarding the terms and conditions of such
mortgage financing. During such negotiation period, the Healthcare Company
Entity shall permit the Vencor Entity to inspect the Mortgage Property and the
books and records relating to the Mortgage Property upon reasonable advance
notice and during reasonable business hours. If the Parties fail to reach a
mutually satisfactory agreement as to the terms for such mortgage within the 30-
day period (or such longer period as may be mutually agreed upon by the Parties)
the Mortgage Right of First Offer shall be deemed to extinguish. Thereafter,
the Healthcare Company Entity may offer the Mortgage Property to third parties
and is free to negotiate with such third parties for a period of one hundred
eighty (180) days with no further obligations hereunder; provided, however, that
-------- -------
no Healthcare Company Entity may mortgage a Mortgage Property to a third party
for an interest rate higher than the Vencor Entity's final offer for such
property without the Vencor Entity first being given an opportunity to match
such third party interest rate. The Vencor Entities' Mortgage Right of First
Offer shall revive in the event that the Healthcare Company Entity fails obtain
a financing commitment for the Mortgage Property from a third party within said
180-day period. If a Vencor Entity elects to
-3-
<PAGE>
exercise its Mortgage Right of First Offer, it shall in all events have not less
than thirty (30) days to close its financing of the Mortgage Property.
(b) If the Healthcare Company Entities determine to mortgage a number of
Mortgage Properties as a group (a "Mortgage Group"), and a Vencor Entity elects
--------------
to exercise its Mortgage Right of First Offer with respect to such Mortgage
Group, the Vencor Entity must finance all of the Mortgage Properties in the
Mortgage Group.
Section 3. Healthcare Company's Lease Right of First Offer. (a) Each
-----------------------------------------------
of the Healthcare Company Entities shall have a right of first offer ("Lease
-----
Right of First Offer") to lease any real property acquired or developed by a
- - --------------------
Vencor Entity in the future which is to be operated as a hospital, nursing
center or other healthcare related facility (a "Lease Property") subject to the
--------------
terms and conditions hereof. If a Vencor Entity determines to lease a Lease
Property, it must provide written notice (the "Lease Opportunity Notice") to
------------------------
Healthcare Company of the lease opportunity. A Healthcare Company Entity shall
exercise its Lease Right of First Offer, if at all, by sending written notice
(the "Lease Acceptance Notice") to the Vencor Entity within thirty (30) days
-----------------------
following such Healthcare Company Entity's receipt of the Lease Opportunity
Notice. Upon receipt of the Lease Acceptance Notice, the Vencor Entity shall
commence negotiating in good faith, on an exclusive basis with such Healthcare
Company Entity regarding the terms and conditions of such lease. During such
negotiation period, the Vencor Entity shall permit the Healthcare Company Entity
to inspect the Lease Property and the books and records relating to the Lease
Property upon reasonable advance notice and during reasonable business hours.
If the Parties fail to reach a mutually satisfactory agreement as to the terms
for such lease within thirty (30) days following the Vencor Entity's receipt of
the Lease Opportunity Notice (or such longer period as may be mutually agreed
upon by the Parties), the Lease Right of First Offer shall be deemed to
extinguish. Thereafter, the Vencor Entity may offer the Lease Property to third
parties and is free to negotiate with such third parties for a period of one
hundred eighty (180) days with no further obligations hereunder. The Healthcare
Company Entities' Lease Right of First Offer shall revive in the event that the
Vencor Entity fails to lease the Lease Property to a third party within said
180-day period; provided, however, that the Vencor Entity may not lease a Lease
-------- -------
Property to a third party for less than the Healthcare Company Entity's final
offer for such property without such Healthcare Company Entity first being given
an opportunity to match such third party offer. If a Healthcare Company Entity
elects to exercise its Lease Right of First Offer, it shall in all events have
not less than thirty (30) days to finalize the terms of its lease of the Lease
Property.
Notwithstanding the foregoing provisions, the Lease Right of First Offer
shall not be applicable to any property which is being operated by a third party
on the date of acquisition or completion of development.
-4-
<PAGE>
(b) If the Vencor Entities determine to lease a number of Lease Properties
as a group (a "Lease Group"), and a Healthcare Company Entity elects to exercise
-----------
its Lease Right of First Offer with respect to such Lease Group, such Healthcare
Company Entity must lease all of the Lease Properties in the Lease Group.
Section 4. Exclusion of Development Properties. Notwithstanding
-----------------------------------
anything else contained herein, none of the Development Properties shall be
deemed to be a Sale Property or a Mortgage Property, and the sale of the
Development Properties (and any right of first offer in connection therewith)
shall be governed by the terms and conditions of the Development Agreement.
Section 5. Term of Agreement. This Agreement shall be effective as of
-----------------
the date hereof and shall continue in effect until the earlier of (i) three
years from the date hereof or (ii) the termination of this Agreement by either
Healthcare Company or Vencor upon the occurrence of a Change of Control of the
other party as defined in the Master Lease Agreement.
Section 6. Miscellaneous.
-------------
Section 6.1 Notices. All notices or other communications under
----------- -------
this Agreement shall be in writing and shall be deemed duly given, effective (a)
three business days later, if sent by registered or certified mail, return
receipt requested, postage prepaid, (b) when sent, if sent by telecopier or
facsimile; provided, that the telecopy or facsimile is promptly confirmed by
--------
telephone confirmation thereof, and (c) one business day later, if sent by
overnight delivery via a national courier service, in each case (a) through (c),
addressed to the intended recipient at the address set forth below.
If to Healthcare Company:
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Attention: General Counsel
Facsimile: (502) 596-4075
If to Vencor:
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Attention: President
with a copy to General Counsel
-5-
<PAGE>
Facsimile: (502) 596-4075
Any party shall have the right to change its address for purposes of notice by
giving notice to the other parties in accordance with the provisions hereof.
Section 6.2 Parties In Interest. This Agreement shall be binding
-------------------
upon and shall accrue to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Agreement, express or implied, is
intended to confer upon any other person, any rights or remedies under or by
reason of this Agreement.
Section 6.3 Severability. If any term or provision of this
------------
Agreement, or the application thereof to any person or circumstance, shall to
any extent be held invalid or unenforceable by a court of competent
jurisdiction, such result shall not affect the other terms and provisions of
this Agreement or applications thereof which can be given effect without the
relevant term, provision or application, and to this end the parties agree that
the provisions of this Agreement are and shall be severable.
Section 6.4 Remedies. All rights, privileges and remedies afforded
--------
the parties by this Agreement shall be deemed cumulative and not exclusive. In
the event of a breach or other failure to perform as required under this
Agreement, the party not breaching or defaulting shall, in addition to all
rights and remedies herein provided, have all rights and remedies available at
law or in equity.
Section 6.5 Variance of Pronouns. The use herein of a singular
--------------------
number shall be deemed to mean the plural, the masculine gender shall be deemed
to mean the feminine or the neuter gender shall be deemed to mean the masculine
or feminine, whenever the sense of this Agreement so requires.
Section 6.6 GOVERNING LAW. THE PARTIES HERETO AGREE THAT THIS
-------------
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF KENTUCKY, WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW. ANY LEGAL SUIT, ACTION OR
PROCEEDING AGAINST ANY PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL
---
BE INSTITUTED IN ANY FEDERAL OR COMMONWEALTH COURT IN THE COMMONWEALTH OF
KENTUCKY. EACH PARTY HEREBY (I) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A
COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM, AND (II)
-6-
<PAGE>
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH SUIT,
ACTION OR PROCEEDING.
Section 6.7 No Implied Consent or Waiver. No consent or waiver,
----------------------------
express or implied, by either party to this Agreement to, of or for any breach
or default by the other party in performance of its obligations hereunder shall
be deemed or construed to be a consent or waiver to or for any other breach or
default in performance by such party of the same or any other obligation of such
party hereunder. Failure on the part of either party to complain of any act or
failure of the other party to this Agreement or to declare the other party in
default, irrespective of whether such failure continues, shall not constitute a
waiver by the non-defaulting party of its rights hereunder.
Section 6.8 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
Section 6.9 Confidentiality. From and after the date hereof, each
---------------
Party shall keep, and shall make its respective officers, directors, employees,
agents and subsidiaries (each a "Related Party") to keep, confidential all
-------------
information proprietary to the other Party that has been acquired by such Party
or any Related Party through participation in the performance of this Agreement;
provided, that the foregoing restriction shall not apply to information that (i)
- - --------
is or hereafter becomes generally available to the public other than by reason
of any default with respect to its confidentiality obligation under this
Agreement or any other agreement, (ii) is hereafter disclosed to a Party or any
Related Party by a third party who is not in default of any confidentiality
obligation to the other Party, or (iii) is required to be disclosed in
compliance with applicable laws or regulations or order by a court or other
governmental or regulatory agency or body having competent jurisdiction;
provided, that reasonable measures shall be taken to assure confidential
- - --------
treatment of such information.
Section 6.10 Entire Agreement; Amendments. Except as provided in
----------------------------
Articles III, V and VI of the Reorganization Agreement regarding
indemnification, access to information and dispute resolution, this Agreement
and the exhibit hereto supersede all prior agreements among the Parties with
respect to the subject matter hereof and contain the entire agreement among the
Parties with respect to such subject matter. This instru ment may not be
amended, supplemented or discharged, and no provisions hereof may be modified or
waived, except expressly by an instrument in writing signed by both Healthcare
Company and Vencor. No waiver of any provision hereof by any Party hereto shall
be deemed a waiver by any other Party nor shall any such waiver by any Party be
deemed a continuing waiver of any matter by such Party. No amendment,
modification, supplement, discharge or waiver hereof or hereunder shall require
the consent of any person not a Party to this Agreement.
-7-
<PAGE>
Section 6.11 Assignment. Each Party hereby acknowledges and agrees
----------
that it will not without the prior written consent of the other Party (which
consent shall not be unreasonably withheld) transfer any portion of its interest
in this Agreement. Notwithstanding the foregoing or anything else contained in
this Agreement, either Party may, without any consent or approval, transfer its
interest in this Agreement to a consolidated subsidiary of such Party; provided,
--------
that the transferring Party guarantees the subsidiary's performance of such
transferring Party's obligations hereunder.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly signed this Agreement
as of the day and year first above written,
VENCOR, INC.
By: __________________
Name:
Title:
VENCOR HEALTHCARE, INC.
By: __________________
Name:
Title:
-9-
<PAGE>
EXHIBIT 10.17
AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT (the "Amendment") is made and entered into as of December
31, 1998, by and between Ventas, Inc. (successor to Vencor, Inc.), a Delaware
corporation ("Ventas" or the "Company"), and W. Bruce Lunsford (the "Employee").
RECITALS:
A. Employee is a party to an Employment Agreement with the Company (the
"Agreement").
B. Employee has elected to resign as Chief Executive Officer of Ventas
effective as at the close of business on December 31, 1998, and
continue in his capacity as Chairman of Ventas.
C. The Board of Directors of Ventas (the "Board") has resolved to provide
for the amendment of the Agreement as set forth below.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Agreement is hereby amended, effective December 31, 1998, as
follows:
1. Section 2 of the Agreement is hereby amended in its entirety to read
as follows:
"2. Duties. Executive is engaged by the Company as Chairman."
------
2. Section 3 of the Agreement is hereby amended in its entirety to read
as follows:
"3. Extent of Services. Executive, subject to the direction and control
------------------
of the Board, shall have the power and authority commensurate with his
executive status as Chairman of the Company and necessary to perform his
duties hereunder. During the term, Executive shall perform such duties,
consistent with his status as Chairman of the Company, as requested by the
Board from time to time."
3. Section 4(a) of the Agreement is hereby amended by replacing the phrase
"$350,000 per year" with the phrase "$150,000 per year".
4. A new Section 7(e) of the Agreement is hereby added to read as
follows:
<PAGE>
"(e) Tax Loan Forgiveness. Notwithstanding anything to the contrary in
--------------------
this Section 7 (including Section 7(b)(7) hereof), (i) if Executive resigns
as Chairman of the Company at the request of the Board of Directors for any
reason other than Cause, the Company shall cause to be forgiven any
remaining amounts (including principal and accrued interest) that are owed
by the Executive under the Tax Loan, and (ii) such resignation shall be
deemed for all purposes under this Agreement to have been a termination of
employment of the Executive other than for Cause."
5. All capitalized terms used in this Amendment shall have the same
definitions as set forth in the Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
VENTAS, INC.
___________________________
By:
Title:
EMPLOYEE
____________________________
W. Bruce Lunsford
-1-
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 13th day of January, 1999
(the "Effective Date"), by and between Ventas, Inc., a Delaware corporation (the
"Company"), and JOHN C. THOMPSON (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Executive is employed by the Company and the parties
hereto desire to provide for Executive's continued employment by the Company;
and
WHEREAS, the Board of Directors of the Company (the "Board") have
determined that it is in the best interests of the Company to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and Executive agree as follows:
1. Employment. The Company hereby agrees to employ Executive and
----------
Executive hereby agrees to be employed by the Company on the terms and
conditions herein set forth. The initial term of this Agreement shall be for a
one-year period commencing on the Effective Date. The Term shall be
automatically extended by one additional day for each day beyond the Effective
Date that the Executive remains employed by the Company until such time as the
Company elects to cease such extension by giving written notice of such election
to the Executive. In such event, the Agreement shall terminate on the first
anniversary of the effective date of such election notice.
2. Duties. Executive is engaged by the Company in an executive
------
capacity.
3. Extent of Services. Executive, subject to the direction and
------------------
control of the Board, shall have the power and authority commensurate with his
executive status and necessary to perform his duties hereunder. During the
term, Executive shall devote his entire working time, attention, labor, skill
and energies to the business of the Company, and shall not, without the consent
of the Company, be actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or other pecuniary
advantage.
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than $100,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or incentive compensation as the Board may approve from
time to time.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit, welfare benefit (including, without limitation,
medical, dental, disability and group life insurance coverages) and fringe
benefit plans from time to time in effect for
<PAGE>
Executives of the Company and its affiliates.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacation in a
reasonable manner. The Executive may also be entitled to such other leave,
with or without compensation, as shall be mutually agreed by the Company
and Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below),
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
(b) Cause. The Company may terminate Executive's employment during
-----
the Term for Cause. For purposes of this Agreement, "Cause" shall mean the
Executive's (i) conviction of or plea of nolo contendere to a crime
---- ----------
involving moral turpitude; or (ii) willful and material breach by Executive
of his duties and responsibilities, which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best
interests of the Company and its affiliates, but with respect to (ii) only
if the Board adopts a resolution by a vote of at least 75% of its members
so finding after giving the Executive and his attorney an opportunity to be
heard by the Board. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon advice of
counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best interests of
the Company.
(c) Good Reason. Executive's employment may be terminated by Executive
-----------
for Good Reason. "Good Reason" shall exist upon the occurrence, without
Executive's express written consent, of any of the following events:
(i) the Company shall assign to Executive duties of a
substantially nonexecutive or nonmanagerial nature;
2
<PAGE>
(ii) an adverse change in Executive's status or position as an
executive officer of the Company, including, without limitation, an
adverse change in Executive's status or position as a result of a
diminution in Executive's duties and responsibilities (other than any
such change directly attributable to the fact that the Company is no
longer publicly owned);
(iii) the Company shall (A) materially reduce the Base Salary or
bonus opportunity of Executive, or (B) materially reduce his benefits
and perquisites (other than pursuant to a uniform reduction applicable
to all similarly situated executives of the Company);
(iv) the Company shall require Executive to relocate Executive's
principal business office more than 30 miles from its location on the
Effective Date; or
(v) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 11(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event
shall not constitute "Good Reason" provided that such event is remedied
within 60 days after receipt of such written notice.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by Executive for Good Reason, shall be communicated by Notice of
Termination given in accordance with this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the
provision so indicated and (iii) specifies the intended termination date
(which date, in the case of a termination for Good Reason, shall be not
more than thirty days after the giving of such notice). The failure by
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company, respectively,
hereunder or preclude Executive or the Company, respectively, from
asserting such fact or circumstance in enforcing Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
-------------------
Executive's employment is terminated by the Company for Cause, or by
Executive for Good Reason, the later of the date specified in the Notice of
Termination or the date that is one day after the last day of any
applicable cure period, (ii) if Executive's employment is terminated by the
Company other than for Cause or Disability, or Executive resigns without
Good
3
<PAGE>
Reason, the Date of Termination shall be the date on which the Company or
Executive notified Executive or the Company, respectively, of such
termination, and (iii) if Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
Executive or the Disability Effective Date, as the case may be.
7. Obligations of the Company Upon Termination. Following any
-------------------------------------------
termination of Executive's employment hereunder, the Company shall pay Executive
his Base Salary through the Date of Termination and any amounts owed to
Executive pursuant to the terms and conditions of the Executive benefit plans
and programs of the Company at the time such payments are due. In addition,
subject to Executive's execution of a general release of claims in form
satisfactory to the Company, Executive shall be entitled to the following
additional payments:
(a) Death or Disability. If, during the Term, Executive's employment
-------------------
shall terminate by reason of Executive's death or Disability, the Company
shall pay to Executive (or his designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus (as defined below)
Executive would have received for the year of termination of employment.
Such amount shall be paid within 30 days of the date when such amounts
would otherwise have been payable to the Executive if Executive's
employment had not terminated.
(b) Good Reason; Other than for Cause. If, during the Term, the
---------------------------------
Company shall terminate Executive's employment other than for Cause (but
not for Disability), or the Executive shall terminate his employment for
Good Reason:
(1) Within fourteen (14) days of Executive's Date of Termination,
the Company shall pay to Executive (i) the prorated portion of the
Target Bonus for Executive for the year in which the Date of
Termination occurs, plus (ii) an amount equal to the Executive's Base
Salary and Target Bonus as of the Date of Termination.
For purposes of this Agreement: "Target Bonus" shall mean the
full amount of bonuses and/or performance compensation (other than
Base Salary and awards under the Company's 1997 Incentive Compensation
Plan) that would be payable to the Executive, assuming all performance
criteria on which such bonus and/or performance compensation are based
were deemed to be satisfied, in respect of services for the calendar
year in which the date in question occurs.
(2) For a period of one year following the Date of Termination,
the Executive shall be treated as if he or she had continued to be an
Executive for all purposes under the 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. Following this continuation
period, the Executive shall be entitled to receive continuation
coverage under Part 6 of Title I or ERISA
4
<PAGE>
("COBRA Benefits") treating the end of this period as a termination of
the Executive's employment if allowed by law.
(3) For a period of one year following the Date of Termination,
Company shall maintain in force, at its expense, the Executive's life
insurance being provided by the Company as of the Date of Termination.
(4) For a period of one year 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 he remained employed under the
disability insurance plans applicable to Executive on the Date of
Termination. Should Executive become disabled during such period,
Executive shall be entitled to receive such benefits, and for such
duration, as the applicable plan provides.
(5) To the extent not already vested pursuant to the terms of
such plan, the Executive's interests under the Vencor, Inc. Retirement
Savings Plan and any 401(k), retirement savings plan or profit sharing
plan of the Company shall be automatically fully (i.e., 100%) vested,
without regard to otherwise applicable percentages for the vesting of
employer matching contributions based upon the Executive's years of
service with the Company.
(6) The Company shall adopt such amendments to its Executive
benefit plans, if any, as are necessary to effectuate the provisions
of this Agreement.
(7) Executive shall be credited with an additional one year of
vesting for purposes of all restricted stock awards and Executive will
have an additional one year in which to exercise all outstanding stock
option awards.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
5
<PAGE>
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, or any
business of the Company for which Executive's services are principally
performed, to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used 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.
10. Other Severance Benefits. Executive hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Executive
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company or their respective affiliates that
provide for severance payments or benefits upon a termination of employment,
other than the Change in Control Severance Agreement between the Company and
Executive (the "Severance Agreement"); provided that any payments payable to
--------
Executive hereunder shall be offset by any payments payable under the Severance
Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
obligations to make any payments hereunder shall not be subject to or affected
by any setoff, counterclaims or defenses which the Company may have against
Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation of receipt, addressed as follows:
If to Executive:
---------------
John C. Thompson
604 Yancy Lane
Louisville, KY 40202
6
<PAGE>
If to Company:
-------------
Ventas, Inc.
400 West Market Street, Suite 3300
Louisville, KY 40202
Attn: President
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral, with respect to the subject matter hereof. No provisions of this
Agreement may be modified, waived or discharged unless such modification, waiver
or discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENTAS, INC.
By:
----------------------------------------
Thomas T. Ladt
President, Chief Executive Officer and
Chief Operating Officer
----------------------------------------
John C. Thompson
7
<PAGE>
EXHIBIT 10.21
AGREEMENT
This Separation Agreement and Release of Claims ("Agreement") is entered
into by Thomas T. Ladt ("Employee"), and Ventas, Inc. ("Ventas") on its own
behalf and on behalf of all of its affiliates, directors, officers, supervisors,
employees, agents, successors, assigns, representatives, subsidiaries or related
companies, past and present (collectively, the "Company").
WHEREAS, Employee and Company hereby desire to settle all disputes and
issues related to the resignation of Employee from his services to the Company.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
1. Resignation. Employee hereby resigns from the Ventas Board of
-----------
Directors and all capacities and positions with the Company effective March 5,
1999 ("Date of Termination"), and Ventas and the Company hereby accept such
resignation effective as of such date.
2. Obligations of the Company. Following the execution of this
Agreement, the Company shall pay Employee his base salary through March 31, 1999
and any amounts owed to Employee pursuant to the Company's standard
reimbursement procedures. In addition, subject to the terms and conditions of
this Agreement (including Section 13), Employee shall be entitled to the
following additional payments and benefits:
(a) $62,812.50 representing the prorated portion of the Employee's
target bonus for 1999.
(b) 37,500 shares of Ventas common stock representing two (2) years
of additional vesting of restricted stock awards to the Employee.
(c) $670,000 representing an amount equal to tow (2) times the
Employee's base salary for 1999.
(d) $502,500 representing an amount equal to two (2) times the
Employee's target bonus for 1999.
(e) For a period of twenty four (24) months following the Date of
Termination, the Company shall provide health insurance benefits to Employee
<PAGE>
equivalent to the coverage provided by the Company for Employee on the Date of
Termination.
(f) For a period of 24 months following the Date of Termination, the
Company shall maintain in force, at its expense, the Employee's life insurance
equivalent to the coverage paid for by the Company and applicable to the
employee on the Date of Termination.
(g) For a period of twenty four (24) months following the Date of
Termination, the Company shall continue to provide the Company's standard
short-term and long-term disability insurance benefits to Employee equivalent to
the standard coverage applicable to Employee and the premium for which is paid
by the Company on the Date of Termination and based on his base salary on the
such date. Should Employee become disabled during such period, Employee shall be
entitled to receive such benefits, and for such duration, and subject to such
caps as the applicable standard plan provides.
(h) The Company shall take such action as is required to cause the
promissory note, dated June 15, 1998 in an original principal amount of $140,400
(the "Tax Loan") entered into in connection with the loan made to Employee to
cover certain taxes owned by Employee, to be amended to provide that the Tax
Loan and any payments scheduled to be made in respect thereof shall not be due
and payable prior to the fifth anniversary of the Date of Termination.
(p) The Company shall provide Employee with assistance in complying
with his reporting obligations under Section 16 of the Securities Act of 1934,
as amended for a period of six months following the Date of Termination.
(q) All commitments made to Employee under paragraphs (a)-(d) above
shall be paid or issued upon the later of 14 days from the Date of Termination
or the expiration of the seven day period referenced in Section 16.
3. Employee Acknowledgment and Release. In consideration for the above
payments and benefits, Employee hereby settles, waives, releases and discharges
any and all claims or actions arising from Employee's employment, his Employment
Agreement dated as of July 31, 1998, his Change in Control Severance Agreement,
the terms and conditions of Employee's employment, and Employee's termination of
employment with the Company, including claims of breach of contract, employment
discrimination, wrongful termination, unemployment compensation or any claim
arising under law or equity, express or implied contract, tort, public policy,
common law or any federal, state or local statute, ordinance, regulation or
constitutional provision.
<PAGE>
(a) The claims settled, waived, released and discharged by Employee
under this Section 3 include, but are not limited to, claims arising under Title
VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991;
The Older Workers Benefit Protection Act ("OWBPA"); the Age Discrimination in
Employment Act of 1967 ("ADEA"), as amended; the American with Disabilities Act
("ADA"); the Fair Labor Standards Act; the Employee Retirement Income Security
Act of 1974, as amended; the National Labor Relations Act; the Labor Management
Relations Act; the Equal Pay Act of 1963; the Pregnancy Discrimination Act of
1978; the Rehabilitation Act of 1973; workers' compensation laws; Kentucky Wage
and Hours Laws, claims before the Kentucky Commission for Human Rights and
Kentucky Revised Statutes sections 341 et seq.
(b) Employee recognizes that by signing this Agreement, he may be
giving up some claim, demand or cause of action which he now has, but which is
unknown to him. Employee also acknowledges that he is giving up any right to
seek future employment with the Company, that the Company has no obligation to
rehire him at any future date, and agrees that he will not apply for work with
the Company.
(c) Employee agrees not to file any lawsuits against the Company that
relate in any manner to the Employee's employment or the resignation or
termination of Employee's employment with the Company.
(d) employee acknowledges that the Company does not admit that it
engaged in any discrimination, wrong doing or violation of law on the Company's
part concerning Employee. Employee and the Company agree that by entering into
this Agreement no discrimination, wrong doing, or violation of law has been
acknowledged by the Company or assumed by Employee. Employee and the Company
further acknowledge that this Agreement is not an admission of liability.
4. Confidentiality. Employee and the Company agree to keep the contents
---------------
and terms of this Agreement confidential and not to voluntarily disclose the
terms or amount of settlement to third parties. The only exception is that
Employee may reveal the terms of this Agreement to his spouse, attorney, tax
preparer or as otherwise required by law. The Company may reveal the terms of
this Agreement to its attorneys, accountants, financial advisors, managerial
employees and any other employee whose action is needed to implement this
Agreement, and any disclosure required by law or business necessity. Employee
and the Company agree that in the event the terms of this Agreement are
disclosed to the third parties as allowed or required herein, the third parties
will be advised of the obligation to keep the terms of this Agreement
confidential, and will obtain the third party's Agreement to abide by the terms
of the confidentiality provisions set forth in this Agreement. In the event that
Employee breaches the confidentiality of this Agreement, Employee understands
that the Company shall h ave the right to pursue all
<PAGE>
appropriate legal and equitable relief, including, but unlimited to, attorneys'
fees and costs.
5. Public Statement. Employee further agrees not to make derogatory or
----------------
negative remarks or comments about the Company, its affiliates and their
respective directors, officers, shareholders, agents or employees, to any third
parties, and not to otherwise defame the Company in any manner. In the event
that Employee defames the Company, its affiliates and their respective
directors, officers, shareholders, agents or employees, employee understands
that the Company shall have the right to pursue all appropriate legal and
equitable relief, including but not limited to, attorneys fees and costs.
Company agrees not to make derogatory or negative remarks or comments about
Employee to any third parties, not to otherwise defame the Employee in any
manner. In the event that the Company defames Employee, Company understands that
the Employee shall have the right to pursue all appropriate legal and equitable
relief, including but not limited to, attorneys' fees and costs.
6. Ability to Revoke.
-----------------
(a) Employee acknowledges and agrees that (i) the Company, through
this Section 7(a) has advised him in writing and encouraged him in writing to
consult with an attorney, (ii) he will receive consideration under this
Agreement to which he is otherwise not entitled, and (iii) he has been given a
period of at least twenty one (21) days within which to consider this Agreement,
including waiver of any ADEA and OWBPA age claims before voluntarily signing
this Agreement.
(b) Employee agrees and understands that he may revoke this Agreement
within seven (7) days after signing the Agreement, and that the Agreement shall
not become effective or enforceable until the revocation period has expired.
(c) Any revocation of this Agreement must be made in writing and
delivered by hand or certified mail to T. Richard Riney, Ventas, Inc., 4360
Brownsboro Road, Suite 105, Louisville, Kentucky 40207, before the expiration of
the revocation period.
7. Restrictive Covenants.
---------------------
(a) For a period of 12 months from the Date of Termination, Employee
shall not divulge, furnish, or make accessible to anyone any confidential
knowledge or information about the Company's businesses or operations (except as
required by law or order of court or other governmental agency) or any of the
clients, patients, customers or suppliers of the Company or with respect to any
other confidential aspect of the businesses of the Company. Employee's
obligations under this Section 7(a)
<PAGE>
are in addition to, not in lieu of, any obligations he has under applicable law
to protect the Company confidential information and trade secrets.
(b) For a period of 12 months from the Date of Termination, Employee
agrees that he will not, directly or indirectly or by action in concert with
others, induce, solicit, or influence or seek to induce or influence any person
who has been engaged as an employee, agent, independent contractor or otherwise
by the Company and with whom Employee had contact during his employment by the
Company, to terminate his or her relationship with the Company.
(c) If the agreement set forth in this Section 8 would otherwise be
determined to be invalid or unenforceable by a court of competent jurisdiction,
the parties intend and agree that such court shall exercise its discretion in
reforming the provisions of this Agreement to the end that Employee will be
subject to restrictions which are reasonable under the circumstances and
enforceable by the Company.
(d) Employee understands and agrees that any violation of this
Agreement will cause the Company irreparable harm which cannot adequately be
compensated by an award of money damages. As a result, Employee agrees that, in
addition to any other remedy the Company may have, a violation of this Agreement
may be restrained by issuance of an injunction by any court of competent
jurisdiction.
8. Cooperation. Employee agrees that should the Company request
-----------
Employee's cooperation in connection with litigation, government investigations
or other administrative or legal proceeding, Employee shall cooperate fully with
the Company or its designated agents. Employee further agrees to cooperate fully
in disclosing to the Company or its designated agents, any information which
Employee obtained during the course and scope of his employment with the
Company, and to which other employees of the Company were not privy.
9. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement (other than a dispute or controversy under
Sections 4, 5 or 7) shall, at the election and upon written demand of either
party, be finally determined and settled by binding arbitration in the City of
Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof.
10. Attorney's Fees, Costs and Expenses. If any action at law or equity
-----------------------------------
or any arbitration proceeding is necessary to enforce or interpret the terms of
this Agreement, the prevailing party will be entitled to reasonable attorney's
fees, costs and expenses incurred, in addition to any other relief to which such
party might be entitled.
<PAGE>
11. Successors. This Agreement is personal to Employee and without the
----------
prior written consent of the Company shall not be assignable by Employee
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by, and shall be binding upon,
Employee's legal representatives. This Agreement shall inure to the benefit of
and be binding upon the Company and its successors and assigns.
12. Other Benefits. Employee hereby agrees that in consideration for the
--------------
payments and benefits to be received under this Agreement, Employee waives any
and all rights to any payments or benefits under any plans, programs, contracts
or arrangements of the Company, the Employment Agreement between Employee and
the Company, dated as of July 31, 1998 and the Change in Control Severance
Agreement between the Employee and the Company.
13. Withholding. all payments and stock issuances to be made to Employee
-----------
hereunder will be subject to all applicable required withholding of taxes.
14. No Mitigation. Employee shall have no duty to seek other employment
-------------
and, should Employee actually receive compensation from any such other
employment, the payments required hereunder shall not be reduced or offset by
any such compensation.
15. Execution by Employee. Employee will execute this Agreement and
---------------------
deliver the executed Agreement to T. Richard Riney, Ventas, Inc., 4360
Brownsboro Road, Suite 115, Louisville, Kentucky 40207.
16. Termination of Waiting Period. After receipt of the executed
-----------------------------
Agreement by Employee, and after the expiration of this seven (7) day waiting
period in Section 7(b) of this Agreement, the Company will execute the
Agreement.
17. Voluntary Action. Employee acknowledges that he has read and fully
----------------
understands all of the provisions of this Agreement and that he is entering into
this Agreement freely and voluntarily.
18. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
<PAGE>
If to Employee:
Thomas T. Ladt
4323 Camanche Trail
Louisville, Kentucky 40207
If to Company:
Ventas, Inc.
4360 Brownsboro Road
Suite 150
Louisville, KY 40207
Attn: General Counsel
19. Governing Law. This Agreement shall be governed by the laws of the
-------------
Commonwealth of Kentucky.
20. Waiver of Breach and Severability. The waiver by either party of a
---------------------------------
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
21. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Employee and a designated officer of
the Company.
22. Headings. The headings in this Agreement are for convenience only
--------
and shall not be used to interpret or construe its provisions.
23. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
March 5, 1999.
VENTAS, INC.
<PAGE>
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE
---------------------------------------
THOMAS T. LADT
<PAGE>
EXHIBIT 10.30
AMENDMENT
TO THE
VENTAS, INC.
1987 INCENTIVE COMPENSATION PROGRAM
December 31, 1998
WHEREAS, the Board of Directors of Ventas, Inc. have authorized the
amendment of the Ventas, Inc., 1987 Incentive Compensation Program (the "Plan").
NOW, THEREFORE, the Plan is hereby amended, effective December 31,
1998, as follows:
1. Section 3.2 of the Plan is hereby amended by adding the following
at the end thereof:
"The Committee (or the Board, in the absence of any such Committee) shall
have the discretion to determine for purposes of the Plan whether any
participant in the Plan (i) is or remains (or is not or does not remain) a
full-time employee of the Company, and (ii) shall have incurred (or shall
not have incurred) a termination of employment."
2. All capitalized terms used herein shall have the same definitions
as set forth in the Plan.
IN WITNESS WHEREOF, the Company has duly executed this Amendment as of
the date first above written.
VENTAS, INC.
____________________________
By: W. Bruce Lunsford,
Chairman of the Board,
President and CEO
<PAGE>
EXHIBIT 10.35
AMENDMENT
TO THE
VENTAS, INC.
1997 INCENTIVE COMPENSATION PLAN
December 31, 1998
WHEREAS, the Board of Directors of Ventas, Inc. have authorized the
amendment of the Ventas, Inc., 1997 Incentive Compensation Plan (the "Plan").
NOW, THEREFORE, the Plan is hereby amended, effective December 31,
1998, as follows:
1. Section 3.2 of the Plan is hereby amended by adding the following
at the end thereof:
"The Committee (or the Board, in the absence of any such Committee) shall
have the discretion to determine for purposes of the Plan whether any
participant in the Plan (i) is or remains (or is not or does not remain) a
full-time employee of the Company, and (ii) shall have incurred (or shall
not have incurred) a termination of employment."
2. All capitalized terms used herein shall have the same definitions
as set forth in the Plan.
IN WITNESS WHEREOF, the Company has duly executed this Amendment as of
the date first above written.
VENTAS, INC.
____________________________
By: W. Bruce Lunsford,
Chairman of the Board,
President and CEO
<PAGE>
EXHIBIT 10.43
AMENDMENT NO. 1
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AMENDMENT TO THE CHANGE-IN-CONTROL SEVERANCE AGREEMENT (the
"Amendment") is made and entered into as of the 19th day of November, 1997, by
and between Vencor, Inc., a Delaware corporation ("Vencor" or the "Company"),
and W. Bruce Lunsford (the "Employee").
RECITALS:
A. Employee has entered into a Change-in-Control Severance Agreement
with the Company (the "Agreement").
B. The Company recognizes that Employee's contribution to Vencor's
growth and success has been and continues to be significant.
C. The Company wishes to amend the Change-in-Control Agreement to
recognize Employee's continuing contribution and provide incentive for
Employee's ongoing efforts.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENT:
1. Cash Payment. Section 3.a. shall be changed to the following:
The Employee shall be paid cash equal to three times the greater of:
(i) the sum of the Employee's Base Salary and Prior Year's Bonus as
of the Termination of Employment, or
(ii) the sum of the Employee's Base Salary and Prior Year's Bonus as
of the Change-in-Control Date.
In addition, notwithstanding any provision to the contrary in the Company's
bonus plan, Employee shall be paid a pro rata portion of the maximum bonus to
which he or she would have been entitled if (i) Employee had been employed by
the Company as of the year-end in which the Termination of Employment had
occurred, and (ii) the Company had achieved the highest targeted goals under the
bonus plan in effect for such year. The pro rata portion shall be determined
based on the number of days within the year that Employee was employed by the
Company, divided by 365 days. Payment shall be made in a single lump sum within
ten days following the date in which Employee's Termination of Employment
occurs.
<PAGE>
2. Continuation of Benefits. The first six words of Sections 3.b.(i),
------------------------
3.b.(ii) and 3.b.(iii) shall be changed to the following:
For a period of three years....
3. Defined Terms. All capitalized terms used in this Amendment shall have
-------------
the same definitions as set forth in the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
VENCOR, INC. EMPLOYEE
By:
---------------------------- ----------------------------------
W. Bruce Lunsford
<PAGE>
EXHIBIT 10.44
AMENDMENT NO. 2
TO
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AMENDMENT (the "Amendment") is made and entered into as of December
31, 1998, by and between Ventas, Inc. (successor to Vencor, Inc.), a Delaware
corporation ("Ventas" or the "Company"), and W. Bruce Lunsford (the "Employee").
RECITALS:
A. Employee is a party to a Change-in-Control Severance Agreement with
the Company (the "Agreement"), dated as of November 15, 1995, and
amended as of November 19, 1997.
B. Employee has elected to resign as Chief Executive Officer of Ventas
effective as at the close of business on December 31, 1998, and
continue in his capacity as Chairman of Ventas.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Agreement is hereby amended, effective December 31, 1998, as
follows:
1. Section 1(h) of the Agreement is hereby amended by adding the
following phrase immediately preceding the end thereof:
"; provided, however, that the Employee shall be deemed not to have
-------- -------
incurred a Termination of Employment as a result of the Employee's
resignation as Chief Executive Officer of the Company and continuation as
Chairman of the Company."
2. All capitalized terms used in this Amendment shall have the same
definitions as set forth in the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
VENTAS, INC.
___________________________
By:
Title:
EMPLOYEE
____________________________
W. Bruce Lunsford
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Ventas Realty, Limited Partnership
Ventas Realty LP, LLC
Ventas LP Realty II, LLC
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Ventas, Inc. of our report dated January 22, 1999, included in the 1998
Annual Report to Shareholders of Ventas, Inc.
Our audit also included the financial statement schedule of Ventas, Inc. listed
in Item 14. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audit. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Louisville, Kentucky
January 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILE AS PART OF THE ANNUAL REPORT ON FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-1-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 338
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 959,706
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 18,402
<OTHER-SE> (27,411)
<TOTAL-LIABILITY-AND-EQUITY> 959,706
<SALES> 0
<TOTAL-REVENUES> 149,933
<CGS> 0
<TOTAL-COSTS> 93,973
<OTHER-EXPENSES> 5,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,004
<INCOME-PRETAX> 55,960
<INCOME-TAX> 21,151
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 8,051
<CHANGES> 0
<NET-INCOME> 26,758
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
