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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, 1999
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:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class: on which Registered:
<S> <C>
Common Stock, par value $.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 17, 2000, there were 67,954,423 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 17, 2000, was approximately $190,146,399. For purposes of
the foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
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 23, 2000 to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K.
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CAUTIONARY STATEMENTS
Forward Looking 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 and its subsidiaries'
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," "may," "could," 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.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this Form 10-K and elsewhere in
the Company's filings with the Securities and Exchange Commission (the
"Commission"). Factors that may affect the plans or results of the Company
include, without limitation, (a) the treatment of the Company's claims in the
chapter 11 cases of its primary tenant, Vencor, Inc. and certain affiliates
(collectively, "Vencor"), as well as certain of its other tenants, (b) the
ability and willingness of Vencor to continue to meet and/or honor its
obligations under the Spin Agreements (as defined below), including, without
limitation, the obligation to indemnify and defend the Company for all
litigation and other claims relating to the health care operations and other
assets and liabilities transferred to Vencor in the 1998 Spin Off (as defined
below), (c) the ability of Vencor and the Company's other operators to
maintain the financial strength and liquidity necessary to satisfy their
respective obligations and duties under the leases and other agreements with
the Company, and their existing credit agreements, (d) the Company's success
in implementing its business strategy, (e) the nature and extent of future
competition, (f) the extent of future health care reform and regulation,
including cost containment measures and changes in reimbursement policies and
procedures, (g) increases in the cost of borrowing for the Company, (h) the
ability of the Company's operators to deliver high quality care and to attract
patients, (i) the results of litigation affecting the Company, (j) the results
of the settlement discussions Vencor and Ventas have been engaged in with the
federal government seeking to resolve federal civil and administrative claims
against them arising from the participation of Vencor facilities in various
federal health benefit programs, (k) changes in general economic conditions
and/or economic conditions in the markets in which the Company may, from time
to time, compete, (l) the ability of the Company to pay down, refinance,
restructure, and/or extend its indebtedness as it becomes due, and (m) the
ability of the Company to qualify as a real estate investment trust. Many of
such factors are beyond the control of the Company and its management.
Vencor Information
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, or has been provided by Vencor. The Company has not verified this
information either through an independent investigation or by reviewing
Vencor's public filings. The Company has no reason to believe that such
information is inaccurate in any material respect, but there can be no
assurance that all such information is accurate. 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.
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TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I
Item 1. Business....................................................... 4
Item 2. Properties..................................................... 41
Item 3. Legal Proceedings.............................................. 47
Item 4. Submission of Matters to a Vote of Security Holders............ 47
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 49
Item 6. Selected Financial Data........................................ 50
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 50
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 61
Item 8. Financial Statements and Supplementary Data.................... 61
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 61
PART III
Item 10. Directors and Executive Officers of the Registrant............. 61
Item 11. Executive Compensation......................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 61
Item 13. Certain Relationships and Related Transactions................. 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.............................................................. 62
</TABLE>
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PART I
Item 1. Business
General
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
acute care hospitals), 218 nursing facilities and eight personal care
facilities in 36 states as of December 31, 1999. The Company conducts
substantially all of its business through a wholly owned operating
partnership, Ventas Realty, Limited Partnership ("Ventas Realty"). Although
the Company currently expects to qualify as a real estate investment trust
("REIT") for the year ended December 31, 1999, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail or
not elect to qualify as a REIT. The Company operates in one segment which
consists of owning and leasing health care facilities and leasing or
subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health
care services.
On May 1, 1998, the Company effected a corporate reorganization (the "1998
Spin Off") pursuant to which the Company was separated into two publicly held
corporations. A new corporation, subsequently named Vencor, Inc., was formed
to operate the hospital, nursing facility and ancillary services businesses.
Pursuant to the terms of the 1998 Spin Off, 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 1998 Spin Off, the historical financial statements
of the Company were assumed by Vencor, and the Company is deemed to have
commenced operations on May 1, 1998. 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 owns and leases a geographically diverse portfolio of health
care related facilities, including hospitals, nursing facilities and personal
care facilities whose principal tenants are health care related companies. As
a result of announcements during 1999 by Vencor and industry-wide factors, the
Company suspended the implementation of its original business strategy during
1999. The Company's current principal objectives are preserving and maximizing
stockholders' capital.
Dependence on Vencor
The Company leases all of its hospitals and 210 of its nursing facilities to
Vencor under four master lease agreements relating to 209 facilities and a
single facility lease (individually a "Master Lease" and collectively "the
Master Leases"). For the year ended December 31, 1999 and for the period from
May 1, 1998 to December 31, 1998, Vencor accounted for approximately 98.5%
(98.3%, net of write-offs) and 98.7% of the Company's revenues, respectively.
See "--Risk Factors--Dependence of the Company on Vencor" and "Note 3--
Concentration of Credit Risk" to the Consolidated Financial Statements.
Recent Developments Regarding Vencor
On September 13, 1999, Vencor filed for protection under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). Under the automatic
stay provisions of the Bankruptcy Code, the Company is currently prevented
from exercising certain rights and remedies under its agreements with Vencor,
including the Spin Agreements (as defined below), and from taking certain
enforcement actions against Vencor. See "--Risk Factors--Effects of Bankruptcy
Proceedings." The Company, Vencor and Vencor's major creditors have been
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engaged in negotiations both prior and subsequent to Vencor's bankruptcy
filing to restructure Vencor's debt and lease obligations. Terms of a
preliminary, non-binding agreement among Vencor's major creditors, Vencor and
Ventas, reached at the time of Vencor's filing for protection under the
Bankruptcy Code regarding Vencor's plan of reorganization (the "September 1999
Agreement in Principle"), are set forth below. On March 22, 2000, the Delaware
bankruptcy court granted Vencor's motion to extend through May 16, 2000, the
period during which Vencor has the exclusive right to file a plan of
reorganization, and Vencor recently extended the expiration date for its
debtor-in-possession financing until June 30, 2000. Vencor has stated that
events arising after the filing of its bankruptcy petition that resulted in
adjustments to its financial projections have caused it to enter into
additional negotiations with its various creditors and Ventas regarding the
September 1999 Agreement in Principle. Vencor has also retained The Blackstone
Group as its financial advisor in connection with the negotiation and
consummation of a plan of reorganization. There can be no assurance that
Vencor's plan of reorganization, when filed, will be on the terms of the
September 1999 Agreement in Principle or otherwise be acceptable to the
Company.
Under the terms of the September 1999 Agreement in Principle, the Company
would make approximately $45 million in annual rent concessions, effective as
of May 1, 1999, resulting in annual base rent of approximately $181 million
for the 1999-2000 lease year. The Company would also receive (a) in addition
to the current 2% annual cash escalator contained in its Master Leases, a 1
1/2% annual non-cash rent escalator that would accrue at 6% per annum until
the occurrence of certain specified events, at which time the accrual with
interest would be due and payable and thereafter the 1 1/2% rent escalator
would convert to a cash escalator totalling 3 1/2% per year; (b) an additional
1% annual cash rent bonus escalator payable if Vencor's net patient revenue
growth at the Company's facilities exceeds a cumulative annual growth rate of
5%; (c) a one time, unilateral right to reset the rents for the facilities,
exercisable on a lease by lease basis from May 2002 through May 2005, to a
then fair rental rate, for a total fee of $5 million payable on a pro-rata
basis at the time of exercise under any lease; (d) 15% of the common stock and
warrants in reorganized Vencor (the Company, in order to qualify as a REIT,
may not hold 10% or more of the total combined voting power or the total
number of shares in Vencor; the Company is evaluating alternatives for dealing
with any Vencor equity ultimately received in excess of the 10% or more
limitation); and (e) a reaffirmation and continuation of Vencor's indemnity
obligations under the Spin Agreements. The Development Agreement and the
Participation Agreement between the Company and Vencor (each, as defined
below) would be terminated, and the Tax Allocation Agreement and the Master
Leases (each, as defined below) would be amended and clarified under the
September 1999 Agreement in Principle. The terms of the September 1999
Agreement in Principle also provided that on the date that Vencor's plan of
reorganization becomes effective (the "Vencor Effective Date") the Company
would also receive approximately $3.4 million, representing reduced August
1999 minimum monthly base rent ("August 1999 Rent") (approximately $15.1
million), net of $11.7 million ($3.75 million reduction in rent per month for
May, June and July 1999 rent, plus $0.45 million relating to previously paid
rent for a disputed facility). However, there can be no assurance that
Vencor's plan of reorganization, when filed, will be on the terms of the
September 1999 Agreement in Principle or otherwise will be acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
Other terms of the September 1999 Agreement in Principle for Vencor include:
(a) the principal amount of Vencor senior bank debt would be reduced from
approximately $520 million to approximately $320 million in exchange for 56%
of the common stock in the restructured Vencor, and (b) Vencor's senior
subordinated notes would be converted into approximately 29% of the common
stock in restructured Vencor, and the holders of such debt would receive
warrants in the restructured company. There can be no assurance that Vencor's
plan of reorganization, when filed, will be on the terms of the September 1999
Agreement in Principle or otherwise be acceptable to the Company. The Company
believes that the best outcome for the Company, Vencor and their respective
banks and other creditors is a global restructuring of Vencor's financial
obligations in connection with Vencor's chapter 11 bankruptcy filing.
Ventas and Vencor continue to be engaged in advanced settlement discussions
with the federal government seeking to resolve all federal civil and
administrative claims against them arising from the participation of Vencor
facilities in various federal health benefit programs. The majority of these
claims arise from lawsuits filed under the qui tam, or whistleblower,
provision of the Federal Civil False Claims Act, which allows private
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citizens to bring suit in the name of the United States. See "Note 11--
Litigation" to the Consolidated Financial Statements. The United States
Department of Justice, Civil Division, filed two proofs of claim in the Vencor
bankruptcy court covering the United States claims and the qui tam suits. The
United States asserted approximately $1.3 billion, including triple damages,
against Vencor in these proofs of claim. The Department of Justice has
informed the Company that it is the Department of Justice's position that, if
liability exists, the Company and Vencor will be jointly and severally liable
for the portion of such claims related to the period prior to the date of the
1998 Spin Off. If the United States, Vencor and the Company reach a
settlement, any liability of the Company and Vencor related to these matters
would likely be resolved in the settlement. There can be no assurance that a
settlement will be reached regarding these claims and suits, or, if reached,
that the settlement will be on terms acceptable to the Company.
There can be no assurance that Vencor will be successful in obtaining the
approval of its creditors for a restructuring plan, that any such plan will be
on the terms of the September 1999 Agreement in Principle or on other terms
acceptable to the Company, Vencor and its creditors, or that any restructuring
plan will not have a material adverse effect on the business, financial
condition, results of operation and liquidity of the Company, on the Company's
ability to service its indebtedness and on the Company's ability to make
distributions to its stockholders as required to elect or maintain its status
as a REIT (a "Material Adverse Effect"). Nor can there be any assurance that
Vencor and the Company will be able to reach a settlement with the Department
of Justice, or that any such settlement will be on terms acceptable to Vencor,
Vencor's creditors and the Company. The Company, Vencor and its creditors are
not legally bound by the terms of the September 1999 Agreement in Principle,
and the terms of the September 1999 Agreement in Principle: (i) are mutually
interdependent, (ii) are subject to agreement on a satisfactory plan of
reorganization and confirmation thereof and (iii) are further subject to other
conditions (including, but not limited to, negotiation and execution of
definitive documentation). As discussed above, Vencor has entered into
additional negotiations with its various creditors and Ventas regarding the
September 1999 Agreement in Principle. Under the terms of the Amended and
Restated Credit, Security, Guaranty and Pledge Agreement (the "Amended Credit
Agreement") that the Company and all of its lenders entered into on January
31, 2000, it is an event of default if Vencor's plan of reorganization is not
effective on or before December 31, 2000. See "--Recent Developments Regarding
Liquidity" and "Note 4--Borrowing Arrangements" to the Consolidated Financial
Statements.
During the Company's discussions with Vencor, Vencor asserted various
potential claims against the Company arising out of the 1998 Spin Off. See
"Note 11--Litigation" to the Consolidated Financial Statements. The Company
intends to defend these claims vigorously if they are asserted in a legal or
mediation proceeding.
In connection with the discussions between the Company and Vencor, both
before and after Vencor's bankruptcy filing, regarding Vencor's contemplated
restructuring, the Company and Vencor have entered into certain agreements,
including a "Stipulation," "Second Standstill Agreement," and a "Tolling
Agreement," as defined below.
The Stipulation
In connection with the bankruptcy filing by Vencor, the Company and Vencor
entered into a stipulation (the "Stipulation") for the payment by Vencor to
the Company of approximately $15.1 million per month starting in September
1999, to be applied against the total amount of minimum monthly base rent that
is due and payable under the Master Leases. The Stipulation was approved by
the bankruptcy court. During the period in which the Stipulation is in effect,
Vencor has agreed to fulfill all of its obligations under the Spin Agreements
as such obligations become due, including its obligation to indemnify and
defend Ventas from and against all claims arising out of the Company's former
health care operations or assets or liabilities transferred to Vencor in the
1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to seek to reject such agreements pursuant and
subject to the applicable provisions of the Bankruptcy Code. A termination of
the Stipulation and/or rejection by Vencor of the Spin Agreements could have a
Material Adverse Effect on the Company. See "--Risk Factors--Effects of
Bankruptcy Proceedings."
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The payments under the Stipulation are required to be made by the fifth day
of each month, or on the first business day thereafter. Starting in September,
1999, the difference between the amount of minimum monthly base rent due under
the Company's Master Leases with Vencor and the monthly payment of
approximately $15.1 million accrues as a superpriority administrative expense
in Vencor's bankruptcy, junior in right only to the following: (i) any liens
or superpriority claims provided to lenders under Vencor's debtor-in-
possession credit agreement (the "DIP facility"); (ii) any fees due to the
Office of the United States Trustee; (iii) certain fees of Vencor's
professionals; (iv) any liens or superpriority claims granted to pre-petition
secured creditors as adequate protection for their claims under the interim
DIP order issued by the bankruptcy court and the final DIP order; and (v) pre-
petition liens granted to the lenders under Vencor's credit agreement, as
amended, and related agreements, to the extent such pre-petition claims are
allowed as secured, subject to challenge in the Vencor bankruptcy proceeding.
The monthly payment of approximately $15.1 million under the Stipulation is
not subject to offset, recoupment or challenge. August 1999 Rent in the amount
of approximately $18.9 million remains unpaid and will be asserted as a claim
in Vencor's chapter 11 case.
The Stipulation by its terms initially would have expired on October 31,
1999, but automatically renews for one-month periods unless either party
provides a fourteen-day notice of its election to terminate the Stipulation.
To date, no such notice of termination has been given. The Stipulation may
also be terminated prior to its expiration upon a payment default by Vencor,
the consummation of a plan of reorganization for Vencor, or the occurrence of
certain events under the DIP facility. There can be no assurance as to how
long the Stipulation will remain in effect or that Vencor will continue to
perform under the terms of the Stipulation.
The Stipulation also addresses an agreement by Ventas and Vencor concerning
any statutes of limitations and other time constraints. See "--The Tolling
Agreement" below.
The Second Standstill Agreement
On April 12, 1999, the Company entered into a Second Standstill Agreement
with Vencor, which was subsequently amended on May 5, May 8, June 6, July 6,
August 5, and September 3, 1999 (as amended, the "Second Standstill
Agreement"). The Second Standstill Agreement terminated on September 9, 1999.
Under the Second Standstill Agreement, the Company agreed not to exercise its
remedies under the Master Leases based on any default arising from or relating
to disclosures made by Vencor to the Company, and to accept the payment of
April, May, June and July 1999 rent pursuant to a specified schedule. These
payments represent the full amount of rent that was due for each month's rent
under the Master Leases. Vencor made all rent payments required by the Second
Standstill Agreement with respect to the April, May, June and July 1999 lease
payments. August 1999 Rent remains unpaid and will be asserted as a claim in
Vencor's chapter 11 bankruptcy case.
Also, under the Second Standstill Agreement, each of the Company and Vencor
agreed not to pursue any claims against the other or any third party relating
to the agreements entered into in connection with the 1998 Spin Off, or any of
the Master Leases, or with respect to certain specified disputes, during a
defined period that terminated on September 9, 1999.
The Tolling Agreement
The Company and Vencor have also entered into an agreement (the "Tolling
Agreement") pursuant to which they have agreed that any statutes of
limitations or other time constraints in a bankruptcy proceeding, including
the assertion of certain "bankruptcy avoidance provisions" that might be
asserted by one party against the other, are extended or tolled for a
specified period. That period currently terminates on the termination date of
the Stipulation. Pursuant to the Stipulation, the Tolling Agreement does not
shorten any time period otherwise provided under the Bankruptcy Code.
Recent Developments Regarding Liquidity
On January 31, 2000, the Company and all of its lenders entered into the
Amended Credit Agreement, which amended and restated the $1.2 billion credit
agreement (the "Bank Credit Agreement") the Company entered into at the time
of the 1998 Spin Off. Under the Amended Credit Agreement, borrowings bear
interest at an
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applicable margin over an interest rate selected by the Company. Such interest
rate may be either (a) the Base Rate, which is the greater of (i) the prime
rate or (ii) the federal funds rate plus 50 basis points, or (b) the London
Interbank Offered Rate ("LIBOR"). Borrowings under the Amended Credit
Agreement are comprised of: (1) a new $25.0 million revolving credit line (the
"Revolving Credit Line") that expires on December 31, 2002, which bears
interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%; (2) a $200.0
million term loan due December 31, 2002 (the "Tranche A Loan"), which bears
interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%; (3) a $300.0
million term loan due December 31, 2005 (the "Tranche B Loan"), which bears
interest at either LIBOR plus 3.75% or the Base Rate plus 2.75%; and (4) a
$473.4 million term loan due December 31, 2007 (the "Tranche C Loan"), which
bears interest at either LIBOR plus 4.25% or the Base Rate plus 3.25%. The
interest rate on the Tranche B Loan will be reduced by .50% (50 basis points)
once $150.0 million of the Tranche B Loan has been repaid.
The Amended Credit Agreement requires the following amortization: (a) with
respect to the Tranche A Loan, (i) $50.0 million of the Tranche A Loan was
paid at closing on January 31, 2000, (ii) $50.0 million is due within 30 days
after the Vencor Effective Date, and (iii) thereafter all Excess Cash Flow (as
defined in the Amended Credit Agreement) of the Company will be applied to the
Tranche A Loan until $200.0 million in total has been paid down on the Amended
Credit Agreement, with the balance due December 31, 2002; (b) with respect to
the Tranche B Loan, (i) after the $50.0 million paydown on the Tranche A Loan
to be made within 30 days after the Vencor Effective Date and after
consideration of other cash needs of the Company, a one-time paydown of Excess
Cash (as defined in the Amended Credit Agreement) within 30 days of the Vencor
Effective Date, and (ii) scheduled paydowns of $50.0 million on December 31,
2003 and December 31, 2004, with the balance due December 31, 2005; and (c)
with respect to the Tranche C Loan, no scheduled paydowns with a final
maturity of December 31, 2007. The facilities under the Amended Credit
Agreement are pre-payable without premium or penalty.
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders regarding the restructuring of the Company's
long term debt, including the $275.0 million Bridge Loan (the "Waiver and
Extension Agreement"), the Company paid a $2.4 million loan waiver fee. In
connection with the consummation of the Amended Credit Agreement on January
31, 2000, the Company paid a $7.3 million loan restructuring fee. The fees are
being amortized proportionately over the terms of the related loans and
agreements.
The Amended Credit Agreement is secured by liens on substantially all of the
Company's real property and any related leases, rents and personal property.
Certain properties are being held in escrow by counsel for the agents under
the Amended Credit Agreement pending the receipt of third party consents
and/or resolution of certain other matters. In addition, the Amended Credit
Agreement contains certain restrictive covenants, including, but not limited
to, the following: (a) until such time that $200.0 million in principal amount
has been paid down, the Company can pay REIT dividends based on a certain
minimum percentage of its taxable income (currently equal to 95 percent of its
taxable income for the year ended December 31, 1999 and the year ending
December 31, 2000 and 90 percent of its taxable income for years ending on or
after December 31, 2001); however, after $200.0 million in total principal
paydowns, the Company will be allowed to pay dividends for any year in amounts
up to 80 percent of funds from operations ("FFO"), as defined in the Amended
Credit Agreement; (b) limitations on additional indebtedness, acquisitions of
assets, liens, guarantees, investments, restricted payments, leases and
affiliate transactions; (c) limitations on capital expenditures; (d) certain
financial covenants, including requiring that the Company have (i) $50.0
million in cash and cash equivalents on hand at the Vencor Effective Date;
(ii) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (iii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month following the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any
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person in the Vencor bankruptcy case (other than by the Company and its
affiliates) shall be deemed to constitute or result in a "Material Adverse
Effect," as defined in the Amended Credit Agreement. In addition, the Amended
Credit Agreement provides that if the Company is in compliance with its
financial covenants and the covenant relating to releases in the Vencor
bankruptcy on the Vencor Effective Date, no event or condition arising
primarily from the Vencor plan of reorganization shall be deemed to have
caused a "Material Adverse Effect," as defined in the Amended Credit
Agreement, to have occurred. Under the terms of the Amended Credit Agreement,
however, an event of default is deemed to have occurred if the Vencor
Effective Date does not occur on or before December 31, 2000.
Other Recent Developments
Certain of the Company's other operators have experienced financial
difficulties that have impacted their ability to perform their obligations
under agreements with the Company. See "--Risk Factors--Effects of Bankruptcy
Proceedings" and "Note 9--Commitments and Contingencies" to the Consolidated
Financial Statements.
The 1998 Spin Off
In order to govern certain of the relationships between the Company and
Vencor after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the 1998 Spin Off, including the Master Leases (the "Spin Agreements"). In
connection with the 1998 Spin Off, an Independent Committee of the Board of
Directors of the Company was formed. The function of the Independent Committee
was 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 a new director to the Independent
Committee and the committee appointed him the Chairman of the Independent
Committee. As of the date hereof, the Company and Vencor have no common
directors, officers or, to the Company's knowledge, common ownership by
stockholders owning greater than 10% of both companies. During 1999, the
Company moved its offices from space it shared with Vencor and no longer
requires administrative support from Vencor. However, as discussed below,
Vencor assisted in the preparation of certain Commission filings and tax
returns and continues to provide certain information in connection with
related audits of tax matters for the Company and to defend certain litigation
to which the Company is or may become a party.
Certain material terms of the Master Leases and certain of the other Spin
Agreements are described below. The reader is also strongly encouraged to
review and consider the factors described in "--Recent Developments Regarding
Vencor" and "--Risk Factors--Effects of Bankruptcy Proceedings."
Master Lease Agreements
In the 1998 Spin Off, the Company retained substantially all of its real
property, buildings and other improvements (primarily long-term acute care
hospitals and nursing facilities) and leased nearly all these facilities to
Vencor under four Master Leases. A single nursing facility in Corydon, Indiana
was leased by the Company to Vencor in August, 1998 under the terms of a fifth
Master Lease. The Master Leases 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 Company's ability to exercise certain rights and remedies under the
Master Leases described below has been stayed as a result of Vencor's filing
for protection under chapter 11 of the Bankruptcy Code. The Bankruptcy Code,
however, generally provides that a landlord is entitled to receive rent during
the pendency of a tenant's bankruptcy proceeding, subject to such tenant's
rights to reject the lease and its other legal defenses and rights. Vencor has
disputed that it is required to pay rent at the rate set forth in the Master
Leases and in the Stipulation has reserved the right to challenge the rate set
forth in the Master Leases in the event the Stipulation is terminated. The
Stipulation discussed above provides for Vencor to pay $15.1 million per month
in minimum
9
<PAGE>
base rent under the Master Leases while the Stipulation is in effect. Various
provisions of the Master Leases may ultimately be challenged in Vencor's
chapter 11 bankruptcy case, and certain provisions regarding payment of rent
have been modified by the Stipulation in anticipation of the contemplated
restructuring. The Company expects that the terms of the Master Leases will be
substantially amended and reflected in the terms of new or restated master
lease agreements in connection with the consummation of Vencor's plan of
reorganization according to the terms of the September 1999 Agreement in
Principle. See "--Recent Developments Regarding Vencor."
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all or substantially all insurance, taxes, utilities
and maintenance related to the properties. The base annual contract rent was
approximately $226.6 million and $222.2 million at December 31, 1999 and 1998,
respectively. Base annual rent increases 2% per annum, effective May 1 of each
year, provided Vencor achieves 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.
Under the terms of each Master Lease, except as noted below, upon the
occurrence of an event of default thereunder, the Company may, at its option,
exercise the remedies under a Master Lease on all properties included within
that particular 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 and (iii) 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 reduction in the number of licensed beds at a facility in
excess of 10% or 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 constitutes 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 the 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 prior written notice and the
opportunity to cure any such event of default within the cure period for
Leasehold Mortgagees set forth in the Master Leases. 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.
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<PAGE>
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 specified levels of liability,
all risk property and workers' compensation insurance for 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 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 as it relates 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 Spin Agreements, all controversies, claims or disputes
arising out of the Master Leases are subject to mediation between the parties
for a reasonable period of time in an effort to settle such controversy, claim
or dispute. If the parties are unable to reach resolution after such period of
time, then the dispute is to 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. During the year
ended December 31, 1999, the Company did not acquire any facilities under this
agreement. During the period from May 1, 1998 to December 31, 1998, the
Company acquired one skilled nursing facility under the Development Agreement
for $6.2 million and has entered into a separate Master 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. The ability of the Company to
purchase properties pursuant to the terms of the Development Agreement is
restricted by the terms of the Amended Credit Agreement. Any such future
purchases would likely require the consent of the "Required Lenders" under the
Amended Credit Agreement, and there can be no assurance that such consent
would be obtained. The Company expects the Development Agreement to be
terminated in the event the Company, Vencor and Vencor's creditors agree on a
plan of reorganization for Vencor and such plan is consummated.
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
facility or other health care 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.
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<PAGE>
The Participation Agreement also provides, subject to certain terms, that
the Company has a right of first offer to purchase or finance any health care
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. The
ability of the Company to purchase or finance properties pursuant to the terms
of the Participation Agreement is restricted by the terms of the Company's
Amended Credit Agreement. Any such future purchases or financings would likely
require the consent of the "Required Lenders" under the Amended Credit
Agreement, and there can be no assurance that such consent would be obtained.
The Company expects the Participation Agreement to be terminated in the event
the Company, Vencor and Vencor's creditors agree on a plan of reorganization
for Vencor and such plan is consummated.
Tax Allocation Agreement
The Tax Allocation Agreement provides that Vencor will be liable for, and
will hold the Company harmless from and against, (i) any taxes of Vencor and
its then subsidiaries (the "Vencor Group") for periods after the 1998 Spin
Off, (ii) any taxes of the Company and its then subsidiaries (the "Company
Group") or the Vencor Group for periods prior to the 1998 Spin Off (other than
taxes associated with the Spin Off) with respect to the portion of such taxes
attributable to assets owned by the Vencor Group immediately after completion
of the 1998 Spin Off and (iii) any taxes attributable to the 1998 Spin Off to
the extent that Vencor derives certain tax benefits as a result of the payment
of such taxes. Vencor will be entitled to any refund or credit in respect of
taxes owed or paid by Vencor under (i), (ii) or (iii) above. Vencor's
liability for taxes for purposes of the Tax Allocation Agreement will be
measured by the Company's actual liability for taxes after applying certain
tax benefits otherwise available to the Company other than tax benefits that
the Company in good faith determines would actually offset tax liabilities of
the Company in other taxable years or periods. Any right to a refund for
purposes of the Tax Allocation Agreement will be measured by the actual refund
or credit attributable to the adjustment without regard to offsetting tax
attributes of the Company.
The Company will be liable for, and will hold Vencor harmless against, any
taxes imposed on the Company Group or the Vencor Group other than taxes for
which the Vencor Group is liable as described in the above paragraph. The
Company will be entitled to any refund or credit for taxes owed or paid by the
Company as described in this paragraph. The Company's liability for taxes for
purposes of the Tax Allocation Agreement will be measured by the Vencor
Group's actual liability for taxes after applying certain tax benefits
otherwise available to the Vencor Group other than tax benefits that the
Vencor Group in good faith determines would actually offset tax liabilities of
the Vencor Group in other taxable years or periods. Any right to a refund will
be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Vencor Group. See "Note 7--
Income Taxes" to the Consolidated Financial Statements.
On February 3, 2000 the Company received a refund (the "Refund") of
approximately $26.6 million from the Internal Revenue Service representing the
refund of income taxes paid by it from 1996 and 1997 and accrued interest
thereon arising out of the Company's 1998 federal income tax return. Although
the Company believes that it is entitled to the Refund pursuant to the terms
of the Tax Allocation Agreement and on other legal grounds, the Internal
Revenue Service may assert a right to all or some portion of the Refund. In
addition, Vencor has asserted that it is entitled to the Refund pursuant to
the terms of the Tax Allocation Agreement and on other legal grounds. The
Company intends to vigorously defend its rights to the Refund. There can be no
assurance as to how such controversy will be resolved, or as to whether or not
the Company will ultimately retain all or a portion of the Refund.
Accordingly, the amount has been classified with the other liabilities of the
Company at December 31, 1999 in the Consolidated Financial Statements. See
"Note 7-- Income Taxes" and "Note 8--Transactions with Vencor--The 1998 Spin
Off" to the Consolidated Financial Statements.
Vencor and the Company are also engaged in a dispute relating to the
entitlement to certain federal, state and local tax refunds, including the
Refund. In connection with Vencor's bankruptcy filing, the Company and Vencor
are currently discussing the terms of a stipulation relating to such tax
refunds. There can be no assurance as to how such dispute will be resolved.
12
<PAGE>
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to Vencor
(the "Third Party Leases"). The lessors of these properties may claim that the
Company remains liable on the Third Party Leases 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 Leases
assigned by the Company to Vencor. Either prior to or following the 1998 Spin
Off, the tenant's rights under a subset of the Third Party Leases were
assigned or sublet to unrelated third parties (the "Subleased Third Party
Leases"). If Vencor or such third party subtenants are unable to satisfy the
obligations under any Third Party Lease assigned by the Company to Vencor, and
if the lessors prevail in a claim against the Company under the Third Party
Leases, then the Company may be liable for the payment and performance of the
obligations under any such Third Party Lease. In that event, the Company may
be entitled to receive revenues from those properties that would mitigate the
costs incurred in connection with the satisfaction of such obligations. The
Third Party Leases relating to nursing facilities, hospitals, offices and
warehouses have remaining terms (excluding renewal periods) of 1 to 11 years
and total aggregate remaining minimum rental payments under those leases
amount to $114.0 million. The Third Party Leases relating to ground leases
have remaining terms from 1 to 81 years and total aggregate remaining minimum
rental payments under those leases amount to $33.6 million. The annual minimum
rental payments under all of these leases for 2000 equals approximately $35.3
million. Pursuant to the Stipulation, Vencor has agreed to fulfill its
obligations under the Agreement of Indemnity--Third Party Leases during the
period in which the Stipulation is in effect, and, except for disputes with
Health Care Property Investors discussed in "Note 9--Commitments and
Contingencies" to the Consolidated Financial Statements, has to date performed
its obligations. See "--Risk Factors--Dependence of the Company on Vencor,"
"Note 8--Transactions With Vencor--The 1998 Spin Off" and "Note 9--Commitments
and Contingencies" to the Consolidated Financial Statements.
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Vencor (the "Third Party Guarantees"). The
Company may remain liable on 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 assigned by the Company to
Vencor, then the Company may be liable for the payment and performance of the
obligations under any such agreement. The Third Party Guarantees were entered
into in connection with certain acquisitions and financing transactions. The
aggregate exposure under these guarantees is approximately $49.8 million. Of
that amount, Atria Communities, Inc. ("Atria") also has directly guaranteed
and agreed to indemnify and hold the Company harmless from and against all
claims against the Company arising out of one of the Third Party Guarantees,
in an aggregate principal amount of approximately $34.5 million. The Company
is engaged in discussions with Atria in an effort to have the $34.5 million
liability formally assumed by Atria and the Company released from the
liability. There can be no assurance that the Company will be successful in
its attempt to be released from this liability. See "--Risk Factors--
Dependence of the Company on Vencor" and "Note 8--Transactions With Vencor--
The 1998 Spin Off" to the Consolidated Financial Statements.
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
period from May 1, 1998 to December 31, 1998 for services provided under the
Transition Services Agreement.
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<PAGE>
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 were no
longer provided by Vencor. During 1999, Vencor assisted in the preparation of
Commission filings and certain tax returns and other tax filings made on
behalf of the Company for the period ending on or before December 31, 1998 and
is continuing to assist the Company under the terms of the Tax Allocation
Agreement and the other Spin Agreements by providing certain information in
connection with the Company's fixed asset records, ongoing audits of tax
matters and defending certain litigation to which the Company is or may become
liable.
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, 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 health care operations either before or after
the date of the 1998 Spin Off. 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 health care operations. In
addition, at the time of the 1998 Spin Off, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that were pending at the time
of the 1998 Spin Off, and which arose out of the ownership or operation of the
health care operations. Vencor also agreed to defend, on behalf of the
Company, any claims asserted after the 1998 Spin Off which arise out of the
ownership and operation of the health care 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 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. For example, Vencor has not
agreed to assume the Spin Agreements and has reserved its right to seek to
reject such agreements pursuant and subject to the applicable provisions of
the Bankruptcy Code. If Vencor does not satisfy or otherwise honor the
obligations under these arrangements, then the Company may be liable for the
payment and performance of such obligations and may have to assume the defense
of such claims. In addition, if Vencor's plan of reorganization is
consummated, it is likely that the Company will be required to make payments
to settle certain government claims which will not be subject to recovery from
or indemnification by Vencor. See "--Risk Factors--Dependence of the Company
on Vencor."
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 1999.
<TABLE>
<CAPTION>
Type of Percentage Number of Number of Number of
Facility of Portfolio (1) Facilities Beds/Units States (2)
-------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Hospitals.................... 40.0% 45 4,171 21
Skilled Nursing Facilities... 59.7% 218 27,992 31
Personal Care Facilities..... 0.3% 8 136 1
----- --- ------
Total...................... 100.0% 271 32,299 36
===== === ====== ===
</TABLE>
- --------
(1) Based on the percentage of gross rent earned before write-offs by the
Company for the year ended December 31, 1999.
(2) The Company has properties located in 36 states operated by eight
different operators.
Hospital Facilities
The Company's hospitals generally are long-term acute 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 parenteral
nutrition, respiration or cardiac monitors and dialysis
14
<PAGE>
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 facility or rehabilitation hospital.
Nursing Facilities
The Company's nursing facilities generally are skilled nursing facilities.
In addition to the customary services provided by skilled nursing facilities,
the operators of the Company's nursing facilities typically provide
rehabilitation services, including physical, occupational and speech
therapies.
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 health care
providers, other health care 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. When the Company is permitted under the terms of the
Amended Credit Facility to reinstate 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. See "Risk Factors--Implementation of Original Business Strategy" and
"Note 4--Borrowing Arrangements" to the Consolidated Financial Statements.
The operators of the Company's properties compete on a local and regional
basis with other health care 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 health care
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.
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
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<PAGE>
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 Regarding Vencor" and "--Risk Factors--Dependence of the Company
on Vencor." 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 did not have to make any material capital expenditures in 1999
and does not expect that it will have to make any material capital
expenditures in connection with such environmental, health, and safety laws,
ordinances, and regulations during 2000.
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 jointly funded by federal
and state governments and 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 that 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
and Medicaid programs. See "--Recent Developments Regarding Government
Regulation" below. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures and the assumption by
health care 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 facility operators that decide
to withdraw from the Medicaid program from evicting or transferring patients
who are residents as of the effective date of withdrawal, and who rely on
Medicaid to cover their long-term care expenses. There can be no assurance
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,
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<PAGE>
ownership of facilities, addition of facilities, services, prices for services
and billing for services. These laws authorize periodic inspections and
investigations, and identified deficiencies that, if not corrected, can result
in sanctions that 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. Federal 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 health care 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") periodically 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 health
care 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. A violation of such
laws and regulations 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.
Government investigations and enforcement of health care 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 health care fraud and related offenses and broadened the scope
to include private health care 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 health care fraud. Private enforcement of health care
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 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.
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
health care programs for operators convicted of a prior health care offense.
Some states require state approval for development and expansion of health
care facilities and services, including findings of need for additional or
expanded health care facilities or services. A certificate of need ("CON"),
which is issued by governmental agencies with jurisdiction over health care
facilities, is at times
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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 health care
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 Acute Care Hospitals
All but two of the Company's hospitals are operated as long-term acute care
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 acute care hospitals
are currently excluded from the prospective payment system that applies to
acute care hospitals ("PPS"). A long-term acute care hospital has an average
length of stay greater than 25 days. Inpatient operating costs for long-term
acute care 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 Facilities
The operators of the Company's nursing facilities 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 facilities.
The Budget Act also established a prospective payment system for Medicare
skilled nursing facilities ("SNF") for cost reporting periods beginning on or
after July 1, 1998 ("SNF PPS"). During a SNF's first three cost reporting
periods under SNF 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 Medicare, Medicaid, and SCHIP Balanced Budget
Refinement Act of 1999 (the "Refinement Act") permits an operator of a SNF to
waive the three year transition period for a SNF and have that SNF immediately
transitioned to the federal per diem rate.) The rates for such services were
first published in the Federal Register on May 12, 1998, after the
consummation of the 1998 Spin Off. The payments received under the new SNF 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. Although there has been some payment relief
under the
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Refinement Act, the new SNF PPS has resulted, and will likely continue to
result in, reduced reimbursement for the operators of the Company's properties
relative to the period prior to the effective date of the SNF PPS, thereby
adversely impacting the operators' ability to satisfy their obligations,
including payment of rent, under the leases with the Company. See "--Recent
Developments Regarding Government Regulation" below.
Health Care Reform
Health care 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, contained 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 have come from health
care operators and changes in program components. For certain health care
providers, including hospitals, home health agencies, SNFs and hospices,
implementation of the Budget Act has resulted in more drastic reimbursement
reductions than had been anticipated. In an effort to provide some relief for
those health care providers, Congress enacted the Refinement Act which
provides for an additional $16.0 billion in funding over 5 years.
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 SNF
PPS for cost reporting periods beginning on or after July 1, 1998. During a
SNF's first three cost reporting periods under SNF 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 rates. (The
Refinement Act permits an operator to waive the three year transition of a SNF
to the federal per diem rate.) 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 in a Part A stay, 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 SNF PPS are substantially less than before enactment of the Budget Act,
even with increases under the Refinement Act. Vencor has been subject to SNF
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 remain
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, the Refinement Act, future
health care legislation, or other changes in the administration or
interpretation of governmental health care 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.
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Recent Developments Regarding Government Regulation
In response to widespread health care industry concern about the effects of
the Budget Act, Congress passed the Refinement Act, which the President signed
into law on November 29, 1999. The Refinement Act does not enact any
fundamental changes in the Medicare system, but rather reverses or delays some
of the reductions in Medicare payment increases mandated by the Budget Act. It
is estimated that in the next five fiscal years this "givebacks" law will
return to health care providers about $16.0 billion of the $115 billion the
Budget Act was expected to cut from increases to the Medicare program.
Specific providers receiving relief under the Refinement Act include skilled
nursing facilities, which will receive temporary (effective April 1, 2000 to
October 1, 2000) per diem payment increases for certain high cost patients,
and outpatient rehabilitation therapy providers, which will no longer be
subjected to a $1,500 annual cap on the amount of physical, occupational and
speech therapy provided to a patient. The Refinement Act requires HHS to
recommend a new payment policy for outpatient therapy by January 2001. The
Refinement Act also specifies that the temporary per diem payment increase
will be replaced by specific administrative rate increases. If such
administrative rate increases are not final by October 1, 2000, the temporary
per diem increases will remain in place. In addition, PPS rates are subject to
a 4% inflationary adjustment effective October 1, 2000.
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 ended December 31, 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, subject to its ability to meet the
minimum distribution requirements as discussed below. 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 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. Although the
Company is currently expected to qualify as a REIT for the year ended December
31, 1999, it is possible that economic, market, legal, tax or other
considerations may cause the Company to fail or not elect to qualify as a
REIT. 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 such stockholder's
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 ended December 31, 1999 and to
distribute 95% of its 1999 taxable income as a dividend on or prior to
September 15, 2000. See "--Annual Distribution Requirements." 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
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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 or property repossessed by the Company upon dispossessing a tenant
after a lease default) 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")).
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. The amount of any such capital gain realized would be limited to the
extent of any available capital loss carryforwards. In connection with the
sale of any assets, a portion of such gain could be treated as ordinary income
instead of capital gain and be subject to taxation and/or the minimum REIT
distribution requirements. See "--Annual Distribution Requirements" below.
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
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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). As permitted by its certificate
of incorporation, the Company has granted waivers of such ownership
limitations to certain stockholders. Such waivers, in general, restrict such
stockholders to owning less than 15% of the Common Stock of the Company, and
terminate in circumstances where the stockholders' ownership of in excess of
9.9% of the Common Stock would jeopardize the Company's ability to elect (or
maintain) REIT status.
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 to 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).
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 at December 31, 1999 it did
not have any accumulated earnings and profits that are attributable to periods
during which the Company was not a REIT, although the IRS would be entitled to
challenge that determination. For taxable years beginning after 2000, a
distribution made to meet the requirement that a REIT may not have non-REIT
earnings and profits will be treated, on a first-in, first-out basis, as made
from earnings and profits which, if not distributed, would result in a failure
to meet such requirement. Thus, such earnings and profits are deemed
distributed first from earnings and profits that would cause such a failure,
starting with the earliest Company year for which such failure would occur.
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,
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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 99% general partnership interest in the
Operating Partnership and indirectly owns the remaining 1% limited partnership
interest in the Operating Partnership through a wholly owned limited liability
company. Under the Check-the-Box Regulations, the limited liability company,
and therefore the Operating Partnership, is disregarded as an entity 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) on
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 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.
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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
(based on the fair market values after 2000), 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. An
"independent contractor" is defined as an entity that does not own (directly
or indirectly) more than 35% of the Company's stock or an entity not more than
35% owned (directly or indirectly) by persons who own more than 35% of the
Company's stock. If any class of stock of the Company or the person being
tested as an independent contractor is regularly traded on an established
securities market, only persons who directly or indirectly own 5% or more of
such class of stock shall be counted in determining whether the 35% ownership
limitations have been exceeded.
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 relief provisions. Even
if these relief provisions were to apply, a tax would be imposed with respect
to the excess net income.
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Foreclosure Property
General
The foreclosure property rules permit the Company (by the Company's
election) to foreclose or repossess properties without being disqualified as a
result of receiving income that does not qualify under the gross income tests;
however, a corporate tax is imposed upon net income from "foreclosure
property" that is not otherwise "good REIT" income. Detailed rules specify the
calculation of the tax. The after tax amount increases the amount the REIT
must distribute each year.
"Foreclosure property" includes any real property and any personal property
incident to such real property acquired by bid at foreclosure or by agreement
or process of law after there was a default or a default was imminent on the
leased property. The 90 day grace period for the foreclosure property, during
which the Company may operate the foreclosed property without an "independent
contractor" or qualifying lessee, will begin on the date the Company acquires
possession of the property.
To maintain foreclosure property treatment after the 90 day grace period,
the Company must cause the property to be managed by an "independent
contractor" (from whom the Company derives or receives no income) or lease the
property pursuant to a lease qualifying as a true lease for income tax
purposes to an unrelated third party. Ownership of the tenant must not be
attributed to the Company in violation of the related tenant rule of Section
856(d)(2)(B) (relating to 10% or more owned tenants). If the property is
leased to a third party under a true lease, the foreclosure property rules are
not then relevant.
Foreclosure property treatment will end on the first day on which the REIT
enters into a lease of the property that will give rise to income that is not
good rental income under Section 856(c)(3). In addition, foreclosure property
treatment will end if any construction takes place on the property (other than
completion of a building, or other improvement more than 10 percent complete
before default became imminent). Foreclosure property treatment may be
extended up to six years.
Health Care Properties
The Company is permitted to terminate leases of "qualified health care
properties" other than by reason of default or imminent default. Except as
noted below, health care foreclosure properties are subject to the foreclosure
property tax and other rules under the general foreclosure property rules.
The differences between this special health care rule and the general
foreclosure rule are that (i) the initial foreclosure property period is for
two rather than three years, although it may be extended for the same
aggregate six years, (ii) the lease may be terminated without requirement of
default, and (iii) income from the independent contract is permitted if
received as otherwise qualifying rent.
A "qualified health care property" includes any real property and any
personal property incident to such real property which is a "health care
facility" or is necessary or incidental to the use of a health care facility.
The qualified health care facility may be operated by an independent
contractor from whom the REIT does not derive or receive any income other than
certain qualifying lease income from an independent contractor.
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
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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 or after 2000, 10% of the value of any one
issuer's outstanding securities, subject to limited "safe harbor" exceptions
for certain straight debt obligations (except for the Company's ownership
interest in an entity that is disregarded for federal income tax purposes,
that is classified as a partnership for federal income tax purposes or that is
the stock of a qualified REIT subsidiary) (the "10% voting securities test").
In addition, no more than 20% of the value of the Company's assets can be
represented by securities of taxable REIT subsidiaries (as defined below).
Taxable REIT Subsidiaries
The Company, however, is permitted to own up to 100% of a "taxable REIT
subsidiary." To qualify as a taxable REIT subsidiary, both the Company and the
subsidiary corporation must join in an election to treat the subsidiary
corporation as a taxable REIT subsidiary. In addition, any corporation (other
than a REIT or a qualified REIT subsidiary) of which a taxable REIT subsidiary
owns, directly or indirectly, more than 35 percent of the vote or value is
automatically treated as a taxable REIT subsidiary.
A taxable REIT subsidiary can provide services to tenants of the Company's
properties (even if such services were not considered services customarily
furnished in connection with the rental of real property), and can manage or
operate properties, generally for third parties, without causing amounts
received or accrued directly or indirectly by the Company for such activities
to fail to be treated as rents from real property. However, rents paid to the
Company generally are not qualified rents if the Company owns more than 10%
(by vote or value) of the corporation paying the rents. Nevertheless,
qualified rents do include rents that are paid by taxable REIT subsidiaries
and that also meet a limited rental exception (where 90% of space is leased to
third parties at comparable rents) and an exception for rents from certain
lodging facilities (operated by an independent contractor).
Moreover, the taxable REIT subsidiary cannot directly or indirectly operate
or manage a lodging or health care facility, subject to special rules for
certain lodging facilities.
Also, the taxable REIT subsidiary generally cannot provide to any person
rights to any brand name under which hotels or health care facilities are
operated, unless the rights are provided to an independent contractor to
operate or manage a lodging facility, if the rights are held by the taxable
REIT subsidiary as licensee or franchisee and the lodging facility is owned by
the taxable REIT subsidiary or leased to it by the Company.
The taxable REIT subsidiary cannot deduct interest in any years that would
exceed 50% of the taxable REIT subsidiary's adjusted gross income. If any
amount of interest, rent, or other deductions of the taxable REIT subsidiary
for amounts paid to the Company is determined to be other than at arm's length
("redetermined" items), an excise tax of 100% is imposed on the portion that
was excessive, with limited "safe harbor" exceptions.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter except for its first 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.
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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% (90% for taxable years beginning
after December 31, 2000) of the Company's "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and
(B) 95% (90% for taxable years beginning after December 31, 2000) 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% (90% for taxable years beginning after December
31, 2000), 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 except to the extent of net operating loss or
capital loss carryforwards. 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 anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy
the 95% (90% for taxable years beginning after December 31, 2000) 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% (90% for
taxable years beginning after December 31, 2000) 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 or other cash
needs 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, distribute other property or
securities or engage in a transaction intended to enable it to meet the REIT
distribution requirements. The Company's ability to engage in certain of these
transactions is restricted by the terms of the Amended Credit Agreement. Any
such transaction would likely require the consent of the "Required Lenders"
under the Amended Credit Agreement, and there can be no assurance that such
consent would be obtained. 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 a 4% excise tax and interest to the IRS based upon the
amount of any deduction taken for deficiency dividends.
The Company believes that it has met all of the tests required to be met as
of December 31, 1999 in order to qualify as a REIT for 1999, with the
exception of the annual distribution requirement. As discussed above, the
Company can meet the annual distribution requirement through payment of 95% of
its taxable income, less dividends paid in February 1999, by no later than
September 15, 2000 (the extended due date of its 1999 federal income tax
return). The 1999 dividend may be satisfied by a combination of cash and a
distribution of Vencor
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equity, which the Company expects to receive as part of the Vencor
reorganization, if it occurs, or other property or securities. Since such
distributions were not made by January 31, 2000, the Company is required to
pay a 4% non-deductible excise tax on the portion of the distribution not paid
by January 31, 2000. Failure to pay the required REIT dividend in 2000 with
respect to 1999 would result in the Company not qualifying as a REIT in 1999
and being subject to substantial past due federal, state and local taxes,
interest and penalties. Although the Company currently expects to qualify as a
REIT for the year ended December 31, 1999, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail or
elect not to qualify as a REIT.
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 believes that it has
complied with these requirements for 1999. 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 except to the extent of net
operating loss and capital loss carryforwards. 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 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 that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (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
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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.
If the Company should become a closely held REIT, any person owning at least
10% (by vote or value) of the Company is required to accelerate the
recognition of year-end dividends attributable to the Company, for purposes of
such person's estimated tax payments. A closely held REIT is defined as one in
which at least 50% (by vote or value) is owned by five or fewer persons.
Attribution rules apply to determine ownership.
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 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
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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 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
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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 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, 2000.
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
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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 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-
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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, 2000. 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, 1999, the Company had ten full-time employees. The
Company considers its relationship with its employees to be good.
Insurance
The Company maintains, or requires in its leases that its tenants 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 "--The 1998 Spin Off."
There can be no assurance that Vencor and the Company's other tenants will
maintain such insurance and any failure by Vencor or the Company's other
tenants to do so could have a Material Adverse Effect on the Company. The
Company believes that Vencor and its other tenants are in substantial
compliance with the insurance requirements contained in their respective
leases with the Company.
The Company believes that the amount and coverage of its insurance
protection is customary for similarly situated companies in its industry.
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.
RISK FACTORS
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, accounting
for approximately 98.5% (98.3%, net of write-offs) of the Company's revenues
in 1999.
The operations of Vencor have been negatively impacted by changes in
governmental reimbursement rates, by its current level of indebtedness and by
certain other factors. Vencor filed for protection under chapter 11 of the
Bankruptcy Code on September 13, 1999. See "--Effects of Bankruptcy
Proceedings." Vencor's financial condition, ability and willingness to meet
its rent obligations will determine the Company's revenues and the Company's
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 the Company. 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 Master Leases are structured as triple-net leases under
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which Vencor is responsible for all or substantially all insurance, taxes and
maintenance and repair expenses required in connection with the leased
properties, the inability or unwillingness of Vencor to satisfy its
obligations under the Master Leases would have a Material Adverse Effect on
the Company. 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 health care 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 1998 Spin Off, the Company assigned to Vencor
and Vencor assumed the Third Party Leases, and the rights, obligations and
duties as a tenant thereunder, as well as the Third Party Guarantees. The rent
obligation under the Third Party Leases for the year ending December 31, 2000
is expected to be approximately $35.3 million, and the aggregate exposure
under the Third Party Guarantees is approximately $49.8 million. See "Note 8--
Transactions With Vencor--The 1998 Spin Off" to the Consolidated Financial
Statements. In connection with these assignments, the Company may remain
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 or that Vencor will continue to
honor its obligations incurred in connection with the 1998 Spin Off. If Vencor
or certain third party subtenants are unable or unwilling to satisfy such
obligations, the Company may be obligated to satisfy the obligations under the
Third Party Leases and the Third Party Guarantees. In that event, the Company
may be entitled to receive revenues from the leased properties that would
mitigate the costs incurred in connection with the satisfaction of such
obligations. Of the aggregate exposure under the Third Party Guarantees, Atria
also has directly guaranteed and agreed to indemnify and hold the Company
harmless from and against all claims against the Company arising out of one of
the Third Party Guarantees in an aggregate principal amount of $34.5 million.
Although the Company is engaged in discussions with Atria in an effort to have
the $34.5 million liability formally assumed by Atria and the Company released
from the liability, there can be no assurance that the Company will be
successful in its attempt to be released from this liability. The Company's
performance of these obligations could have a Material Adverse Effect on the
Company. Failure to maintain REIT status would result in the Company incurring
federal, state and local taxes, interest and penalties.
In connection with the 1998 Spin Off, 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 health care operations either before or after
the date of the 1998 Spin Off. 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 health care operations. In
addition, at the time of the 1998 Spin Off, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that (a) were pending at the
time of the 1998 Spin Off and which arose out of the ownership or operation of
the health care operations or (b) were asserted after the 1998 Spin Off and
which arise out of the ownership and operation of the health care operations
or any of the assets or liabilities transferred to Vencor in connection with
the 1998 Spin Off and to indemnify the Company for any fees, costs, expenses
and liabilities arising out of such operations.
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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 1998 Spin Off or that Vencor will continue to honor its
obligations incurred in connection with the 1998 Spin Off. For example, Vencor
has not agreed to assume the Spin Agreements and has reserved its right to
seek to reject such agreements pursuant to and subject to the applicable
provisions of the Bankruptcy Code. If Vencor does not satisfy or otherwise
honor the obligations under these arrangements, then the Company may be liable
for the payment and performance of such obligations and may have to assume the
defense of such claims. In addition, if Vencor's plan of reorganization is
consummated, it is likely that the Company will be required to make payments
to settle certain government claims which will not be subject to recovery from
or indemnification by Vencor. 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 Company.
In connection with the 1998 Spin Off, the Company sold or otherwise
transferred substantially all of the Company's books and records relating to
the hospital, nursing facility and ancillary services businesses to Vencor.
Therefore, the Company must rely on Vencor in order to examine and/or obtain
copies of such books and records. The failure of Vencor to provide the Company
with access to or copies of such books and records could have a Material
Adverse Effect on the Company.
Effects of Bankruptcy Proceedings
Vencor filed for protection under chapter 11 of the Bankruptcy Code on
September 13, 1999. Several other tenants of the Company also have filed for
bankruptcy protection. See "--Recent Developments Regarding Vencor" and "Note
9--Commitments and Contingencies" to the Consolidated Financial Statements.
The limitations imposed by federal bankruptcy law on the ability of the
Company to enforce its agreements with these parties could have a Material
Adverse Effect on the Company.
The Company's ability to manage its assets and operations is subject to
federal and 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, should have an obligation to pay rent to
the Company as landlord during the pendency of the proceeding and pending the
assumption or rejection of the respective lease. The tenants, however, may
dispute the amount of rent to be paid pending the assumption or rejection of a
lease. If the tenant assumes a real property lease, it generally must do so
pursuant to the original contract terms and it must cure pre-petition and
post-petition defaults under the lease unless the landlord has agreed to
modify the contract terms or the bankruptcy court orders the terms modified.
If the tenant rejects a real property lease, the Company may lease the
property to another tenant. See "--Lack of Control Over Properties." If a
tenant becomes insolvent or files for bankruptcy protection, there can be no
assurance 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 assurance 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 federal bankruptcy protection, the
Bankruptcy Code will apply, which may restrict the amount and recoverability
of the Company's claims against the tenant. In addition, the automatic stay
provisions of the Bankruptcy Code prevent a party from exercising certain of
its contractual rights, including the right to payment of amounts past due,
while the debtor is subject to federal bankruptcy protection. These
proceedings could have a Material Adverse Effect on the Company.
In connection with Vencor's bankruptcy filing, the Company and Vencor
entered into a Stipulation for the payment by Vencor to the Company of
approximately $15.1 million per month starting in September 1999, to be
applied against the total amount of minimum monthly base rent that is due and
payable under the Master Leases. During the period in which the Stipulation is
in effect, Vencor has agreed to fulfill all of its obligations under the Spin
Agreements as such obligations become due, including its obligation to
indemnify and defend Ventas for any and all claims relating to the health care
operations and assets and liabilities transferred to Vencor in the
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1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to seek to reject such agreements pursuant and
subject to the applicable provisions of the Bankruptcy Code. A termination of
the Stipulation and/or rejection by Vencor of the Spin Agreements could have a
Material Adverse Effect on the Company. See "--Recent Developments Regarding
Vencor."
In addition, Vencor, as a debtor in possession in a bankruptcy case
commenced under the Bankruptcy Code, or any trustee appointed for it, could
seek to avoid one or more transfers made and obligations incurred as part of
or subsequent to the 1998 Spin Off under the bankruptcy avoidance powers. Such
transfers and obligations could be avoided if, among other things, they were
preferential or otherwise were made or incurred with the actual intent to
delay, hinder or defraud creditors. They also could be avoided if, as of the
1998 Spin Off, 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 1998 Spin Off, 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.
The Company believes that Vencor was solvent (in accordance with the
foregoing definitions) at the time of 1998 Spin Off, was able to repay its
debts as they matured following the 1998 Spin Off and had sufficient capital
to carry on its business. Moreover, the Company at the time of the 1998 Spin
Off 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 1998
Spin Off or that any transfer would not be avoided on other grounds.
Substantial Leverage and Ability to Raise Capital
On January 31, 2000, the Company finalized an agreement with all of its
lenders under the Bank Credit Agreement to restructure its debt under the Bank
Credit Agreement on a long term basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Note 4--Borrowing Arrangements" to the Consolidated
Financial Statements. 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 dependent upon lease
payments from Vencor to meet its interest expense and principal repayment
obligations under its current debt facilities. If the Company's cash flow from
operations was not sufficient to meet all scheduled debt payments, the Company
would be required to obtain additional borrowings or raise equity to meet its
required debt payments. The ability of the Company to incur additional
indebtedness is restricted by the terms of the Amended Credit Agreement. In
addition, adverse economic conditions could cause the terms on which the
Company can obtain additional borrowings to become unfavorable. In such
circumstances, the Company may be required to raise equity in the capital
markets or 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
health care regulations may constrain the ability of the Company to sell
assets. There can be no assurance that the Company will be able to meet its
debt service obligations and the failure to do so could have a Material
Adverse Effect on the Company.
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
Company's leased properties. The Company may be unable to take action if it
believes Vencor or such other lessees are operating one of the leased
properties inefficiently or in a manner adverse to the Company's interests.
See "--Effects of Bankruptcy Proceedings" and "Business--The 1998 Spin Off--
Master Lease Agreements." If a Master Lease or property under a Master Lease
is rejected or otherwise returned to the Company, the Company would have to
locate a suitable lessee/operator for the property. There can be no assurance
that the Company will be able to locate another suitable lessee/operator or
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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, receivership, CON or other laws, as well as Medicare
and Medicaid change of ownership rules.
Conflicts of Interest
Because of the pre-existing 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. Currently, however, the Company and
Vencor have no common officers, directors or, to the Company's knowledge,
common ownership by stockholders owning greater than 10% of both companies. In
addition, the Independent Committee of the Company's Board of Directors has
been formed for the purpose of ensuring arm's length transactions and dealings
between the Company and Vencor.
Health Care Industry Risks
Dependence on Health Care Industry
Because all of the properties are used as health care facilities, the
Company is directly affected by the risks associated with the health care
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 health care providers of all or a portion of the financial risk
of operating a health care facility. Efforts to impose greater discounts and
more stringent cost controls by private payors are expected to continue. There
can be no assurance that adequate reimbursement levels will continue to be
available for services to be provided by Vencor and other lessees which are
currently being reimbursed by Medicare, Medicaid or private payors.
Significant limits on the scope of services reimbursed and on reimbursement
rates and fees could have a material adverse effect on the liquidity,
financial condition and results of operations of Vencor and other lessees,
which, in turn, could have a Material Adverse Effect on the Company.
Extensive Regulation
The health care 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. If not
corrected, deficiencies 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. The Anti-kickback Laws prohibit certain business practices and
relationships that might affect the provision and cost of health care 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 their businesses, 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."
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The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. 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 health care
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 bankruptcy rules and 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.
Health Care Reform
Health care 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, contained 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
health care 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 SNF
PPS for Medicare cost reporting periods beginning on or after July 1, 1998.
During a nursing facilities' first three cost reporting periods under SNF 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 HCFA in the Federal
Register on May 12, 1998. The payments received under SNF PPS cover all
services for Medicare Part A 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 SNF PPS
are substantially less than before enactment of the Budget Act and will remain
so even after the effective date of the Refinement Act. Vencor has been
subject to SNF 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
remain 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.
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There can be no assurance that the Budget Act, future health care
legislation or other changes in the administration or interpretation of
governmental health care 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 and a Material Adverse Effect on the Company.
Implementation of Original Business Strategy
At the time of the 1998 Spin Off, the business strategy of the Company was
to diversify itself from its Vencor tenant concentration. However, current
conditions have impeded this strategy. Also, the terms of the Amended Credit
Agreement significantly limit the Company's ability to acquire or swap assets.
See "Note 4--Borrowing Arrangements" to the Consolidated Financial Statements.
Currently, the Company has no plans to acquire additional assets. If the
Company obtains the contractual ability to acquire and swap assets under the
terms of its credit arrangements, and if Vencor has stabilized its financial
condition, the Company intends to re-implement its original business strategy,
assuming it has the financial flexibility at that time to do so. Accordingly,
if the Company does begin to pursue acquisitions or development of additional
health care 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 would compete 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 or because it
chooses not to make such election, 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 taxable year, 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. However, in such case the Company will be liable for federal,
state and local income taxes on its 1999 taxable income and will incur
interest and penalties.
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
39
<PAGE>
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% (90% for taxable years beginning after December 31, 2000)
distribution requirement and to avoid the nondeductible excise tax. See "--
Federal Income Tax Considerations--Annual Distribution Requirements." 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 anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy
the 95% (90% for taxable years beginning after December 31, 2000) 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% (90% for
taxable years beginning after December 31, 2000) 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 or other cash
needs 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, distribute other property or
securities or engage in a transaction intended to enable it to meet the REIT
distribution requirements. The Company's ability to engage in certain of these
transactions is restricted by the terms of the Amended Credit Agreement. Any
such transaction would likely require the consent of the "Required Lenders"
under the Amended Credit Agreement, and there can be no assurance that such
consent would be obtained. 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. Although the Company currently expects to qualify as a
REIT for the year ended December 31, 1999, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail or
elect not to qualify as a REIT.
Potential Liabilities Due to Fraudulent Transfer Considerations, Legal
Dividend Requirements and Other Claims
The Company
The 1998 Spin Off, including the simultaneous distribution of the Vencor
common stock to the Ventas stockholders, is subject to review under 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 1998 Spin Off, the Company did not receive
fair consideration or reasonably equivalent value for distributing the stock
distributed in the 1998 Spin Off and, at the time of the 1998 Spin Off, 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 among other things order the
holders of the stock distributed in the 1998 Spin Off to return the value of
the stock and any dividends paid thereon and/or invalidate, in whole or in
part, the 1998 Spin Off as a fraudulent conveyance.
Vencor
Although Vencor has not formally asserted a claim, Vencor's legal counsel
has raised questions relating to potential fraudulent conveyance or obligation
issues and other claims relating to the 1998 Spin Off. At the time of the 1998
Spin Off, the Company obtained an opinion from an independent third party that
addressed issues of solvency and adequate capitalization. Nevertheless, if a
fraudulent conveyance or obligation claim or other claim is ultimately
asserted by Vencor, its creditors, or others, the ultimate outcome of any such
claim cannot
40
<PAGE>
presently be determined. The Company intends to defend these claims vigorously
if they are asserted in a court, arbitration or mediation proceeding. If a
Vencor plan of reorganization is confirmed according to the terms of the
September 1999 Agreement in Principle, the potential claims relating to the
1998 Spin Off will be released. However, there can be no assurance that Vencor
will be successful in achieving a plan of reorganization or that such releases
will be included in a Vencor plan of reorganization which may be confirmed. If
these claims were to prevail, they would have a Material Adverse Effect on the
Company. See "Note 8--Transactions with Vencor" and "Note 11--Litigation" to
the Consolidated Financial Statements.
Legal Dividend Requirements
In addition, the 1998 Spin Off 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 1998
Spin Off, were able to repay their debts as they matured following the 1998
Spin Off and had sufficient capital to carry on their respective businesses
and (ii) the 1998 Spin Off was consummated entirely in compliance with
Delaware law. 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 1998 Spin Off or whether lawful funds were
available for the 1998 Spin Off.
The Spin Agreements
The Spin Agreements provide for the allocation, immediately prior to the
1998 Spin Off, of certain debt of the Company. Further, pursuant to the Spin
Agreements, from and after the date of the 1998 Spin Off, 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 1998 Spin Off. 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. See "--Effects of Bankruptcy Proceedings," "Business--
Recent Developments Regarding Vencor" and "Note 11--Litigation" to the
Consolidated Financial Statements.
Tax Claims
Following the Company's REIT election, if and when it is made, the Company
will be deemed to be a former C corporation for income tax purposes. As such,
the Company potentially remains subject to corporate level taxes for any asset
dispositions occurring between January 1, 1999 and December 31, 2008. See
"Note 7--Income Taxes" to the Consolidated Financial Statements. The Internal
Revenue Service is currently reviewing the federal income tax returns for tax
years ending December 31, 1996 and 1995 of the Company (which then operated
under the name Vencor). The income tax returns for the Company for subsequent
years are also subject to a review.
Item 2. Properties
The Company believes that it has a diversified portfolio of health care
facilities in terms of geography and the health care services provided at such
facilities. The Company believes that the geographic diversity of the
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 4,171 beds in 45
hospitals. The nursing facilities 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 27,992 beds in 218 nursing facilities. 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.
41
<PAGE>
The following tables set forth information for each of the Master Leases and
the facilities leased thereunder based on the contract rental amounts for
1999. The chart also includes under the heading "Other Facilities" those
properties under leases with non-Vencor lessees. The 1999 rental income
reflects the stated contract rent, as opposed to amounts paid pursuant to the
Stipulation, without regard to write-offs:
<TABLE>
<CAPTION>
Licensed Licensed
Number of Skilled Number of Personal
Number of Licensed Skilled Nursing Personal Care
1999 Rental Hospital Hospital Nursing Facility Care Facility
Income Facilities ("H") Beds Facilities ("SNF") Beds Facilities Beds
----------- ---------------- -------- ------------------ -------- ---------- --------
($'s in
Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Master Lease 1.............. $ 46,115 9 971 45 5,823 -- --
Master Lease 2.............. 44,541 10 768 38 4,877 -- --
Master Lease 3.............. 46,296 9 841 43 5,627 -- --
Master Lease 4 and Corydon.. 88,167 17 1,591 84 10,490 -- --
-------- --- ----- --- ------ --- ---
TOTAL ALL VENCOR
FACILITIES................. 225,119 45 4,171 210 26,817 -- --
Other Facilities............ 3,481 -- -- 8 1,175 8 136
-------- --- ----- --- ------ --- ---
TOTAL ALL FACILITIES........ $228,600 45 4,171 218 27,992 8 136
======== === ===== === ====== === ===
</TABLE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- -------------- ----- --------
<S> <C> <C> <C>
MASTER LEASE 1
Rehabilitation & Healthcare Center of Birmingham
(1)............................................ Birmingham AL SNF
Desert Life Rehabilitation & Care Center........ Tucson AZ SNF
Vencor Hospital--Ontario........................ Ontario CA H
Magnolia Gardens Care Center.................... Burlingame CA SNF
Maywood Acres Healthcare Center................. Oxnard CA SNF
Cherry Hills Health Care Center................. Englewood CO SNF
Hamilton Rehabilitation & Healthcare Center..... Norwich CT SNF
Homestead Health Center......................... Stamford CT SNF
Vencor Hospital--St. Petersburg................. St. Petersburg FL H
Vencor Hospital--Central Tampa.................. Tampa FL H
Titusville Rehabilitation & Nursing Center...... Titusville FL SNF
Bay Pointe Nursing Pavilion..................... St. Petersburg FL SNF
Rehabilitation & Healthcare Center of Tampa..... Tampa FL SNF
Rehabilitation & Health Center of Cape Coral.... Cape Coral FL SNF
Casa Mora Rehabilitation & Ext Care (1)......... Bradenton FL SNF
Lafayette Nursing & Rehabilitation Center....... Fayetteville GA SNF
Hillcrest Rehabilitation Care Center............ Boise ID SNF
Nampa Care Center............................... Nampa ID SNF
Weiser Rehabilitation and Care Center........... Weiser ID SNF
Vencor Hospital--Sycamore....................... Sycamore IL H
Rolling Hills Health Care Center................ New Albany IN SNF
Windsor Estates Health & Rehabilitation Ctr..... Kokomo IN SNF
Parkwood Health Care Center..................... Lebanon IN SNF
Columbus Health & Rehabilitation Center......... Columbus IN SNF
Oakview Nursing & Rehabilitation Center......... Calvert City KY SNF
Maple Manor Healthcare Center................... Greenville KY SNF
Crawford Skilled Nursing & Rehabilitation
Center......................................... Fall River MA SNF
Hallmark Nursing & Rehabilitation Center........ New Bedford MA SNF
Hillcrest Nursing Home.......................... Fitchburg MA SNF
Country Gardens Sk. Nursing & Rehabilitation.... Swansea MA SNF
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- -------------- ----- --------
<S> <C> <C> <C>
Franklin Sk. Nursing & Rehabilitation Center.... Franklin MA SNF
Eastside Rehabilitation and Living Center....... Bangor ME SNF
Kennebunk Nursing Center........................ Kennebunk ME SNF
Vencor Hospital--Metro Detroit.................. Detroit MI H
Vencor Hospital--Kansas City.................... Kansas City MO H
LaSalle Healthcare Center....................... Durham NC SNF
Guardian Care of Henderson...................... Henderson NC SNF
Guardian Care of Kinston........................ Kinston NC SNF
Guardian........................................ Elizabeth City NC SNF
Greenbriar Terrace Healthcare (1)............... Nashua NH SNF
Torrey Pines Care Center........................ Las Vegas NV SNF
West Lafayette Rehabilitation & Nursing Ctr..... West Lafayette OH SNF
Cambridge Health & Rehabilitation Center........ Cambridge OH SNF
Health Havens Nursing & Rehabilitation Center... E. Providence RI SNF
Primacy Healthcare & Rehabilitation Center...... Memphis TN SNF
Vencor Hospital--Ft. Worth Southwest............ Ft. Worth TX H
Vencor Hospital--Houston Northwest.............. Houston TX H
Vencor Hospital--Ft. Worth West................. Ft. Worth TX H
Wasatch Valley Rehabilitation................... Salt Lake City UT SNF
Harbour Pointe Med. & Rehabilitation Ctr........ Norfolk VA SNF
Bay Pointe Medical & Rehabilitation Centre...... Virginia Beach VA SNF
Lakewood Healthcare Center...................... Lakewood WA SNF
San Luis Medical & Rehabilitation Center........ Greenbay WI SNF
Colonial Manor Medical & Rehabilitation Center.. Wausau WI SNF
MASTER LEASE 2
Rehabilitation & Healthcare Center of Mobile
(1)............................................ Mobile AL SNF
Villa Campana Health Center..................... Tucson AZ SNF
THC--Orange County.............................. Orange County CA H
Californian Care Center......................... Bakersfield CA SNF
Alta Vista Healthcare Center.................... Riverside CA SNF
Brighton Care Center............................ Brighton CO SNF
Camelot Nursing & Rehabilitation Center......... New London CT SNF
Parkway Pavilion Healthcare..................... Enfield CT SNF
Vencor Hospital--Hollywood...................... Hollywood FL H
Healthcare & Rehabilitation Ctr of Sanford...... Sanford FL SNF
Carrollwood Care Center......................... Tampa FL SNF
Windsor Woods Convalescent Center............... Hudson FL SNF
Highland Pines Rehabilitation Center............ Clearwater FL SNF
Savannah Rehabilitation & Nursing Center........ Savannah GA SNF
Specialty Care of Marietta...................... Marietta GA SNF
Emmett Rehabilitation and Healthcare............ Emmett ID SNF
Meadowvale Health & Rehabilitation Center....... Bluffton IN SNF
Wedgewood Healthcare Center..................... Clarksville IN SNF
Cedars of Lebanon Nursing Center................ Lebanon KY SNF
Riverside Manor Health Care..................... Calhoun KY SNF
Danville Centre for Health & Rehabilitation..... Danville KY SNF
Vencor Hosp--Boston Northshore.................. Peabody MA H
Vencor Hospital--Boston......................... Boston MA H
Presentation Nursing & Rehabilitation Center.... Brighton MA SNF
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- ---------------- ----- --------
<S> <C> <C> <C>
Sachem Nursing & Rehabilitation Center........ East Bridgewater MA SNF
Newton and Wellesley Alzheimer Center......... Wellesley MA SNF
River Terrace................................. Lancaster MA SNF
Augusta Rehabilitation Center................. Augusta ME SNF
Brewer Rehabilitation & Living Center......... Brewer ME SNF
Westgate Manor................................ Bangor ME SNF
Vencor Hospital--Detroit...................... Detroit MI H
Vencor Hospital--Greensboro................... Greensboro NC H
Pettigrew Rehabilitation & Healthcare Center.. Durham NC SNF
Raleigh Rehabilitation & Healthcare Center.... Raleigh NC SNF
Lincoln Nursing Center (1).................... Lincoln NC SNF
Guardian Care of Zebulon...................... Zebulon NC SNF
THC--Las Vegas Hospital....................... Las Vegas NV H
Medford....................................... Medford OR SNF
Wyomissing Nursing & Rehabilitation Center.... Reading PA SNF
Cordova Rehabilitation & Nursing Center....... Cordova TN SNF
Vencor Hospital--San Antonio.................. San Antonio TX H
Vencor Hospital--Mansfield.................... Mansfield TX H
Crosslands Rehabilitation & Health Care Ctr... Sandy UT SNF
Edmonds Rehabilitation & Healthcare Center.... Edmonds WA SNF
Vencor Hospital--Mt. Carmel................... Mt. Carmel WI H
Vallhaven Care Center......................... Neenah WI SNF
Mt. Carmel Medical & Rehabilitation Center.... Burlington WI SNF
Mt. Carmel Medical & Rehabilitation Center.... Milwaukee WI SNF
MASTER LEASE 3
Rehabilitation & Healthc. Center of
Huntsville................................... Huntsville AL SNF
Vencor Hospital--Tucson....................... Tucson AZ H
Kachina Point Health Care & Rehabilitation.... Sedona AZ SNF
Valley Gardens HC & Rehabilitation............ Stockton CA SNF
Village Square Nursing & Rehabilitation
Center....................................... San Marcos CA SNF
Vencor Hospital--Denver....................... Denver CO H
Castle Garden Care Center..................... Northglenn CO SNF
Windsor Rehabilitation & Healthcare Center.... Windsor CT SNF
Courtland Gardens Health Center, Inc.......... Stamford CT SNF
Vencor Hospital--Ft. Lauderdale............... Ft. Lauderdale FL H
Colonial Oaks Rehabilitation Center--Ft.
Myers........................................ Ft. Meyers FL SNF
Evergreen Woods Health & Rehabilitation....... Springhill FL SNF
North Broward Rehabilitation & Nursing
Center....................................... Pompano Beach FL SNF
Pompano Rehabilitation/Nursing Center......... Pompano Beach FL SNF
Abbey Rehabilitation & Nsg. Center............ St. Petersburg FL SNF
Tucker Nursing Center......................... Tucker GA SNF
Moscow Care Center............................ Moscow ID SNF
Vencor Hospital--Lake Shore................... Chicago IL H
Valley View Health Care Center................ Elkhart IN SNF
Wildwood Healthcare Center.................... Indianapolis IN SNF
Bremen Health Care Center..................... Bremen IN SNF
Rosewood Health Care Center................... Bowling Green KY SNF
Hillcrest Health Care Center.................. Owensboro KY SNF
Woodland Terrace Health Care Fac.............. Elizabethtown KY SNF
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- ---------------- ----- --------
<S> <C> <C> <C>
Harrodsburg Health Care Center................ Harrodsburg KY SNF
Vencor Hospital--New Orleans.................. New Orleans LA H
Brigham Manor Nursing & Rehabilitation Ctr.... Newburyport MA SNF
Oakwood Rehabilitation & Nursing Center....... Webster MA SNF
Star of David Nursing & Rehabilitation/Alz
Center....................................... West Roxbury MA SNF
Brittany Healthcare Center.................... Natick MA SNF
Den-Mar Rehabilitation & Nursing Center (1)... Rockport MA SNF
Embassy House Sk. Nursing & Rehabilitation.... Brockton MA SNF
Great Barrington Rehabilitation & Nursing
Center....................................... Great Barrington MA SNF
Winship Green Nursing Center.................. Bath ME SNF
Rose Manor Health Care Center................. Durham NC SNF
Guardian Care of Rocky Mount. (1)............. Rocky Mount NC SNF
Homestead Health Care & Rehabilitation Ctr.... Lincoln NE SNF
Vencor Hospital--Albuquerque (1).............. Albuquerque NM H
Chillicothe Nursing & Rehabilitation Center... Chillicothe OH SNF
Pickerington Nursing & Rehabilitation Center.. Pickerington OH SNF
Logan Health Care Center...................... Logan OH SNF
Bridgepark Center for Rehabilitation & Nursing
Sv........................................... Akron OH SNF
Vencor Hospital--Philadelphia................. Philadelphia PA H
Oak Hill Nursing & Rehabilitation Center...... Pawtucket RI SNF
Vencor Hospital--Houston (1).................. Houston TX H
San Pedro Manor............................... San Antonio TX SNF
Vencor Hospital--Arlington, VA................ Arlington VA H
Birchwood Terrace Healthcare (1).............. Burlington VT SNF
Bellingham Health Care & Rehabilitation Svc... Bellingham WA SNF
Eastview Medical & Rehabilitation Center...... Antigo WI SNF
Kennedy Park Medical & Rehabilitation Center.. Schofield WI SNF
South Central Wyoming HC. & Rehabilitation.... Rawlins WY SNF
MASTER LEASE 4 AND CORYDON
Vencor Hospital--Phoenix...................... Phoenix AZ H
Valley Healthcare & Rehabilitation Center..... Tucson AZ SNF
Sonoran Rehabilitation & Care Center.......... Phoenix AZ SNF
Vencor Hospital--San Leandro.................. San Leandro CA H
Vencor Hospital--Orange County................ Westminster CA H
Vencor Hospital--San Diego.................... San Diego CA H
Recovery Inn of Menlo Park.................... Menlo Park CA H
Nob Hill Healthcare Center.................... San Francisco CA SNF
Canyonwood Nursing & Rehabilitation Center.... Redding CA SNF
Lawton Healthcare Center...................... San Francisco CA SNF
La Veta Healthcare Center (1)................. Orange CA SNF
Bay View Nursing & Rehabilitation Center...... Alameda CA SNF
Aurora Care Center............................ Aurora CO SNF
Andrew House Healthcare....................... New Britain CT SNF
Nutmeg Pavilion Healthcare.................... New London CT SNF
Vencor Hospital--Coral Gables................. Coral Gables FL H
Vencor Hospital--North Florida................ Green Cove Spr. FL H
East Manor Medical Care Center................ Sarasota FL SNF
Savannah Specialty Care Center................ Savannah GA SNF
Cascade Care Center........................... Caldwell ID SNF
Lewiston Rehabilitation and Care Center....... Lewiston ID SNF
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- ---------------- ----- --------
<S> <C> <C> <C>
Mountain Valley Care and Rehabilitation....... Kellogg ID SNF
Vencor Hospital--Chicago North................ Chicago IL H
Vencor Hospital--Northlake.................... Northlake IL H
Vencor Hospital--LaGrange..................... LaGrange IN H
Vencor Hospital--Indianapolis................. Indianapolis IN H
Royal Oaks Healthcare & Rehabilitation
Center....................................... Terre Haute IN SNF
Southwood Health & Rehabilitation Center...... Terre Haute IN SNF
Columbia Healthcare Facility.................. Evansville IN SNF
Muncie Health Care & Rehabilitation........... Muncie IN SNF
Westview Nursing & Rehabilitation Center...... Bedford IN SNF
Vencor Corydon................................ Corydon IN SNF
Vencor Hospital--Louisville................... Louisville KY H
Winchester Centre for Health/Rehabilitation... Winchester KY SNF
Lexington Centre for Health & Rehabilitation.. Lexington KY SNF
North Centre for Health & Rehabilitation...... Louisville KY SNF
Laurel Ridge Rehabilitation & Nursing Center.. Jamaica Plain MA SNF
Blue Hills Alzheimer's Care Center............ Stoughton MA SNF
Country Manor Rehabilitation & Nursing
Center....................................... Newburyport MA SNF
Hammersmith House Nursing Care Center......... Saugus MA SNF
Timberlyn Heights Nursing & Alz. Center....... Great Barrington MA SNF
Briarwood Health Care Nursing Ctr............. Needham MA SNF
Westridge Healthcare Center................... Marlborough MA SNF
Bolton Manor Nursing Home..................... Marlborough MA SNF
Quincy Rehabilitation & Nursing Center........ Quincy MA SNF
West Roxbury Manor............................ West Roxbury MA SNF
Eagle Pond Rehabilitation & Living Center..... South Dennis MA SNF
Blueberry Hill Healthcare..................... Beverly MA SNF
Colony House Nursing & Rehabilitation Center.. Abington MA SNF
Walden Rehabilitation & Nursing Center........ Concord MA SNF
Harrington House Nursing & Rehabilitation
Center....................................... Walpole MA SNF
Norway Rehabilitation & Living Center......... Norway ME SNF
Shore Village Rehabilitation & Nursing
Center....................................... Rockland ME SNF
Brentwood Rehabilitation & Nursing Center..... Yarmouth ME SNF
Fieldcrest Manor Nursing Home................. Waldoboro ME SNF
Vencor Hospital--Minneapolis.................. Golden Valley MN H
Vencor Hospital--St. Louis.................... St. Louis MO H
Park Place Health Care Center................. Great Falls MT SNF
Parkview Acres Care & Rehabilitation Center... Dillon MT SNF
Sunnybrook Alzheimer's & HC Spec.............. Raleigh NC SNF
Blue Ridge Rehabilitation & Healthcare
Center....................................... Asheville NC SNF
Cypress Pointe Rehabilitation & HC Center..... Wilmington NC SNF
Winston-Salem Rehabilitation & HC Center...... Winston-Salem NC SNF
Silas Creek Manor............................. Winston-Salem NC SNF
Guardian Care of Roanoke Rapids............... Roanoke Rapids NC SNF
Rehabilitation & Nursing Center of Monroe..... Monroe NC SNF
Rehabilitation & Health Center of Gastonia.... Gastonia NC SNF
Chapel Hill Rehabilitation & Healthcare
Center....................................... Chapel Hill NC SNF
Dover Rehabilitation & Living Center.......... Dover NH SNF
Hanover Terrace Healthcare.................... Hanover NH SNF
Las Vegas Healthcare & Rehabilitation Center.. Las Vegas NV SNF
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- ---------------- ----- --------
<S> <C> <C> <C>
Franklin Woods Health Care Center............. Columbus OH SNF
Winchester Place Nursing & Rehabilitation
Center....................................... Canal Winchester OH SNF
Minerva Park Nursing & Rehabilitation Center.. Columbus OH SNF
Coshocton Health & Rehabilitation Center...... Coshocton OH SNF
Lebanon Country Manor......................... Lebanon OH SNF
Vencor Hospital--Oklahoma City................ Oklahoma City OK H
Sunnyside Care Center......................... Salem OR SNF
Vencor Hospital--Pittsburgh................... Oakdale PA H
Vencor Hospital--Chattanooga.................. Chattanooga TN H
Madison Healthcare & Rehabilitation Center.... Madison TN SNF
Masters Health Care Center.................... Algood TN SNF
Wasatch Care Center........................... Ogden UT SNF
St. George Care and Rehabilitation Center..... St. George UT SNF
Federal Heights Rehabilitation & Nursing
Center....................................... Salt Lake City UT SNF
Nansemond Pointe Rehabilitation & HC Center... Suffolk VA SNF
River Pointe Rehabilitation & Healthc.
Center....................................... Virginia Beach VA SNF
Arden Rehabilitation & Healthcare Ctr......... Seattle WA SNF
Northwest Continuum Care Center............... Longview WA SNF
Rainier Vista Care Center..................... Puyallup WA SNF
Vencor of Vancouver HC & Rehabilitation....... Vancouver WA SNF
Heritage Health & Rehabilitation Center....... Vancouver WA SNF
Queen Anne Healthcare......................... Seattle WA SNF
Colony Oaks Care Center....................... Appleton WI SNF
North Ridge Med. & Rehabilitation Center...... Manitowoc WI SNF
Family Heritage Med. & Rehabilitation Center.. Wisconsin Rapids WI SNF
Sheridan Medical Complex...................... Kenosha WI SNF
Woodstock Health & Rehabilitation Center...... Kenosha WI SNF
Mountain Towers Healthcare & Rehabilitation... Cheyenne WY SNF
Wind River Healthcare & Rehabilitation Ctr.... Riverton WY SNF
Sage View Care Center......................... Rock Springs WY SNF
</TABLE>
- --------
(1) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of the ground lease, improvements revert to the
landlord.
<TABLE>
<CAPTION>
Facility
Facility Name City State Type
- ------------- ---------- ----- -------------
<S> <C> <C> <C>
OTHER FACILITIES
Birchwood Care Center............................ Marne MI SNF
Grayling Health Care Center...................... Grayling MI SNF
Clara Barton Terrace............................. Flint MI SNF
Mary Avenue Care Center.......................... Lansing MI SNF
Bearcreek Rehabilitation Center.................. Rochester MN SNF
Shadowmountain Convalescent Center............... Las Vegas NV SNF
Marietta Convalescent Center..................... Marietta OH SNF
Marigande--Sylvania Nursing Center............... Toledo OH SNF
Tangram--8 sites................................. San Marcos TX Personal Care
</TABLE>
Item 3. Legal Proceedings
Reference is made to "Note 11--Litigation" to the Consolidated Financial
Statements for a description of certain Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
47
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages (as of March 1, 2000) 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.. 52 Chairman of the Board
Debra A. Cafaro.... 42 Chief Executive Officer, President and Director
T. Richard Riney... 42 Executive Vice President, General Counsel and Secretary
John C. Thompson... 32 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 1998 Spin Off. 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, National City Bank, Kentucky, 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 and where she continued to practice until
1997. 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")
and the National Multi-Housing Council.
T. Richard Riney has served as Executive Vice President, General Counsel and
Secretary of the Company from May 1998 to the present. 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 where his areas of concentration were real estate and
corporate finance. He is a member of NAREIT.
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. Mr. Thompson is a member of NAREIT.
48
<PAGE>
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
17, 2000, there were 67,954,423 shares of Common Stock outstanding and
approximately 2,715 stockholders of record. The prices in the table below, for
the calendar quarters indicated since the 1998 Spin Off, represent the high
and low sales prices for the Common Stock as reported on the NYSE. Cash
dividends of $.39 per share were paid in the first quarter of 1999. No other
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 1998 (since May 1,1998)....................... $18 1/8 $13 1/2
Third Quarter 1998........................................... 15 10
Fourth Quarter 1998.......................................... 13 1/8 9 1/2
First Quarter 1999........................................... 13 3/4 4 5/8
Second Quarter 1999.......................................... 6 1/16 3 3/16
Third Quarter 1999........................................... 5 1/2 3 3/8
Fourth Quarter 1999.......................................... 5 3/8 3 11/16
First Quarter 2000 (through March 17, 2000).................. 4 1/4 2 11/16
</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 and anticipates
that its distributions in 1999 and 2000 with respect to 1999 will be equal to
approximately 95% of taxable income (the "Distribution Policy"). See
"Business--Federal Income Tax Considerations--Annual Distribution
Requirements" and "Note 4--Borrowing Arrangements" to the Consolidated
Financial Statements). The Company currently has not determined when any such
distributions would be made, although the Company intends to pay the minimum
required distribution for 1999 on or prior to September 15, 2000. There can be
no assurance 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, and
limitations placed on the payment of distributions in the Company's Amended
Credit Agreement. See "Note 4--Borrowing Arrangements" to the Consolidated
Financial Statements. 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 Amended Credit
Agreement and other obligations, the Board, in its sole discretion, will
determine the actual distribution amount and rate.
Although the Company currently expects to qualify as a REIT for the year
ended December 31, 1999, it is possible that economic, market, legal, tax or
other considerations may cause the Company to fail or elect not to qualify as
a REIT. In order to elect and maintain REIT status, the Company will be
required to make distributions to its stockholders to comply with the 95% (90%
for taxable years beginning after December 31, 2000) distribution requirement
and to avoid the nondeductible excise tax. See "Business--Federal Income Tax
Considerations--Annual Distribution Requirements." It is possible, however,
that the Company, from time to time, may not have sufficient cash or other
liquid assets to meet the 95% (90% for taxable years beginning after December
31, 2000) distribution requirement or to distribute such greater amount as may
be necessary to avoid income and excise taxation. See "Business--Risk
Factors--Risks Associated with REIT Status--Inability to Maintain Required
Distributions" and "Business--Federal Income Tax Considerations--Annual
Distribution Requirements."
49
<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-44.
<TABLE>
<CAPTION>
For the period
from May 1,
Year Ended 1998 to
December 31, December 31,
1999 1998
------------ --------------
(In thousands, except
per share amounts)
<S> <C> <C>
OPERATING DATA
Rental income..................................... $ 228,600 $149,933
General and administrative and other expenses..... 21,566 5,697
Interest expense.................................. 88,753 59,428
Loss on impairment of assets and tenant
receivables...................................... 36,345 --
Net Income before extraordinary charge............ 42,535 34,809
Net Income........................................ 42,535 26,758
OTHER DATA
Net income per share before extraordinary charge,
Basic............................................ $ 0.63 $ 0.51
Net income per share, Basic....................... 0.63 0.39
Net income per share, Diluted..................... 0.63 0.39
Dividend Paid per share........................... 0.39 --
Weighted Average Shares Outstanding, Basic........ 67,754 67,681
Weighted Average Shares Outstanding, Diluted...... 67,989 67,865
<CAPTION>
As of As of
December 31, December 31,
1999 1998
------------ --------------
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA
Real estate investments, net...................... $ 894,791 $939,460
Cash and cash equivalents......................... 139,594 338
Total Assets...................................... 1,071,199 959,706
Notes Payable and Other Debt...................... 974,247 931,127
Stockholders' Equity (Deficit).................... 8,345 (9,009)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this report.
Background Information
The Company is a real estate company that owns or leases 45 hospitals
(comprised of two acute care hospitals and 43 long-term acute care hospitals),
218 nursing facilities and eight personal care facilities in 36 states as of
December 31, 1999. The Company conducts substantially all of its business
through a wholly owned operating partnership, Ventas Realty. Although the
Company currently expects to qualify as a REIT for the year ended December 31,
1999, it is possible that economic, market, legal, tax or other considerations
may cause the Company to fail or elect not to qualify as a REIT. The Company
operates in one segment which consists of owning and leasing health care
facilities and leasing or subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health
care services.
50
<PAGE>
On May 1, 1998, the Company effected the 1998 Spin Off pursuant to which the
Company was separated into two publicly held corporations. A new corporation,
subsequently named Vencor, Inc., was formed to operate the hospital, nursing
facility and ancillary services businesses. Pursuant to the terms of the 1998
Spin Off, 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 1998 Spin
Off, the historical financial statements of the Company were assumed by
Vencor, and the Company is deemed to have commenced operations on May 1, 1998.
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 financial results for the year ended December 31, 1999 are
not comparable to the period from May 1, 1998 to December 31, 1998 included in
the Consolidated Statements of Income or the Consolidated Statements of Cash
Flows due to the difference in the time periods covered and the omission of a
net provision for income taxes in the 1999 financial statements due to the
Company's intention to qualify as a REIT and the use of a portion of the
Company's net operating loss carryforward.
The Company owns and leases a geographically diverse portfolio of health
care related facilities, including hospitals, nursing facilities and personal
care facilities whose principal tenants are health care related companies. As
a result of announcements during 1999 by Vencor and industry-wide factors, the
Company suspended the implementation of its original business strategy during
1999. The Company's current principal objectives are preserving and maximizing
stockholders' capital.
The Company leases all of its hospitals and 210 of its nursing facilities to
Vencor under the Master Leases. For the year ended December 31, 1999 and for
the period from May 1, 1998 to December 31, 1998, Vencor accounted for
approximately 98.5% (98.3%, net of write-offs) and 98.7% of the Company's
revenues, respectively. See "--Risk Factors--Dependence of the Company on
Vencor" and "Note 3--Concentration of Credit Risk" to the Consolidated
Financial Statements.
Portfolio Overview
The following information as of December 31, 1999 provides an overview of
the Company's portfolio of health care properties, which primarily include
skilled nursing facilities and hospitals operated by Vencor. For a description
of the principal terms and provisions of the Master Leases, see "Business--
Relationship with Vencor--Master Lease Agreements," "--Recent Developments
Regarding Vencor" and "--Other Recent Developments."
<TABLE>
<CAPTION>
Year ended December 31, 1999
--------------------------------------------------------------------------
Percent of Percent of
# of # of 1999 Original Investment
Portfolio by Type Properties Beds/Units Revenue* Revenue* Investment Investment Per Bed
- ----------------- ---------- ---------- -------- ---------- ---------- ---------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Skilled Nursing
Facilities............. 218 27,992 $136,423 59.7% $ 830,630 70.2% $29.7
Personal Care
Facilities............. 8 136 734 0.3 7,137 0.6 52.5
Hospitals............... 45 4,171 91,443 40.0 344,780 29.2 82.7
--- ------ -------- ----- ---------- -----
Total................. 271 32,299 $228,600 100.0% $1,182,547 100.0% $36.6
=== ====== ======== ===== ========== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year ended
December 31, 1999
--------------------------
Portfolio by Operator/Tenant* Revenue* Percentage*
- ----------------------------- -------------- -----------
(In thousands)
<S> <C> <C>
Vencor................................................ $225,119 98.5%
Other................................................. 3,481 1.5
-------- -----
Total............................................... $228,600 100.0%
======== =====
</TABLE>
- --------
* Based on the stated contract rent, as opposed to amounts paid pursuant to
the Stipulation, and without regard to write-offs.
51
<PAGE>
The Company's portfolio is broadly diversified by geographic location with
lease revenues from facilities in any one state comprising less than ten
percent of the Company's revenues. In addition to the diversification of lease
revenues from the geographic diversification of the portfolio, the majority of
the Company's facilities are located in states that have certificate of need
requirements. Certain states require state approval for development and
expansion of health care facilities and services, including findings of need
for additional or expanded health care facilities or services. A certificate
of need ("CON"), which is issued by governmental agencies with jurisdiction
over health care 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 Percentage
--------------------
Skilled
Nursing
Certificate of Need States Facilities Hospitals
- -------------------------- ---------- ---------
<S> <C> <C>
States with CON Requirement................................ 73.1% 58.3%
States without CON Requirement............................. 26.9 41.7
----- -----
100.0% 100.0%
===== =====
</TABLE>
Results of Operations
The Company intends to qualify as a REIT for federal income tax purposes for
the year ended December 31, 1999. No net provision for federal corporate
income taxes has been made for the year ended December 31, 1999 in the
accompanying Consolidated Financial Statements due to the Company's intention
to qualify as a REIT and the existence of net operating losses. The financial
results for the year ended December 31, 1999 are not comparable to the period
from May 1, 1998 to December 31, 1998 due to the difference in the time
periods covered and the omission of a net provision for income taxes in the
1999 financial statements due to the Company's intention to qualify as a REIT
and the use of a portion of the Company's net operating loss carryforward.
Year ended December 31, 1999
Rental income for the year ended December 31, 1999 was $228.6 million, of
which $225.1 million was from leases with Vencor. Interest and other income
totaled approximately $4.6 million, and was primarily the result of earnings
from investment of cash and cash equivalents during the year. Expenses for the
year ended December 31, 1999 totaled $190.7 million and included $42.7 million
of depreciation expense on real estate assets and $88.8 million of interest on
and costs relating to the Company's Bank Credit Agreement and other debt.
Included in operating expenses was a charge to earnings of $34.4 million
representing:
(1) $18.8 million for an amount due from Vencor that approximates
the $3.75 million per month difference for August 1999 through
December 1999 between the minimum monthly base rent due the
Company under the current terms of the Master Leases with
Vencor and the minimum monthly base rent that would be due
under leases based on the September 1999 Agreement in
Principle; although the September 1999 Agreement in Principle
provides for a rent reduction for May, June and July, as well,
the Company has not recorded a reserve for such months, as it
has already collected the full amount of minimum monthly base
rent for such months, and has no current legal obligation to
return such amounts;
(2) a $15.1 million write-off of the balance of the unpaid minimum
monthly base rent for August 1999 (in addition to the $3.75
million portion of the August 1999 Rent discussed above) that
is a claim in the extended Vencor bankruptcy proceedings;
during the fourth quarter of 1999, the Company has written off
this amount as uncollectible based upon delays in discussions
with Vencor and the Company's determination that such amount
may be uncollectible if Vencor rejects the Master Leases or if
a consensual or other plan of reorganization does not provide
for the payment of August 1999 minimum monthly base rent; even
if the proposed
52
<PAGE>
Vencor plan of reorganization is consummated under the terms of
the September 1999 Agreement in Principle, the Company may
receive only $3.4 million which represents such $15.1 million,
less $11.7 million representing the sum of (i) the $3.75 million
per month "overpayment" of May through July 1999 rent and (ii)
$0.45 million of rent prior to May 1, 1999 on a disputed
facility; the Company has not recorded a reserve or write-off for
the amount of $11.7 million because it is under no current legal
obligation to return such amount. (See "--Liquidity and Capital
Resources--Proposed Vencor Plan of Reorganization");
(3) a $0.2 million charge for rent due under a lease with Vencor
which is under dispute (see "Business--Recent Developments
Regarding Vencor"); and
(4) a $0.3 million charge to earnings for rent and other items due
from non-Vencor tenants.
Of the total $34.4 million charge, the Company recorded a reserve for $7.5
million during the third quarter of 1999. An impairment loss of $1.9 million
was recorded to write down a facility to its estimated fair value. See "Note
2--Real Estate Investments" to the Consolidated Financial Statements. The
Company retains its legal rights to recover and collect all amounts due from
Vencor and other tenants that have been written off, and intends in all
instances to vigorously assert and enforce such legal rights. There can be no
assurances, however, that the Company will be successful in its efforts.
General and administrative expenses totaled $7.8 million and included an
estimate for federal excise taxes payable related to the delayed payment of
the distribution required under REIT regulations for 1999.
Professional fees totaled approximately $12.5 million and included
approximately $10.7 million in unusual professional fees (legal and financial
advisory fees) incurred as a result of ongoing negotiations with Vencor and in
connection with the Company's business strategy alternatives as discussed
above in "Business--Recent Developments Regarding Vencor" and "Business--
Recent Developments Regarding Liquidity." Substantial legal and financial
advisory expenses will continue to be incurred by the Company until a
resolution of the Vencor matter is reached, although there can be no assurance
that such a resolution will be reached. Included in interest expense is
amortized deferred financing fees of approximately $6.0 million, which
included $1.6 million of amortization for fees incurred in the fourth quarter
of 1999 related to the extension of the maturity of the $275 million Bridge
Loan facility from October 30, 1999 to February 28, 2000. See "Note 4--
Borrowing Arrangements" to the Consolidated Financial Statements. The Company
also incurred $1.3 million in non-recurring employee severance costs in the
first quarter of 1999. Net income for the year ended December 31, 1999 was
$42.5 million, or $0.63 per diluted share.
The Company anticipates that total revenue will decrease from 1999 levels in
the future as a result of reduced rent receipts from Vencor as a result of the
Stipulation and the Vencor restructuring plan, if implemented according to the
terms of the September 1999 Agreement in Principle, and interest expense may
increase as a result of the increased interest rate associated with the
Amended Credit Agreement. See "Business--Recent Developments Regarding
Vencor--The Stipulation" and "--Liquidity and Capital Resources."
In connection with the 1998 Spin Off and the consummation of the Bank Credit
Agreement, the Company entered into an interest rate swap agreement (on a
notional amount of $875 million at December 31, 1999) to reduce the impact of
changes in interest rates on the Company's floating rate debt. On August 4,
1999, the Company entered into an agreement with the interest rate swap
agreement counterparty to shorten the maturity of the interest rate swap
agreement from December 31, 2007 to June 30, 2003, in exchange for a payment
in 1999 from the counterparty to the Company of $21.6 million. So long as the
Company has debt in excess of $750 million, the Company will amortize the
$21.6 million payment for financial accounting purposes in future periods
beginning in July 2003 and ending in December 2007. On January 31, 2000, the
Company further amended the swap agreement, pursuant to which the parties
agreed, for purposes of certain calculations set forth in the swap agreement,
to continue to use certain defined terms set forth in the Bank Credit
Agreement. The Company incurred expenses totalling $6.0 million in 1999
related to the interest rate swap agreement which are included in interest
expense.
53
<PAGE>
The Period from May 1, 1998 to December 31, 1998
Rental revenue for the period from May 1, 1998 to December 31, 1998 totaled
$149.9 million, of which $147.9 million resulted from leases with Vencor.
Operating expenses totaled $94.2 million and included $28.7 million of
depreciation expense on real estate assets and $59.4 million of interest on
bank credit facilities and other debt. Interest expense also included $1.2
million in net payments on the interest rate swap agreement and $3.2 million
in amortization and deferred financing fees. The Company also recorded a
provision for income taxes of approximately $21.2 million for the period from
May 1, 1998 to December 31, 1998. Income from operations was $34.8 million, or
$0.51 per share. The Company incurred an extraordinary loss for the period
from May 1, 1998 to December 31, 1998 of $8.1 million, or $0.12 per share, net
of income taxes, related to the extinguishment of debt. Net income for the
period from May 1, 1998 to December 31, 1998 was $26.8 million, or $0.39 per
diluted share.
Funds from Operations
Funds from operations ("FFO") for the year December 31, 1999 totaled $85.0
million or $1.25 per diluted share. FFO for the period from May 1, 1998 to
December 31, 1998 totaled $84.7 million, or $1.25 per diluted share. FFO for
1999 has been decreased for the aforementioned non-recurring employee
severance costs, the unusual professional fees, the write-off of tenant
receivables and the asset impairment expense. In calculating FFO for the
period from May 1, 1998 to December 31, 1998, the Company has added back to
net income the $21.2 million of income tax expense to be consistent with the
1999 presentation when no income taxes are assumed to be due because of the
Company's intention to qualify as a REIT. FFO for the year ended December 31,
1999 and the period from May 1, 1998 to December 31, 1998 is summarized in the
following table:
<TABLE>
<CAPTION>
For the period
from May 1,
Year Ended 1998 to
December 31, December 31,
1999 1998
------------ --------------
(In thousands, except per
share amounts)
<S> <C> <C>
Net income...................................... $42,535 $26,758
Extraordinary loss on extinguishment of debt.... -- 8,051
------- -------
Income before extraordinary loss................ 42,535 34,809
Provision for income taxes...................... -- 21,151
Depreciation on real estate assets.............. 42,742 28,700
Realized gain on sale of asset.................. (254) --
------- -------
Funds from operations........................... $85,023 $84,660
======= =======
FFO per diluted share........................... $ 1.25 $ 1.25
======= =======
</TABLE>
The Company considers FFO an appropriate measure of performance of an equity
REIT and the Company uses the National Association of Real Estate Investment
Trusts NAREIT's definition of FFO. NAREIT defines FFO as net income (computed
in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation for real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO presented herein is not
necessarily comparable to FFO presented by other real estate companies due to
the fact that not all real estate companies use the same definition. FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance
or as an alternative to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is FFO
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. The Company believes that in order to facilitate a clear understanding
of the consolidated historical operating results of the Company, FFO should be
examined in conjunction with net income as presented in the Consolidated
Financial Statements and data included elsewhere in this Form 10-K.
54
<PAGE>
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 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 leases that primarily
are long-term triple net leases in which the rental rate is generally fixed
with annual escalators, subject to certain limitations. The Company's debt
obligations are floating rate obligations whose interest rate and related
monthly interest payments vary with the movement in LIBOR. See "Note 4--
Borrowing Arrangements" to the Consolidated Financial Statements. 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 health care operations in connection with the 1998 Spin
Off, it also entered into an interest rate swap to effectively 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, 1999, the
Company had an $875 million interest rate swap outstanding with a highly rated
counterparty in which the Company pays a fixed rate of 5.985% and receives
LIBOR from the counterparty.
The interest rate swap agreement originally was in a notional amount of $1
billion and would have expired in varying amounts on December 31 of each year
through December 31, 2007. On August 4, 1999, the Company entered into an
agreement with the interest rate swap agreement counterparty to shorten the
maturity of the interest rate swap agreement from December 31, 2007 to June
30, 2003, in exchange for a payment from the counterparty to the Company of
$21.6 million. The notional amount of the interest rate swap agreement is
scheduled to decline as follows:
<TABLE>
<CAPTION>
Amount Date
------------ -----------------
<S> <C>
$875,000,000 December 31, 1999
850,000,000 December 31, 2000
800,000,000 December 31, 2001
775,000,000 December 31, 2002
-- June 30, 2003
</TABLE>
When interest rates rise the interest rate swap agreement increases in fair
value to the Company and when interest rates fall the interest rate swap
agreement declines in value to the Company. As of December 31, 1999, interest
rates had risen and the interest rate swap agreement was in an unrealized gain
position to the Company of approximately $20.4 million. As of December 31,
1998, interest rates had generally fallen, and the interest rate swap
agreement was in an unrealized loss position to the Company of approximately
$39.2 million. In addition, at December 31, 1999 the interest rate swap
agreement expires in 2003, whereas at December 31, 1998 it expires in 2007.
Generally, interest rate swap agreements with longer terms evidence greater
dollar values of variation when interest rates change. To highlight the
sensitivity of the interest rate swap agreement to changes
55
<PAGE>
in interest rates, the following summary shows the effects of a hypothetical
instantaneous change of 100 basis points (BPS) in interest rates as of
December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Notional Amount.................................. $875,000,000 $900,000,000
Fair Value to the Company........................ $ 20,369,672 ($ 39,175,449)
Fair Value to the Company Reflecting
Change in Interest Rates
-100 BPS....................................... ($ 2,857,857) ($ 95,222,331)
+100 BPS....................................... $ 42,698,286 $ 13,493,122
</TABLE>
The terms of this interest rate swap agreement require that the Company make
a cash payment or otherwise post collateral to the counterparty if the fair
value loss to the Company exceed certain levels (the "threshold levels"). See
"Note 4--Borrowing Arrangements" to the Consolidated Financial Statements. The
threshold levels vary based on the relationship between the Company's debt
obligations and the tangible fair value of its assets as defined in the Bank
Credit Agreement. As of December 31, 1999, the threshold level under the
interest rate swap agreement was a fair value unrealized loss of $35 million
and the interest rate swap agreement was in an unrealized gain position to the
Company of $20.4 million. Under the interest rate swap agreement, if
collateral must be posted, the principal amount of such collateral must equal
the difference between the fair value unrealized loss of the interest rate
swap agreement at the time of such determination and the threshold amount. On
January 31, 2000, the Company entered into a letter agreement with the
counterparty to the swap agreement for the purpose of amending the swap
agreement. The letter agreement provides that, for purposes of certain
calculations set forth in the swap agreement, the parties agree to continue to
use certain defined terms set forth in the Bank Credit Agreement. As of
December 31, 1999, the interest rate swap agreement was in an unrealized gain
position, and therefore no collateral was required to be posted under the
interest rate swap agreement.
As of December 31, 1998, the threshold level under the interest rate swap
agreement was a market value loss of $35.0 million and the interest rate swap
agreement was in an unrealized loss position to the Company of $39.2 million.
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 the Bank Credit Agreement as of that date by a similar amount.
The differences in the Company's market risk exposure relating to the
interest rate swap agreement at December 31, 1999 and December 31, 1998 were
caused by fluctuations in interest rates and by the changes in the notional
amount and maturity of the interest rate swap agreement effected in August
1999.
Credit Risk
The Company monitors credit risk under its lease agreements with its tenants
by monitoring publicly available financial information, discussions with its
tenants and review of information otherwise available to the Company. Pursuant
to the 1998 Spin Off, the Company has a significant concentration of credit
risk under its Master Leases. For the year ended December 31, 1999 and for the
period from May 1, 1998 to December 31, 1998, lease revenues from Vencor
comprised $225.1 million or 98.5% ($191.0 million or 98.3%, net of write-offs)
and $147.9 million, or approximately 98.7%, respectively, of the Company's
total lease revenues of $228.6 million ($194.2 million after write-offs) for
the year ended December 31, 1999 and $149.9 million for the period from May 1,
1998 to December 31, 1998. 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. Vencor filed for
protection under the Bankruptcy Code on September 13, 1999, and the
Stipulation entered into by Vencor and the Company currently governs the
rental payments to be made under the Master Leases. In addition, certain other
tenants of the Company have filed for bankruptcy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Background
Information" and "Business--Risk Factors--Effects of Bankruptcy Proceedings"
and "--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
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<PAGE>
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 a Material
Adverse Effect on the Company. See "Business--Federal Income Tax
Considerations" and "--Risk Factors--Dependence on Vencor."
Liquidity and Capital Resources
Liquidity
Cash provided by operations totaled $103.6 million for the year ended
December 31, 1999 and $86.8 million for the period from May 1, 1998 to
December 31, 1998. Net cash provided by investing activities for the year
ended December 31, 1999 totaled $0.4 million. Net cash used in investing
activities was $0.9 million for the period from May 1, 1998 to December 31,
1998. Net cash provided by financing activities totaled $35.3 million for the
year ended December 31, 1999 and net cash used in financing activities totaled
$85.5 million for the period from May 1, 1998 to December 31, 1998. Cash
provided by financing activities for the year ended December 31, 1999 resulted
primarily from borrowings under the Company's revolving line of credit and
from a payment received in connection with the shortening of the Company's
interest rate swap, net of dividends paid.
The Company had cash and cash equivalents as of March 17, 2000 of $129.9
million which reflects: (1) receipt on February 3, 2000 of a $26.6 million
federal tax refund from the Internal Revenue Service; (2) receipt of rent; and
(3) a $50.0 million principal payment on the Company's Amended Credit
Agreement in January 2000. See "Business--Recent Developments Regarding
Liquidity" and "Business--The 1998 Spin Off--Tax Allocation Agreement."
Credit Facility
In connection with the 1998 Spin Off, the Company refinanced substantially
all of its long-term debt. In connection with the refinancing arrangements,
the Company entered into the Bank Credit Agreement and retained approximately
$6.0 million of prior debt obligations. Borrowings under the Bank Credit
Agreement bore interest at an applicable margin over an interest rate selected
by the Company. Such interest rate could be either the "Base Rate," which is
the higher of the prime rate or the federal funds rate, plus 50 basis points,
or LIBOR. As of December 31, 1999, all borrowings were designated as LIBOR
borrowings. The applicable margin on borrowings varied based on the type of
borrowing and the Company's ratio of indebtedness to the tangible fair value
of its assets. Borrowings under the Bank Credit Agreement were comprised of:
(i) a three year $250.0 million Revolving Credit Facility priced at LIBOR plus
2.00% to 2.50% or the Base Rate plus 1.00% to 1.50% (the "Revolving Credit
Facility"), (ii) a $200.0 million Term A Loan payable in various installments
over three years priced at LIBOR plus 2.25% to 2.50%, or the Base Rate plus
1.25% to 1.50% (iii) a $350.0 million Term B Loan payable in various
installments over five years priced at LIBOR plus 2.75% to 3.00%, or the Base
Rate plus 1.75% to 2.00% and (iv) a $275.0 million term loan originally due on
October 30, 1999 (the "Bridge Loan") and extended to February 28, 2000 as
described below, priced at LIBOR plus 2.75% to 3.00%, or the Base Rate plus
1.75% to 2.00%. For the period from May 1, 1998 to December 31, 1998, the
Company paid $12.0 million in financing fees related to establishing and
maintaining the Bank Credit Agreement. The Bank Credit Agreement was secured
by a pledge of the Company's direct and indirect partnership interests in
Ventas Realty and contained various covenants and restrictions.
As of December 31, 1999, the outstanding balances under the Bank Credit
Agreement amounted to $974.2 million.
On January 31, 2000, the Company and all of the lenders under the Bank
Credit Agreement entered into the Amended Credit Agreement, which amended and
restated the Bank Credit Agreement. Under the Amended Credit Agreement,
borrowings bear interest at an applicable margin over an interest rate
selected by the Company. Such interest rate may be either (a) the Base Rate,
which is the greater of (i) the prime rate or (ii) the federal funds rate plus
50 basis points, or (b) LIBOR. Borrowings under the Amended Credit Agreement
are comprised of: (1) a new $25.0 million revolving credit line (the
"Revolving Credit Line") that expires on December 31, 2002, which bears
interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%; (2) a $200.0
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<PAGE>
million term loan due December 31, 2002 (the "Tranche A Loan"), which bears
interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%; (3) a $300.0
million term loan due December 31, 2005 (the "Tranche B Loan"), which bears
interest at either LIBOR plus 3.75% or the Base Rate plus 2.75%; and (4) a
$473.4 million term loan due December 31, 2007 (the "Tranche C Loan"), which
bears interest at either LIBOR plus 4.25% or the Base Rate plus 3.25%. The
interest rate on the Tranche B Loan will reduce by .50% (50 basis points) once
$150.0 million of the Tranche B Loan has been repaid.
The Amended Credit Agreement requires the following amortization: (a) with
respect to the Tranche A Loan, (i) $50.0 million of the Tranche A Loan was
paid at closing on January 31, 2000, (ii) $50.0 million is due within 30 days
after the Vencor Effective Date, and (iii) thereafter all Excess Cash Flow (as
defined in the Amended Credit Agreement) of the Company will be applied to the
Tranche A Loan until $200.0 million in total has been paid down on the Amended
Credit Agreement, with the balance if any due December 31, 2002; (b) with
respect to the Tranche B Loan, (i) after the $50.0 million paydown on the
Tranche A Loan to be made within 30 days after the Vencor Effective Date and
after consideration of other cash needs of the Company, a one-time paydown of
Excess Cash (as defined in the Amended Credit Agreement) and (ii) scheduled
paydowns of $50.0 million on December 31, 2003 and December 31, 2004, with the
balance due December 31, 2005; and (c) with respect to the Tranche C Loan, no
scheduled paydowns with a final maturity of December 31, 2007. The facilities
under the Amended Credit Agreement are pre-payable without premium or penalty.
During the first quarter of 2000, the Company will incur an extraordinary
loss of approximately $4.2 million relating to the write-off of the
unamortized deferred financing costs associated with the Bank Credit
Agreement.
On October 29, 1999, in conjunction with the execution of the Waiver and
Extension Agreement, the Company paid a $2.4 million loan waiver fee. In
connection with the consummation of the Amended Credit Agreement on January
31, 2000, the Company paid a $7.3 million loan restructuring fee. The fees are
being amortized proportionately over the terms of the related loans and
agreements.
The Amended Credit Agreement is secured by liens on substantially all of the
Company's real property and any related leases, rents and personal property.
Certain properties are being held in escrow by counsel for the agents under
the Amended Credit Agreement pending the receipt of third party consents
and/or resolution of certain other matters. In addition, the Amended Credit
Agreement contains certain restrictive covenants, including, but not limited
to, the following: (a) until such time that $200.0 million in principal amount
has been paid down, the Company can pay REIT dividends based on a certain
minimum percentage of its taxable income (currently equal to 95 percent of its
taxable income for the year ended December 31, 1999 and the year ending
December 31, 2000 and 90 percent of its taxable income for years ending on or
after December 31, 2001); however, after $200.0 million in total principal
paydowns, the Company will be allowed to pay dividends for any year in amounts
up to 80 percent of FFO, as defined in the Amended Credit Agreement; (b)
limitations on additional indebtedness, acquisitions of assets, liens,
guarantees, investments, restricted payments, leases and affiliate
transactions; (c) limitations on capital expenditures; (d) certain financial
covenants, including requiring that the Company have (i) $50.0 million in cash
and cash equivalents on hand at the Vencor Effective Date; (ii) no more than
$1.1 billion of total indebtedness on the Vencor Effective Date; and (iii) at
least $99.0 million of Projected Consolidated EBITDA, as defined in the
Amended Credit Agreement, for the 270 day period beginning in the first month
following the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a "Material Adverse Effect," as defined in the
Amended Credit Agreement. In addition, the Amended Credit Agreement provides
that if the Company is in compliance with its financial covenants and the
covenant relating to releases in the Vencor bankruptcy on the Vencor Effective
Date, no event or condition arising
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<PAGE>
primarily from the Vencor plan of reorganization shall be deemed to have
caused a "Material Adverse Effect," as defined in the Amended Credit Agreement
to have occurred. Under the terms of the Amended Credit Agreement, however, an
event of default is deemed to have occurred if the Vencor Effective Date does
not occur on or before December 31, 2000.
Interest Rate Swap
In connection with the 1998 Spin Off, the Company entered into an interest
rate swap agreement to reduce the impact of changes in interest rates on its
floating rate debt obligations. See "--Asset/Liability Management--Market
Risk." The interest rate swap resulted in a net increase in interest expense
during 1999 of $6.0 million. See "--Results of Operations--Year Ended December
31, 1999."
The fair value of the interest rate swap agreement is not recognized in the
Consolidated Financial Statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Asset/Liability Management"
and "Note 4--Borrowing Arrangements" to the Consolidated Financial Statements.
Dividends
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). The Company intends to qualify as a REIT for the year ending
December 31, 1999. Although such qualification requires the Company to
distribute 95% of its taxable income by September 15, 2000, the Company
announced on each of May 14, 1999, July 21, 1999, and November 1, 1999, that
it would not declare or pay a dividend in the second, third or fourth quarter
of 1999, respectively. The Company expects to pay a dividend for 1999 equal to
95% of its taxable income, less dividends paid in February 1999 of
approximately $26.5 million. The Company expects to make the remaining
required dividend payments for 1999 in 2000. The 1999 dividend may be
satisfied by a combination of cash and a distribution of Vencor equity, which
the Company expects to receive as part of the Vencor reorganization, if it
occurs, or other property or securities. Since such distributions were not
made by January 31, 2000, the Company is required to pay a 4% non-deductible
excise tax on the portion of the distribution not paid by January 31, 2000.
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 anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy
the 95% (90% for taxable years beginning after December 31, 2000) 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% (90% for
taxable years beginning after December 31, 2000) distribution requirement or
to distribute such greater amount as may be necessary to avoid income and
excise taxation. See "Business--Risk Factors--Risks Associated with REIT
Status--Inability to Maintain Required Distributions," "Market for
Registrant's Common Equity and Related Stockholder Matters" and "Business--
Federal Income Tax Considerations."
Capital Expenditures and Property Acquisitions
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 or
through additional borrowings. To the extent that unanticipated expenditures
or significant borrowings are required, the Company's liquidity may be
affected adversely. The Company's ability to make expenditures and borrow
funds is restricted by the terms of the Amended Credit Agreement. Any such
capital expenditures or borrowings would likely require the consent of the
"Required Lenders" under the Amended Credit Agreement, and there can be no
assurance that such consent would be obtained.
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<PAGE>
The Company invested $14.6 million during the period from May 1, 1998 to
December 31, 1998 to acquire health care-related properties. The properties
purchased included two skilled nursing facilities 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 did not acquire any properties in 1999 and
does not currently intend to acquire any additional properties in 2000.
Effect of Vencor Bankruptcy
The Company leases substantially all its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor
filed for protection under Chapter 11 of the Bankruptcy Code on September 13,
1999. Vencor's financial condition and ability to satisfy its rent obligations
under the Master Leases and its obligations under the other Spin Agreements
will impact the Company's revenues and could have a Material Adverse Effect on
the Company. See "Business--Recent Developments Regarding Vencor" and "--Risk
Factors--Dependence of the Company on Vencor" and "--Risk Factors--Effects of
Bankruptcy Proceedings."
Other
The Company loaned, with interest provisions, approximately $3.6 million,
net of repayments, to certain current and former executive officers of the
Company to finance the income taxes payable by them as a result of the 1998
Spin Off. The loans are payable over a ten year period.
In connection with the 1998 Spin Off, 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 at the time, which includes both
current Vencor employees and current and former employees of the Company, for
$17.7 million and used the proceeds to repay long-term debt.
In addition to Vencor, certain of the Company's other tenants have filed for
protection under the Bankruptcy Code. In addition, the Company recently
experienced a casualty of unknown origin at one of its facilities. Such
filings and casualty could have a Material Adverse Effect on the Company. See
"Business--Other Recent Developments" and "Note 9--Commitments and
Contingencies" to the Consolidated Financial Statements.
Proposed Vencor Plan of Reorganization
See "Business--Recent Developments Regarding Vencor" for a discussion of the
proposed Vencor Plan of Reorganization.
Year 2000
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the
applicable year. Without corrective action, computer programs and embedded
chips 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.
The Company has funded Y2K compliance efforts from cash flow from operations
and, other than the transactions described below, has not incurred any
significant costs to date related to Y2K issues. To date, there has been no
material negative impact on the Company's results of operation or financial
condition as a result of its Y2K compliance efforts.
In January 1999, the Company purchased a new file server and converted to a
new financial information system platform that is Y2K compliant. That
conversion was completed during the first quarter of 1999. The Company
acquired a fixed asset system that is Y2K compliant, which was installed in
December 1999. The Company has received certification from all of its
significant software and operating systems vendors that the
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versions of their products currently being installed are Y2K compliant. The
Company has not and does not anticipate independently verifying such
compliance, but it has not been advised of any material Y2K problems by any
such vendors to date. The Company does not anticipate any significant
additional costs related to Y2K for its administrative systems.
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 health care 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 in the facilities that it
leases. 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, which could result in a Material Adverse Effect on the
Company. To date, Vencor has not advised the Company of any material Y2K
problems.
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. The failure of information systems
of federal and state governmental agencies, other third party payors or
suppliers 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. To date, the Company has not been advised of any material impact on
Vencor's results of operation and financial condition related to Y2K problems.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of certain quantitative and quantitative disclosures about
market risk see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset/Liability Management."
Item 8. Financial Statements and Supplementary Data
Financial statements and financial statement schedules required to be filed
by this Item 8 are set forth following the index page at page F-1.
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 is incorporated by reference from
the definitive proxy statement to be filed by the Company 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; however,
certain information required by Item 10 is included in "Business--Executive
Officers of the Registrant" and in "Note 13--Related Party Transactions" to
the Consolidated Financial Statements."
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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>
3.1.1(a) Certificate of Incorporation of the Company, as amended.
3.1.2(b) Certificate of Amendment to Certificate of Incorporation of the
Company.
3.2(c) Third Amended and Restated Bylaws of the Company.
4.1(d) Specimen Common Stock Certificate.
4.2.1(e) Amended and Restated Credit, Security, Guaranty and Pledge
Agreement, by and among Ventas Realty, Limited Partnership, a
Delaware limited partnership, as borrower thereunder, each of the
Company and Ventas LP Realty, L.L.C., a Delaware limited liability
company, as guarantors, each of the Lenders therein named, Bank of
America, N.A., as Administrative Agent, and Morgan Guaranty Trust
Company of New York, as Documentation Agent, dated as of January 31,
2000.
4.2.2(f) Assignment of Leases and Rents, dated as of January 31, 2000, from
Ventas Realty, Limited Partnership, Assignor, to Bank of America,
N.A., as Administrative Agent, Assignee, with respect to Facility
no. 111 located at Rolling Hills Health Care Center, 36255 St.
Joseph Road, New Albany, Indiana (Floyd County).
4.2.3(g) Mortgage, Open End Mortgage, Deed of Trust, Trust Deed, Deed to
Secure Debt, Credit Line Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Financing Statement, dated as of
January 31, 2000, between Ventas Realty, Limited Partnership,
Mortgagor/Trustor/Grantor/Debtor, to Bank of America, N.A., as
Administrative Agent, Mortgagee/Beneficiary/Grantee/Secured Party,
with respect to Facility no. 111 located at Rolling Hills Health
Care Center, 36255 St. Joseph Road, New Albany, Indiana (Floyd
County).
4.2.4(h) Schedule of Agreements Substantially Identical in all Material
Respects to Agreements filed as Exhibits 4.2.2 and 4.2.3 to this
filing, pursuant to Instruction 2 to Item 601 of Regulation S-K.
4.3.1(i) Rights Agreement, dated as of July 20, 1993, between the Company and
National City Bank, as Rights Agent.
4.3.2(j) First Amendment to Rights Agreement, dated as of August 11, 1995,
between the Company and National City Bank, as Rights Agent.
4.3.3(k) Second Amendment to Rights Agreement, dated February 1, 1998,
between the Company and National City Bank, as Rights Agent.
4.3.4(l) Third Amendment to Rights Agreement, dated July 27, 1998, between
the Company and National City Bank, as Rights Agent.
4.3.5(m) Fourth Amendment to Rights Agreement, dated as of April 15, 1999,
between the Company and National City Bank, as Rights Agent.
4.3.6(n) Fifth Amendment to Rights Agreement, dated as of December 15, 1999,
between the Company and National City Bank, as Rights Agent.
10.1(o)* Directors and Officers Insurance and Company Reimbursement Policies.
10.2(p)* Form of Ventas, Inc. Promissory Note.
10.3(q)* Amendment to Promissory Note entered into as of December 31, 1998 by
and between Ventas Realty, Limited Partnership and W. Bruce
Lunsford.
10.4.1(r) Form of Agreement and Plan of Reorganization between the Company and
Vencor, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.4.2(s) Form of Distribution Agreement between Vencor, Inc. and the
Company.
10.4.3(t) Form of Development Agreement between Vencor, Inc. and the
Company.
10.4.4(u) Form of Participation Agreement between Vencor, Inc. and the
Company.
10.4.5(v) Tax Allocation Agreement, dated as of April 30, 1998, by and
between the Company and Vencor, Inc.
10.4.6(w) Agreement of Indemnity--Third Party Leases, dated April 30, 1998,
by and between Vencor, Inc. and its subsidiaries and the Company.
10.4.7(x) Agreement of Indemnity--Third Party Contracts, dated April 30,
1998, by and between Vencor, Inc. and its subsidiaries and the
Company.
10.5.1(y) Form of Master Lease Agreement between Vencor, Inc. and the
Company.
10.5.2(z) Form of Amendment to Master Lease Agreement between Vencor, Inc.
and the Company.
10.5.3(aa) Form of Second Amendment to Master Lease, dated April 12, 1999,
between the Company and Vencor, Inc.
10.6.1(bb)* Form of Employment Agreement, dated as of July 31, 1998, between
Ventas, Inc. and each of W. Bruce Lunsford and Thomas T. Ladt.
10.6.2(cc)* Amendment to Employment Agreement entered into as of December 31,
1998 by and between Ventas, Inc. and W. Bruce Lunsford.
10.6.3(dd)* Separation Agreement and Release of Claims dated as of March 5,
1999 between Ventas, Inc. and Thomas L. Ladt.
10.7(ee)* Separation and Release Agreement, dated February 29, 2000,
between Ventas, Inc. and Steven T. Downey.
10.8(ff)* Employment Agreement, dated as of July 31, 1998, between Ventas,
Inc. and T. Richard Riney.
10.9(gg)* Employment Agreement, dated as of January 13, 1999, between
Ventas, Inc. and John Thompson.
10.10.1(hh)* 1987 Non-Employee Directors Stock Option Plan.
10.10.2(ii)* Amendment to the 1987 Non-Employee Directors Stock Option Plan,
dated April 30, 1998.
10.11.1(jj)* 1987 Incentive Compensation Program.
10.11.2(kk)* Amendment to the 1987 Incentive Compensation Program, dated May
15, 1991.
10.11.3(ll)* Amendments to the 1987 Incentive Compensation Program, dated May
18, 1994.
10.11.4(mm)* Amendment to the 1987 Incentive Compensation Program, dated
February 15, 1995.
10.11.5(nn)* Amendment to the 1987 Incentive Compensation Program, dated
September 27, 1995.
10.11.6(oo)* Amendment to the 1987 Incentive Compensation Program, dated May
15, 1996.
10.11.7(pp)* Amendment to 1987 Incentive Compensation Program, dated April 30,
1998.
10.11.8(qq)* Amendment to the 1987 Incentive Compensation Program, dated
December 31, 1998.
10.12.1(rr)* 1997 Incentive Compensation Plan, dated December 31, 1996.
10.12.2(ss)* Amendment No. 1, dated May 8, 1997, to the 1997 Incentive
Compensation Plan.
10.12.3(tt)* Amendment to the 1997 Incentive Compensation Plan, dated April
30, 1998.
10.12.4(uu)* Amendment to the Ventas, Inc. 1997 Incentive Compensation Plan,
dated December 31, 1998.
10.12.5* Amendment to the Ventas, Inc. 1997 Incentive Compensation Plan
dated March 5, 1999.
10.13.1(vv)* 1997 Stock Option Plan for Non-Employee Directors, dated December
31, 1996.
10.13.2(ww)* Amendment to the 1997 Stock Option Plan for Non-Employee
Directors, dated April 30, 1998.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.14.1(xx)* TheraTx, Incorporated Amended and Restated 1994 Stock
Option/Stock Issuance Plan, as amended.
10.14.2(yy)* Amendment to the TheraTx, Incorporated Amended and Restated 1994
Stock Option/Stock Issuance Plan.
10.15(zz)* TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan.
10.16(aaa)* 1989 Amended and Restated Stock Option Plan of Helian Health
Group, Inc. ("Helian").
10.17.1(bbb)* Form of Ventas, Inc., formerly known as Vencor, Inc., Change-in-
Control Severance Agreement.
10.17.2(ccc)* Amendment No. 1 to Change-in-Control Severance Agreement entered
into as November 19, 1997 between the Company and W. Bruce
Lunsford.
10.17.3(ddd)* 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.
10.17.4(eee)* Form of Amendment to Change-in-Control Severance Agreement,
dated as of September 30, 1999, between Ventas, Inc. and each of
Steven T. Downey, T. Richard Riney and John C. Thompson.
10.18(fff) Form of Indemnification Agreement for directors of TheraTx.
10.19(ggg) 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.
10.20 Amended and Restated Guarantee Reimbursement Agreement dated as
of April 28, 1998 among Vencor, Inc., Vencor Healthcare, Inc.
and Tenet Healthcare Corporation, Inc.
10.21(hhh) Employment Agreement, dated March 5, 1999, between the Company
and Debra A. Cafaro.
10.22(iii) Stipulation and Order by and among Vencor Inc., Vencor Operating
Inc. and Vencor Nursing Centers Limited Partnership and Ventas,
Inc. and Ventas Realty Limited Partnership, dated as of
September 13, 1999.
10.23(jjj) Form of Amendment to Employment Agreement, dated as of September
30, 1999, between Ventas, Inc. and each of Steven T. Downey, T.
Richard Riney and John C. Thompson.
10.24(kkk) First Amended and Restated Agreement of Limited Partnership,
executed and delivered by the Company and Ventas LP Realty,
L.L.C., dated as of January 31, 2000.
11 Statement regarding computation of per share earnings.
21(lll) Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
- --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(a) Incorporated herein by reference to Exhibit 3 to the Company's Form 10-Q
for the quarterly period ended September 30, 1995.
(b) Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q
for the quarterly period ended June 30, 1998.
(c) Incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K
for the year ended December 31, 1997.
(d) Incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-K
for the year ended December 31, 1998.
(e) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K
filed February 8, 2000.
(f) Incorporated herein by reference to Exhibit 10.1.1 to the Company's Form
8-K filed March 8, 2000.
(g) Incorporated herein by reference to Exhibit 10.1.2 to the Company's Form
8-K filed March 8, 2000.
64
<PAGE>
(h) Incorporated herein by reference to Exhibit 10.1.3 to the Company's Form 8-
K filed March 8, 2000.
(i) Incorporated herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A.
(j) Incorporated herein by reference to Exhibit 2 to the Company's Registration
Statement on Form 8-A/A.
(k) Incorporated herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A/A.
(l) Incorporated herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A12B/A.
(m) Incorporated herein by reference to Exhibit 1 to the Company's Form 8-A/A,
filed on April 19, 1999.
(n) Incorporated herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A12B/A, filed on December 22, 1999.
(o) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-K
for the year ended December 31, 1995.
(p) Incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-Q
for the quarterly period ended June 30, 1998.
(q) Incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K
for the year ended December 31, 1998.
(r) Incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K
for the year ended December 31, 1998.
(s) Incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-K
for the year ended December 31, 1998.
(t) Incorporated herein by reference to Exhibit 10.10 to the Company's Form 10-
K for the year ended December 31, 1998.
(u) Incorporated herein by reference to Exhibit 10.11 to the Company's Form 10-
K for the year ended December 31, 1998.
(v) Incorporated herein by reference to Exhibit 10.9 to the Company's Form 10-Q
for the quarterly period ended June 30, 1998.
(w) Incorporated herein by reference to Exhibit 10.11 to the Company's Form 10-
Q for the quarterly period ended June 30, 1998.
(x) Incorporated herein by reference to Exhibit 10.12 to the Company's Form 10-
Q for the quarterly period ended June 30, 1998.
(y) Incorporated herein by reference to Exhibit 10.8 to the Company's Form 10-K
for the year ended December 31, 1998.
(z) Incorporated herein by reference to Exhibit 10.9 to the Company's Form 10-K
for the year ended December 31, 1998.
(aa) Incorporated herein by reference to Exhibit 99.1 to the Company's 8-K
filed April 12, 1999.
(bb) Incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-
Q for the quarterly period ended September 30, 1998.
(cc) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1998.
(dd) Incorporated herein by reference to Exhibit 10.21 to the Company's Form
10-K for the year ended December 31, 1998
(ee) Incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K
filed March 8, 2000.
(ff) Incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-
Q for the quarterly period ended September 30, 1998.
(gg) Incorporated herein by reference to Exhibit 10.20 to the Company's Form
10-K for the year ended December 31, 1998.
(hh) Incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1.
(ii) Incorporated herein by reference to Exhibit 10.14 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(jj) Incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1.
(kk) Incorporated herein by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8.
(ll) Incorporated herein by reference to Exhibit 10.13 to the Company's Form
10-K for the year ended December 31, 1994.
65
<PAGE>
(mm) Incorporated herein by reference to Exhibit 10.14 to the Company's Form
10-K for the year ended December 31, 1994.
(nn) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1995.
(oo) Incorporated herein by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1996.
(pp) Incorporated herein by reference to Exhibit 10.13 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(qq) Incorporated herein by reference to Exhibit 10.30 to the Company's Form
10-K for the year ended December 31, 1998.
(rr) Incorporated herein by reference to Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 1996.
(ss) Incorporated herein by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.
(tt) Incorporated herein by reference to Exhibit 10.15 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(uu) Incorporated herein by reference to Exhibit 10.35 to the Company's Form
10-K for the year ended December 31, 1998.
(vv) Incorporated herein by reference to Exhibit 10.25 to the Company's Form
10-K for the year ended December 31, 1996.
(ww) Incorporated herein by reference to Exhibit 10.16 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(xx) Incorporated herein by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of TheraTx.
(yy) Incorporated herein by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8.
(zz) Incorporated herein by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 of TheraTx.
(aaa) Incorporated herein by reference to 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.
(bbb) Incorporated herein by reference to Exhibit 10.32 to the Company's Form
10-K for the year ended December 31, 1997.
(ccc) Incorporated herein by reference to Exhibit 10.43 to the Company's Form
10-K for the year ended December 31, 1998.
(ddd) Incorporated herein by reference to Exhibit 10.44 to the Company's Form
10-K for the year ended December 31, 1998.
(eee) Incorporated herein by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarterly period ended September 30, 1999.
(fff) Incorporated herein by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of TheraTx.
(ggg) Incorporated herein by reference to Exhibit 10.37 to the Company's Form
10-K for the year ended December 31, 1995.
(hhh) Incorporated herein by reference to Exhibit 10.1 to the Company's 10-Q
for the quarterly period ended March 31, 1999.
(iii) Incorporated herein by reference to Exhibit 10.1 to the Company's 8-K
filed September 20, 1999.
(jjj) Incorporated herein by reference to Exhibit 10.4 to the Company's 10-Q
for the quarterly period ended September 30, 1999.
(kkk) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K filed February 8, 2000.
(lll) Incorporated herein by reference to Exhibit 21 to the Company's Form 10-
K for the fiscal year ended December 31, 1998.
(b) Reports on Form 8-K:
On November 3, 1999, the Company filed a Current Report on Form 8-K
announcing that it entered into a Waiver and Extension Agreement with over 95%
of its lenders under its credit agreement and that it plans to enter into a
new credit facility no later than January 31, 2000.
66
<PAGE>
On February 8, 2000, the Company filed a Current Report on Form 8-K
announcing that it entered into an Amended and Restated Credit, Security,
Guaranty and Pledge Agreement with its senior lenders on January 31, 2000,
providing for the restructuring of the approximately $973 million owed by the
Company to its senior lenders, and the execution and delivery by the Company
of the First Amended and Restated Agreement of Limited Partnership of Ventas
Realty, Limited Partnership, on January 31, 2000. The Company also announced
the Department of Justice's intervention in a qui tam lawsuit for the purpose
of representing the United States' interests in the Vencor bankruptcy
proceeding.
On March 8, 2000, the Company filed a Current Report on Form 8-K announcing
that on February 28, 2000 it had completed the post-closing requirements set
forth in the Amended Credit Agreement. Under the terms of the Amended Credit
Agreement the Company was required to execute and deliver to its lenders, by
no later than February 28, 2000, mortgages, deeds of trust, assignments, and
other related documentation granting liens and security interests in
substantially all of their real property assets and in other related assets.
The Company also announced that Steven T. Downey had resigned as the Company's
Chief Financial Officer pursuant to a Separation and Release Agreement dated
February 29, 2000.
(c) Financial Statement Schedules:
The response to this portion of Item 14 is included in the financial
statement schedules listed in the index to Consolidated Financial Statements
and Financial Statement Schedules listed on page F-1 of this Report.
67
<PAGE>
ITEM 14(c). FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
VENTAS, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998................... F-3
Consolidated Statements of Income for the year ended December 31, 1999 and
the period
from May 1, 1998 to December 31, 1998...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended
December 31, 1999
and the period from May 1, 1998 to December 31, 1998....................... F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1999
and the period from May 1, 1998 to December 31, 1998....................... F-6
Notes to Consolidated Financial Statements.................................. F-7
Consolidated Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation.................... S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions, and are inapplicable, or the information required is
included in the Consolidated Financial Statements or notes thereto and
therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Ventas, Inc.
We have audited the accompanying consolidated balance sheets of Ventas, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1999 and the period from May 1, 1998 through December 31, 1998.
Our audits 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ventas, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1999 and the
period from May 1, 1998 through December 31, 1998, in conformity with
accounting principles generally accepted in the United States. 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.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 23, 2000
F-2
<PAGE>
VENTAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Assets
Real estate investments:
Land................................................. $ 120,891 $ 120,928
Building and improvements............................ 1,061,656 1,065,041
---------- ----------
1,182,547 1,185,969
Accumulated depreciation............................. (287,756) (246,509)
---------- ----------
Total real estate investments...................... 894,791 939,460
Cash and cash equivalents.............................. 139,594 338
Deferred financing costs, net.......................... 5,702 8,816
Due from Vencor, Inc................................... -- 6,967
Notes receivable from employees........................ 3,611 4,027
Recoverable federal income taxes....................... 26,610 --
Other.................................................. 891 98
---------- ----------
Total assets....................................... $1,071,199 $ 959,706
========== ==========
Liabilities and stockholders' equity (deficit)
Liabilities:
Notes payable and other debt......................... $ 974,247 $ 931,127
Deferred gain on partial termination of interest rate
swap agreement...................................... 21,605 --
Accounts payable and other accrued liabilities....... 9,886 7,082
Other liabilities.................................... 26,610 --
Deferred income taxes................................ 30,506 30,506
---------- ----------
Total liabilities.................................. 1,062,854 968,715
---------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, 10,000 shares authorized, unissued.. -- --
Common stock, $0.25 par value; authorized 180,000
shares;
issued 73,608 shares in 1999 and 1998............... 18,402 18,402
Capital in excess of par value....................... 139,723 140,103
Unearned compensation on restricted stock............ (2,080) (1,962)
Retained earnings (deficit).......................... 6,409 (9,637)
---------- ----------
162,454 146,906
Treasury stock--5,619 shares in 1999 and 5,759 in
1998................................................ (154,109) (155,915)
---------- ----------
Total stockholders' equity (deficit)............... 8,345 (9,009)
---------- ----------
Total liabilities and stockholders' equity......... $1,071,199 $ 959,706
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Period
From May 1,
1998 to
December 31,
1999 1998
-------- --------------
<S> <C> <C>
Revenues:
Rental income....................................... $228,600 $149,933
Interest and other income........................... 4,645 201
-------- --------
Total revenues.................................... 233,245 150,134
-------- --------
Expenses:
General and administrative.......................... 7,767 4,190
Professional fees................................... 12,527 1,507
Non-recurring employee severance costs.............. 1,272 --
Loss on uncollectible amounts due from tenants...... 34,418 --
Loss on impairment of assets........................ 1,927 --
Amortization of restricted stock grants............. 1,304 349
Depreciation on real estate investments............. 42,742 28,700
Interest............................................ 88,753 59,428
-------- --------
Total expenses.................................... 190,710 94,174
-------- --------
Income before provision for income taxes and
extraordinary loss................................... 42,535 55,960
Provision for income taxes............................ -- 21,151
-------- --------
Income before extraordinary loss...................... 42,535 34,809
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $4,935......................... -- (8,051)
-------- --------
Net income............................................ $ 42,535 $ 26,758
======== ========
Earnings per common share:
Basic:
Income before extraordinary loss.................. $ 0.63 $ 0.51
Extraordinary loss on extinguishment of debt...... -- (0.12)
-------- --------
Net income........................................ $ 0.63 $ 0.39
======== ========
Diluted:
Income before extraordinary loss.................. $ 0.63 $ 0.51
Extraordinary loss on extinguishment of debt...... -- (0.12)
-------- --------
Net income........................................ $ 0.63 $ 0.39
======== ========
Weighted average number of shares outstanding, basic.. 67,754 67,681
Weighted average number of shares outstanding,
diluted.............................................. 67,989 67,865
</TABLE>
See accompanying notes.
F-4
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Year Ended December 31, 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Unearned
Common Capital in Compensation Retained
Stock Excess of On Restricted Earnings 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 for the
period from
May 1, 1998 to December
31, 1998............... -- -- -- 26,758 -- 26,758
Proceeds from issuance
of shares for stock
incentive plans........ 13 142 -- -- -- 155
Grant of restricted
stock, net of
forfeitures............ -- 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)
Net income for the year
ended December 31,
1999................... -- -- -- 42,535 -- 42,535
Cash distributions to
stockholders........... -- -- -- (26,489) -- (26,489)
Proceeds from issuance
of shares for stock
incentive plans........ -- (58) -- -- 62 4
Grant of restricted
stock, net of
forfeitures............ -- (232) (1,512) -- 1,744 --
Amortization of
restricted stock
grants................. -- (90) 1,394 -- -- 1,304
------- -------- ------- -------- --------- --------
Balance at December 31,
1999................... $18,402 $139,723 $(2,080) $ 6,409 $(154,109) $ 8,345
======= ======== ======= ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
For the Period
From May 1,
1998 to
December 31,
1999 1998
--------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 42,535 $ 26,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 42,803 28,700
Amortization of deferred financing costs......... 6,049 3,223
Amortization of restricted stock grants.......... 1,304 349
Normalized rents................................. (140) --
Loss on impairment of assets..................... 1,927 --
Gain on sale of assets........................... (254) --
Extraordinary loss on 1998 extinguishment of
debt............................................ -- 8,051
Provision for deferred income taxes.............. -- 20,151
Changes in operating assets and liabilities:
(Increase) decrease in amount due from Vencor,
Inc............................................. 6,967 (6,843)
Increase in accounts receivable and other
assets.......................................... (27,025) (87)
Increase in accounts payable and accrued and
other liabilities............................... 29,414 6,455
--------- -----------
Net cash provided by operating activities...... 103,580 86,757
Cash flows from investing activities:
Purchase of furniture and equipment................ (299) (15)
Sale (purchase) of real estate properties.......... 254 (14,566)
Repayment (issuance) of notes receivable from
employees......................................... 416 (4,027)
Sale of Vencor, Inc. preferred stock in connection
with the 1998 Spin Off transaction................ -- 17,700
--------- -----------
Net cash provided by (used in) investing
activities.................................... 371 (908)
Cash flows from financing activities:
Net change in borrowings under revolving line of
credit............................................ 173,143 29,600
Proceeds from long-term debt....................... -- 951,540
Repayment of long-term debt........................ (130,023) (54,596)
Repayment of long-term debt in connection with the
1998 Spin Off..................................... -- (1,000,171)
Proceeds from partial termination of interest rate
swap agreement.................................... 21,605 --
Payment of deferred financing costs................ (2,935) (12,039)
Issuance of common stock........................... 4 155
Cash distribution to stockholders.................. (26,489) --
--------- -----------
Net cash provided by (used in) financing
activities.................................... 35,305 (85,511)
--------- -----------
Increase in cash and cash equivalents................ 139,256 338
Cash and cash equivalents at beginning of period..... 338 --
--------- -----------
Cash and cash equivalents at end of period........... $ 139,594 $ 338
========= ===========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 86,125 $ 52,649
========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Organization and Significant Accounting Policies
Organization
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
acute care hospitals), 218 nursing facilities and eight personal care
facilities in 36 states as of December 31, 1999. The Company conducts
substantially all of its business through a wholly owned operating
partnership, Ventas Realty, Limited Partnership ("Ventas Realty"). No net
provision for federal corporate income taxes has been made for the year ended
December 31, 1999, in the Consolidated Financial Statements due to the
Company's intention to qualify as a real estate investment trust ("REIT") and
distribute 95% of its 1999 taxable income as a dividend and the existence of
net operating losses that will offset any remaining 1999 liability for federal
corporate income taxes. Although the Company currently expects to qualify as a
REIT for the year ended December 31, 1999, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail or
not elect to qualify as a REIT. The Company operates in one segment which
consists of owning and leasing health care facilities and leasing or
subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health
care services.
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 health care operations through the distribution of the
common stock of a new entity (which assumed the Company's former name, Vencor,
Inc. ("Vencor") to stockholders of the Company of record as of April 27, 1998
(the "1998 Spin Off"). The 1998 Spin Off was effected on May 1, 1998. For
financial reporting periods subsequent to the 1998 Spin Off, the historical
financial statements of the Company were assumed by Vencor and the Company is
deemed to have commenced operations on May 1, 1998. The financial results for
the year ended December 31, 1999 are not comparable to the period from May 1,
1998 to December 31, 1998 on the Consolidated Statements of Income or the
Consolidated Statements of Cash Flows due to the difference in the time
periods covered and the omission of a provision for income taxes in the 1999
financial statements due to the Company's intention to qualify as a REIT and
the use of a portion of the Company's net operating loss carryforward.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which became effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
report certain information about operating segments, products and services,
the geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has determined that the Company operates in a single
business segment. Accordingly, the adoption of SFAS 131 has had no effect on
the consolidated financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133, as amended, is
required to be adopted in years beginning after June 15, 2000. The Company
expects to adopt SFAS 133 effective January 1, 2001. 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
F-7
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 of approximately $20.4 million at
December 31, 1999, as well as the $21.6 million gain incurred but not yet
reflected in net income on the terminated derivative position (see "Note 4--
Borrowing Arrangements"), the Company estimates that upon adoption it would
report a positive adjustment of $42.0 million in other comprehensive income.
The Company was not required to report the $20.4 million unrealized gain for
the year ended December 31, 1999.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
Ventas Realty and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 1998 presentation to conform
to the 1999 presentation.
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.
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. See "Note 2--Real Estate Investments."
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 as a component of interest expense
over the terms of the related borrowings using a method that approximates a
level yield, and are net of accumulated amortization of approximately $9.2
million and $3.2 million at December 31, 1999 and 1998, respectively.
Revenue Recognition
Rental revenue is recognized as earned over the terms of the related leases
and are treated as operating leases. Such income includes periodic increases
based on pre-determined formulas as defined in the lease agreements. See "Note
8--Transactions with Vencor--The 1998 Spin Off." Certain leases with tenants
other than Vencor contain provisions relating to increases in rental payments
over the terms of the leases. Rental income under these leases is recognized
over the term of each lease on a straight-line basis.
F-8
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 two to 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.
2. Real Estate Investments
Substantially all of the Company's real estate investments are leased under
provisions of four master leases and a single facility lease (individually a
"Master Lease" and collectively the "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 or substantially all maintenance, repairs, taxes
and insurance on the leased properties.
The future contracted minimum rentals, excluding rent escalations but with
normalized rents where applicable, for the remainder of the initial terms of
the Master Leases and other leases are as follows (in thousands) (see "Note
8--Transactions with Vencor--Recent Developments Regarding Vencor"):
<TABLE>
<CAPTION>
Vencor Other Total
---------- ------- ----------
<S> <C> <C> <C>
2000........................................... $ 226,603 $ 2,730 $ 229,333
2001........................................... 226,603 2,614 229,217
2002........................................... 226,603 1,992 228,595
2003........................................... 226,603 1,607 228,210
2004........................................... 226,603 1,272 227,875
Thereafter..................................... 1,196,131 5,101 1,201,232
---------- ------- ----------
Total........................................ $2,329,146 $15,316 $2,344,462
========== ======= ==========
</TABLE>
During the fourth quarter of 1999, a tenant at one of the Company's
facilities ceased paying rent on one of the two facilities leased by them and
has subsequently filed for protection under the United States Bankruptcy Code
(the "Bankruptcy Code"). The Company has not yet located a new operator for
the facility and has deemed the asset to be impaired and recorded a real
estate impairment loss of $1.9 million to write down the asset to its
estimated fair value.
F-9
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Concentration of Credit Risk
As of December 31, 1999, 70.2% 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 97.4% of the
Company's real estate investments, based on the original cost of such
investments, are operated by Vencor and approximately 98.5% (or 98.3%, net of
write-offs) of rental revenue in 1999 was derived from Vencor leases.
Because the Company leases substantially all of its properties to Vencor and
Vencor is the primary source of the Company's revenues, Vencor's financial
condition and ability to satisfy its rent obligations under the Master Leases
and certain other agreements will significantly impact the Company's revenues
and its ability to service its indebtedness and to make distributions to its
stockholders. The operations of Vencor have been negatively impacted by
changes in governmental reimbursement rates, by its current level of
indebtedness and by certain other factors. On September 13, 1999, Vencor filed
for protection under chapter 11 of the Bankruptcy Code in Wilmington,
Delaware. The Company, Vencor and Vencor's major creditors have been engaged
in negotiations to restructure Vencor's debt and lease obligations. There can
be no assurance that Vencor will be successful in obtaining the approval of
its creditors for a restructuring plan, that any such plan will be on terms
acceptable to the Company, Vencor and its creditors, or that any restructuring
plan will not have a material adverse effect on the business, financial
condition, results of operation and liquidity of the Company, on the Company's
ability to service its indebtedness and on the Company's ability to make
distributions to its stockholders as required to elect or maintain its status
as a REIT (a "Material Adverse Effect"). See "Note 8--Transactions with
Vencor--Recent Developments Regarding Vencor."
The Company generally invests excess cash in short term maturities of time
deposits and other similar cash equivalents as required by the Amended Credit
Agreement (as defined below). See "Note 4--Borrowing Arrangements."
4. Borrowing Arrangements
In connection with the 1998 Spin Off, 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 period from May 1, 1998 to December 31, 1998. In
connection with the refinancing arrangements, the Company entered into a $1.2
billion bank credit agreement, dated April 29, 1998, (the "Bank Credit
Agreement") and retained approximately $6.0 million of prior debt obligations.
Borrowings under the Bank Credit Agreement bore interest at an applicable
margin over an interest rate selected by the Company. Such interest rate could
be either the "Base Rate", which is the higher of the prime rate or the
federal funds rate, plus 50 basis points, or the London Interbank Offered Rate
("LIBOR"). As of December 31, 1999, all borrowings were designated as LIBOR
borrowings. The applicable margin on borrowings varied based on the type of
borrowing and the Company's ratio of indebtedness to the tangible fair value
of its assets. Borrowings under the Bank Credit Agreement were comprised of:
(i) a three year $250.0 million Revolving Credit Facility priced at LIBOR plus
2.00% to 2.50% or the Base Rate plus 1.00% to 1.50% (the "Revolving Credit
Facility"), (ii) a $200 million Term A Loan payable in various installments
over three years priced at LIBOR plus 2.25% to 2.50%, or the Base Rate plus
1.25% to 1.50% (iii) a $350.0 million Term B Loan payable in various
installments over five years priced at LIBOR plus 2.75% to 3.00%, or the Base
Rate plus 1.75% to 2.00% and (iv) a $275.0 million term loan originally due on
October 30, 1999 (the "Bridge Loan") and extended to February 28, 2000 as
described below, priced at LIBOR plus 2.75% to 3.00%, or the Base Rate plus
1.75% to 2.00%. For the period from May 1, 1998 to December 31, 1998, the
Company paid $12.0 million in financing fees related to establishing and
maintaining the Bank Credit Agreement. The Bank Credit Agreement was secured
by a pledge of the Company's direct and indirect partnership interests in
Ventas Realty and contained various covenants and restrictions.
F-10
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of long-term borrowings at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Revolving line of credit, bearing interest at a base rate
of LIBOR plus 2.25%
(8.72% to 8.74% at December 31, 1999).................... $202,743 $ 29,600
Bridge facility loan, bearing interest at a base rate of
LIBOR plus 2.75%
(9.23% at December 31, 1999)............................. 275,000 400,000
Term A Loan, bearing interest at a base rate of LIBOR plus
2.25%
(8.74% at December 31, 1999)............................. 181,818 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus
2.75%
(9.24% at December 31, 1999)............................. 314,682 318,182
Other..................................................... 4 1,527
-------- --------
$974,247 $931,127
======== ========
</TABLE>
On January 31, 2000, the Company and the lenders under the Bank Credit
Agreement entered into the Amended and Restated Credit, Security, Guaranty and
Pledge Agreement (the "Amended Credit Agreement"), which amended and restated
the Bank Credit Agreement. Under the Amended Credit Agreement, borrowings bear
interest at an applicable margin over an interest rate selected by the
Company. Such interest rate may be either (a) the Base Rate, which is the
greater of (i) the prime rate or (ii) the federal funds rate plus 50 basis
points, or (b) LIBOR. Borrowings under the Amended Credit Agreement are
comprised of: (1) a $25.0 million revolving credit line (the "Revolving Credit
Line") that expires on December 31, 2002, which bears interest at either LIBOR
plus 2.75% or the Base Rate plus 1.75%; (2) a $200.0 million term loan due
December 31, 2002 (the "Tranche A Loan"), which bears interest at either LIBOR
plus 2.75% or the Base Rate plus 1.75%; (3) a $300.0 million term loan due
December 31, 2005 (the "Tranche B Loan"), which bears interest at either LIBOR
plus 3.75% or the Base Rate plus 2.75%; and (4) a $473.4 million term loan due
December 31, 2007 (the "Tranche C Loan"), which bears interest at either LIBOR
plus 4.25% or the Base Rate plus 3.25%. The interest rate on the Tranche B
Loan will be reduced by .50% (50 basis points) once $150.0 million of the
Tranche B Loan has been repaid.
The Amended Credit Agreement requires the following amortization: (a) with
respect to the Tranche A Loan, (i) $50.0 million of the Tranche A Loan was
paid at closing on January 31, 2000, (ii) $50.0 million is due within 30 days
after Vencor's plan of reorganization becomes effective (the "Vencor Effective
Date"), and (iii) thereafter all Excess Cash Flow (as defined in the Amended
Credit Agreement) of the Company will be applied to the Tranche A Loan until
$200.0 million in total has been paid down on the Amended Credit Agreement,
with the balance, if any, due December 31, 2002; (b) with respect to the
Tranche B Loan, (i) after the $50.0 million paydown on the Tranche A Loan to
be made within 30 days after the Vencor Effective Date and after consideration
of other cash needs of the Company, a one-time paydown of Excess Cash (as
defined in the Amended Credit Agreement) and (ii) scheduled paydowns of $50.0
million on December 31, 2003 and December 31, 2004, with the balance due
December 31, 2005; and (c) with respect to the Tranche C Loan, no scheduled
paydowns with a final maturity of December 31, 2007. The facilities under the
Amended Credit Agreement are pre-payable without premium or penalty.
During the first quarter of 2000, the Company will incur an extraordinary
loss of approximately $4.2 million relating to the write-off of the
unamortized deferred financing costs associated with the Bank Credit
Agreement.
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders regarding the restructuring of the Company's
long term debt, including the $275.0 million Bridge Loan (the "Waiver and
Extension Agreement"), the Company paid a $2.4 million waiver fee. In
connection with the consummation of the Amended Credit Agreement on January
31, 2000, the Company paid a $7.3 million loan restructuring fee. The fees are
being amortized proportionately over the terms of the related loans and
agreements.
F-11
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Amended Credit Agreement is secured by liens on substantially all of the
Company's real property and any related leases, rents and personal property.
Certain properties are being held in escrow by counsel for the agents under
the Amended Credit Agreement pending the receipt of third party consents
and/or resolution of certain other matters. In addition, the Amended Credit
Agreement contains certain restrictive covenants, including, but not limited
to, the following: (a) until such time that $200.0 million in principal amount
has been paid down, the Company can pay REIT dividends based on a certain
minimum percentage of its taxable income (currently equal to 95 percent of its
taxable income for the year ended December 31, 1999 and the year ending
December 31, 2000 and 90 percent of its taxable income for years ending on or
after December 31, 2001); however, after $200.0 million in total principal
paydowns, the Company will be allowed to pay dividends for any year in amounts
up to 80 percent of funds from operations ("FFO"), as defined in the Amended
Credit Agreement; (b) limitations on additional indebtedness, acquisitions of
assets, liens, guarantees, investments, restricted payments, leases and
affiliate transactions; (c) limitations on capital expenditures; (d) certain
financial covenants, including requiring that the Company have (i) $50.0
million in cash and cash equivalents on hand at the Vencor Effective Date;
(ii) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (iii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month after the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a "Material Adverse Effect," as defined in the
Amended Credit Agreement. In addition, the Amended Credit Agreement provides
that if the Company is in compliance with its financial covenants and the
covenant relating to releases in the Vencor bankruptcy on the Vencor Effective
Date, no event or condition arising primarily from the Vencor plan of
reorganization shall be deemed to have caused a "Material Adverse Effect," as
defined in the Amended Credit Agreement, to have occurred. Under the terms of
the Amended Credit Agreement, however, an event of default is deemed to have
occurred if the Vencor Effective Date does not occur on or before December 31,
2000.
In connection with the 1998 Spin Off and the consummation of the Bank Credit
Agreement, the Company entered into an interest rate swap agreement (on a
notional amount of $875.0 million outstanding at December 31, 1999) to reduce
the impact of changes in interest rates on the Company's floating rate debt
obligations. The original agreement expired in varying amounts through
December 2007; however, as discussed below, the agreement was amended to
expire in varying amounts through June 2003. The agreement provides for the
Company to pay a fixed rate at 5.985% and receive LIBOR (floating rate). The
terms of the interest rate swap agreement require that the Company make a cash
payment or otherwise post collateral to the counterparty if the fair value
loss to the Company exceeds certain levels. The threshold levels vary based on
the relationship between the Company's debt obligations and the tangible fair
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 $35.0 million and the interest rate swap
agreement was in an unrealized loss position to the Company of $39.2 million.
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 the Bank Credit Agreement as of that date by a similar amount.
On August 4, 1999, the Company entered into an agreement with the interest
rate swap agreement counterparty to shorten the maturity of the interest rate
swap agreement from December 31, 2007 to June 30, 2003, in exchange for a
payment in 1999 from the counterparty to the Company of $21.6 million. So long
as the Company has debt in excess of $750 million, the Company will amortize
the $21.6 million payment for financial accounting purposes in future periods
beginning in July 2003 and ending December 2007.
F-12
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 31, 2000, the Company entered into a letter agreement with the
counterparty to the swap agreement for the purpose of amending the swap
agreement. The letter agreement provides that, for purposes of certain
calculations set forth in the swap agreement, the parties agree to continue to
use certain defined terms set forth in the Bank Credit Agreement. As of
December 31, 1999, no collateral was required to be posted under the interest
rate swap agreement.
The notional amount of the interest rate swap agreement will amortize as
follows (in thousands):
<TABLE>
<S> <C>
December 31, 2000................................................... $ 25,000
December 31, 2001................................................... 50,000
December 31, 2002................................................... 25,000
June 30, 2003....................................................... 775,000
</TABLE>
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement. However, the Company does not
anticipate nonperformance by the financial institution counterparty. The net
interest rate difference incurred on these contracts for the year ended
December 31, 1999 and for the period from May 1, 1998 to December 31, 1999 was
$6.4 million and $1.2 million, respectively, and has been included in interest
expense in the Consolidated Financial Statements.
5. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
. Cash and cash equivalents: The carrying amount of cash and cash
equivalents reported in the balance sheet approximates fair value
because of the short maturity of these instruments.
. Notes receivable from employees: The fair values of the notes receivable
from employees are estimated using a discounted cash flow analysis,
using interest rates being offered for similar loans to borrowers with
similar credit ratings.
. Interest rate swap agreement: The fair values of the Company's interest
rate swap agreement are based on rates being offered for similar
arrangements.
. Notes payable: The fair values of the Company's borrowings under
variable rate agreements approximate their carrying value.
At December 31, 1999 and 1998 the carrying amounts and fair values of the
Company's financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Amount
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $139,594 $139,594 $ 338 $ 338
Notes receivable from employees............ 3,611 3,219 4,027 3,285
Interest rate swap agreement............... -- 20,370 -- (39,175)
Notes payable.............................. 974,247 974,247 931,127 931,127
</TABLE>
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.
F-13
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity and Stock Options
The Company has five plans under which options to purchase common stock have
been, or may be, granted to officers, employees and non-employee directors
(the following are collectively referred to as the "Plans"): (1) The 1987
Incentive Compensation Program (Employee Plan); (2) The 1997 Incentive
Compensation Plan (Employee Plan); (3) The 1987 Stock Option Plan for Non-
Employee Directors; (4) The 1997 Stock Option Plan for Non-Employee Directors;
and (5) The TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. Under
the Plans, options are exercisable at the market price at the date of grant,
expire ten years from the date of grant, and vest over varying periods ranging
from two to four years. The Company has also granted options and restricted
stock to certain officers, employees and non-employee directors outside of the
Plans. The options and restricted stock that have been granted outside the
Plans vest over varying periods and the options are exercisable at the market
price at the date of grant and expire ten years from the date of grant. As of
December 31, 1999, options for 4,410,669 shares had been granted to eligible
participants and remained outstanding (including options granted and held by
Vencor employees) under the provisions of the Plans. The weighted average
exercise price for each Plan is noted in each table below. As of December 31,
1999, options for 655,861 shares had been granted outside of the Plans to
certain employees and non-employee directors and remained outstanding. The
Company granted 188,500 and 150,000 shares of restricted stock for the year
ended December 31, 1999 and for the period from May 1, 1998 to December 31,
1998, respectively. 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 stockholders' equity.
Unearned compensation is amortized to expense over the vesting period, with
charges to operations of approximately $1.3 million and $0.3 million in 1999
and the period from May 1, 1998 to December 31, 1998, respectively.
The Company currently utilizes the 1997 Incentive Compensation Plan
(Employee Plan) and the 1997 Stock Option Plan for Non-Employee Directors for
option and stock grants. Under the terms of the Ventas, Inc. 1997 Incentive
Compensation Plan (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. As of December 31,
1999, shares available for future grants under the Ventas, Inc. 1997 Incentive
Compensation Plan (Employee Plan) are 1,401,511 and under the Ventas, Inc.
1997 Stock Option Plan for Non-Employee Directors are 152,750.
F-14
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option activity for the Company in 1998
and 1999:
I. 1987 Incentive Compensation Program (Employee Plan)
A. 1999 Activity
<TABLE>
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............. 3,215,290 $ 0.5479 - $23.6237 $16.4001
Options Granted....... -- -- - -- --
Options Exercised..... (7,031) 0.5479 - 0.5479 0.5479
Options Canceled...... (769,152) 1.4774 - 23.3159 16.3195
--------- -------- -------- --------
Outstanding at end of
period ................ 2,439,107 $ 1.4774 - $23.6237 $16.4712
=========
Exercisable at end of
period................. 1,973,502 $ 1.4774 - $23.6237 $16.1359
=========
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 3,859,178 $ 0.4925 - $23.6237 $16.3931
Options Granted....... -- -- - -- --
Options Exercised..... (40,005) 0.4925 - 17.5446 4.8193
Options Canceled...... (603,883) 11.3886 - 23.6237 17.1230
--------- -------- -------- --------
Outstanding at end of
period................. 3,215,290 $ 0.5479 - $23.6237 $16.4001
=========
Exercisable at end of
period................. 1,980,599 $ 0.5479 - $23.6237 $15.6940
=========
II. 1997 Incentive Compensation Plan (Employee Plan)
A. 1999 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 1,854,050 $10.8125 - $27.0095 $14.2799
Options Granted....... 423,639 4.6880 - 8.1875 5.2544
Options Exercised..... -- -- - -- --
Options Canceled...... (472,450) 10.8125 - 26.0091 14.6185
--------- -------- -------- --------
Outstanding at end of
period................. 1,805,239 $ 4.6880 - $27.0095 $12.0732
=========
Exercisable at end of
period................. 469,413 $ 5.0000 - $27.0095 $12.5604
=========
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 110,000 $14.6590 - $27.0095 $19.0428
Options Granted....... 2,031,900 10.8125 - 17.5831 14.0234
Options Exercised..... -- -- - -- --
Options Canceled...... (287,850) 13.7356 - 26.5478 14.6413
--------- -------- -------- --------
Outstanding at end of
period................. 1,854,050 $10.8125 - $27.0095 $14.2799
=========
Exercisable at end of
period................. 22,750 $14.6590 - $27.0095 $18.4638
=========
</TABLE>
F-15
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
III. The 1987 Stock Option Plan for Non-Employee Directors
A. 1999 Activity
<TABLE>
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 42,197 $12.2628 - $20.0070 $16.7225
Options Granted......... -- -- - -- --
Options Exercised....... -- -- - -- --
Options Canceled........ (7,737) 12.2628 - 20.0070 17.1014
------- -------- -------- --------
Outstanding at end of
period................... 34,460 $12.2628 - $20.0070 $16.6375
=======
Exercisable at end of
period................... 31,644 $12.2628 - $20.0070 $16.3376
=======
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 59,073 $ 0.4925 - $20.0070 $12.2941
Options Granted......... -- -- - -- --
Options Exercised....... (16,876) 0.4925 - 3.6628 1.2210
Options Canceled........ -- -- - -- --
------- -------- -------- --------
Outstanding at end of
period................... 42,197 $12.2628 - $20.0070 $16.7225
=======
Exercisable at end of
period................... 32,346 $12.2628 - $20.0070 $15.9701
=======
IV. 1997 Stock Option Plan for Non-Employee Directors
A. 1999 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 36,000 $15.0437 - $19.4684 $16.8873
Options Granted......... 15,000 12.1875 - 12.1875 12.1875
Options Exercised....... -- -- - -- --
Options Canceled........ (6,750) 12.1875 - 19.4684 14.7575
------- -------- -------- --------
Outstanding at end of
period................... 44,250 $12.1875 - $19.4684 $15.6190
=======
Exercisable at end of
period................... 12,750 $15.0437 - $19.4684 $17.6465
=======
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 18,000 $19.4684 - $19.4684 $19.4684
Options Granted......... 21,000 15.0437 - 15.0437 15.0437
Options Exercised....... -- -- - -- --
Options Canceled........ (3,000) 19.4684 - 19.4684 19.4684
------- -------- -------- --------
Outstanding at end of
period................... 36,000 $15.0437 - $19.4684 $16.8873
=======
Exercisable at end of
period................... 3,750 $19.4684 - $19.4684 $19.4684
=======
</TABLE>
F-16
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
V. TheraTx Incorporated 1996 Stock Option/Stock Issuance Plan
A. 1999 Activity
<TABLE>
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 179,192 $ 0.1231 - $23.9037 $16.8713
Options Granted......... -- -- - -- --
Options Exercised....... -- -- - -- --
Options Canceled........ (91,579) 9.8127 - 23.9037 17.7696
------- -------- -------- --------
Outstanding at end of
period................... 87,613 $ 0.1231 - $23.9037 $15.9515
=======
Exercisable at end of
period................... 74,456 $ 0.1231 - $23.9037 $15.9052
=======
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 254,923 $ 0.1231 - $27.8200 $16.9872
Options Granted......... -- -- - -- --
Options Exercised....... (5,930) 0.1970 - 18.8004 7.5625
Options Canceled........ (69,801) 5.8851 - 27.8200 18.0341
------- -------- -------- --------
Outstanding at end of
period................... 179,192 $ 0.1231 - $23.9037 $16.8913
=======
Exercisable at end of
period................... 129,261 $ 0.1231 - $23.9037 $16.8511
=======
VI. Outside the Plans
A. 1999 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 52,500 $10.8125 - $24.1623 $14.7952
Options Granted......... 613,361 5.0000 - 5.0630 5.0411
Options Exercised....... -- -- - -- --
Options Canceled........ (10,000) 10.8125 - 17.2500 14.0313
------- -------- -------- --------
Outstanding at end of
period................... 655,861 $ 5.0000 - $24.1623 $ 5.6848
=======
Exercisable at end of
period................... 484,299 $ 5.0000 - $24.1623 $ 5.3441
=======
B. 1998 Activity
<CAPTION>
Weighted
Average
Activity Shares Exercise Price Exercise Price
-------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period................ 7,500 $10.9761 - $24.1623 $21.5251
Options Granted......... 45,000 10.8125 - 17.2500 13.6736
Options Exercised....... -- -- - -- --
Options Canceled........ -- -- - -- --
------- -------- -------- --------
Outstanding at end of
period................... 52,500 $10.8125 - $24.1623 $14.7952
=======
Exercisable at end of
period................... 3,000 $10.9761 - $24.1623 $17.5692
=======
</TABLE>
F-17
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Exercise prices for 1,468,454 and 3,598,076 options outstanding at December
31, 1999 range from $0.1231 to $13.2500 and $13.2501 to $27.8200,
respectively. The weighted average contractual life of options outstanding on
December 31, 1999 is 7.2 years.
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 fair value of options granted for the year ended December 31, 1999
and the period from May 1, 1998 to December 31, 1998 was approximately
$1,232,000 and $817,000, respectively.
Pro forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Pro forma income available to common stockholders........... $36,203 $19,803
Pro forma earnings per common share:
Basic..................................................... $ .53 $ .29
Diluted................................................... .53 .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 assumptions:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Risk free interest rate.................................... 6.0% 6.0%
Dividend yield............................................. 12.0% 9.0%
Volatility factors of the expected market price for the
Company's common stock.................................... .25% .25%
Weighted average expected life of options.................. 8 years 8 years
</TABLE>
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
1999
The Company intends to make an election to be taxed as a REIT under the
Internal Revenue Code of 1986 (the "Code"), as amended, commencing with its
taxable year that ended December 31, 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, subject to its ability to meet the
minimum distribution requirements. The Company intends to operate in such a
manner as to enable it to qualify. The Company's actual qualification and
taxation as a REIT however, will depend upon its ability to meet, on a
continuing basis, through actual annual operating results, distribution
levels, stock ownership, and the various qualification tests imposed under the
Code. No assurance can be given that the actual results of the Company's
operation for any particular taxable year will satisfy such requirements. No
net provision for income taxes has been recorded in the Consolidated Financial
Statements for
F-18
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the year ended December 31, 1999 due to the Company's intention to qualify as
a REIT, distribute 95% of its 1999 taxable income as a dividend and the
existence of operating losses that offset the remaining 1999 liability for
federal corporate income taxes. Although the Company currently expects to
qualify as a REIT for the year ended December 31, 1999, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail or elect not to qualify as a REIT and be taxed at corporate statutory
rates. As a REIT, the Company generally will not be subject to federal income
tax on income it distributes to stockholders, as long as it distributes 100%
of REIT taxable income. The Company can meet the annual distribution
requirement by payment of 95% of its 1999 taxable income, less dividends paid
in February 1999, by no later than September 15, 2000. The Company is subject
to a federal excise tax under REIT regulations of the Code to the extent that
required distributions to qualify as a REIT for 1999 were not paid by January
31, 2000 and has recorded an estimate of such expense and liability in the
1999 Consolidated Financial Statements. Ordinary income paid to stockholders,
for federal income tax purposes, during the year ended December 31, 1999 was
$.39 per share. Net taxable income for federal income tax purposes results
from net income for financial reporting purposes adjusted for the differences
between the financial reporting and tax bases of assets and liabilities,
including depreciation, impairment losses on real estate and the deferred gain
on the partial termination of the interest rate swap agreement. For the eight
month period from May 1, 1998 to December 31, 1998, the Company was taxed at
the statutory corporate rates as a C corporation.
The tax basis of the Company's real estate investments for federal income
tax purposes was approximately $880 million at December 31, 1999.
The Company made no income tax payments for the year ended December 31, 1999
and the period from May 1, 1998 to December 31, 1998.
As a former C corporation for federal income tax purposes, the Company
potentially remains subject to corporate level taxes for any asset
dispositions between January 1, 1999 to December 31, 2008 ("built-in gains
tax"). The amount of income potentially subject to corporate level tax is
generally equal to the excess of the fair value of the asset over its adjusted
tax basis as of December 31, 1998, or the actual amount of taxable gain,
whichever is greater. Any gain recognized during this period of time could be
offset by available net operating losses and capital loss carryforwards. The
remaining deferred income tax liability at December 31, 1999 reflects a
previously established liability to be utilized for any built-in gain tax
incurred on assets that are disposed of within the subsequent 10-year period.
Prior Years
See "Note 8--Transactions with Vencor--The 1998 Spin Off" for a discussion
of the Tax Allocation Agreement the Company entered into with Vencor in
connection with the 1998 Spin Off.
The Internal Revenue Service is currently reviewing the federal income tax
returns for tax years ending December 31, 1996 and 1995 of the Company (which
then operated under the name Vencor). The income tax returns for the Company
for subsequent years are also subject to a review. The ultimate outcome of
these matters has not been determined and accordingly, no additional provision
for any resulting tax liabilities, if any, has been made in the Consolidated
Financial Statements at December 31, 1999.
On February 3, 2000 the Company received a refund (the "Refund") of
approximately $26.6 million from the Internal Revenue Service representing the
refund of income taxes paid by it from 1996 and 1997 and accrued interest
thereon arising out of the Company's 1998 federal income tax return. Although
the Company believes that it is entitled to the Refund pursuant to the terms
of the Tax Allocation Agreement and on other legal grounds, the Internal
Revenue Service may assert a right to all or some portion of the Refund based
upon its review of income tax returns for the years as previously discussed.
In addition, Vencor has asserted that it is entitled to the
F-19
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Refund pursuant to the terms of the Tax Allocation Agreement and on other
legal grounds. The Company intends to vigorously defend its rights to the
Refund. There can be no assurance as to how such controversy will be resolved,
or as to whether or not the Company will ultimately retain all or a portion of
the Refund. Accordingly, the Refund has been classified with the other
liabilities of the Company at December 31, 1999 in the Consolidated Financial
Statements.
Vencor and the Company are also engaged in a dispute relating to the
entitlement to certain federal, state and local tax refunds, including the
Refund. In connection with Vencor's bankruptcy filing, the Company and Vencor
are currently discussing the terms of a stipulation relating to such tax
refunds. There can be no assurance as to how such dispute will be resolved.
The provision for income taxes for the period from May 1, 1998 to December
31, 1998 consists of the following (in thousands):
<TABLE>
<CAPTION>
The Period From
May 1, 1998 to
December 31,
1998
--------------------
<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
=======
A summary of non-current deferred income taxes by source included in the
consolidated balance sheet at December 31, 1998 follows (in thousands):
<CAPTION>
(Assets) Liabilities
--------------------
December 31,
1998
--------------------
<S> <C>
Depreciation.......................................... $14,700
Property.............................................. 905
Interest rate swap loss............................... 14,972
Compensation.......................................... (71)
-------
$30,506
=======
</TABLE>
On September 15, 1999, the Company completed and filed its calendar year
1998 U.S. Corporation Income Tax Return. On its return the Company reflected
capital loss carryforwards of approximately $201.0 million which can only be
utilized against future capital gains, if any. The carryforwards expire in
2019. The Company also has a net operating loss ("NOL") carryforward of $15.0
million, of which approximately $4.0 million was used to offset taxes for 1999
and $11.0 million can be used to offset future taxable income (and/or taxable
income for prior years if audits of any prior year's return determine that
amounts are owed), if any, remaining after the dividend paid deduction. The
Company's ability to utilize tax carryforwards will be subject to a variety of
factors including the Company's dividend distribution policy. In general, the
Company will be entitled to utilize NOL's and tax credit carryforwards only to
the extent that REIT taxable income exceeds the Company's deduction for
dividends paid.
As a result of the uncertainties relating to the ultimate utilization of
favorable tax attributes described above, no net deferred tax benefit has been
ascribed to capital loss and net operating loss carryforwards as of December
31, 1999 and 1998.
F-20
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
The Period From
May 1, 1998 to
December 31,
1998
---------------
<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
Recent Developments Regarding Vencor
On September 13, 1999, Vencor filed for protection under chapter 11 of the
United States Bankruptcy Code the ("Bankruptcy Code"). Under the automatic
stay provisions of the Bankruptcy Code, the Company is currently prevented
from exercising certain rights and remedies under its agreements with Vencor,
including the Spin Agreements (as defined below), and from taking certain
enforcement actions against Vencor. The Company, Vencor and Vencor's major
creditors have been engaged in negotiations both prior and subsequent to
Vencor's bankruptcy filing to restructure Vencor's debt and lease obligations.
Terms of a preliminary, non-binding agreement among Vencor's major creditors,
Vencor and Ventas, reached at the time of Vencor's bankruptcy filing regarding
Vencor's plan of reorganization (the "September 1999 Agreement in Principle"),
are set forth below. On March 22, 2000, the Delaware bankruptcy court granted
Vencor's motion to extend through May 16, 2000 the period during which Vencor
has the exclusive right to file a plan of reorganization, and Vencor recently
extended the expiration date for its debtor-in-possession financing until June
30, 2000. There can be no assurance that Vencor's plan of reorganization, when
filed, will be on the terms of the September 1999 Agreement in Principle or
otherwise be acceptable to the Company.
Under the terms of the September 1999 Agreement in Principle, the Company
would make approximately $45 million in annual rent concessions, effective as
of May 1, 1999, resulting in annual base rent of approximately $181 million
for the 1999-2000 lease year. The Company would also receive (a) in addition
to the current 2% annual cash escalator contained in its Master Leases, a 1
1/2% annual non-cash rent escalator that would accrue at 6% per annum until
the occurrence of certain specified events, at which time the accrual with
interest would be due and payable and thereafter the 1 1/2% rent escalator
would convert to a cash escalator totalling 3 1/2% per year; (b) an additional
1% annual cash rent bonus escalator payable if Vencor's net patient revenue
growth at the Company's facilities exceeds a cumulative annual growth rate of
5%; (c) a one time, unilateral right to reset the rents for the facilities,
exercisable on a lease by lease basis from May 2002 through May 2005, to a
then fair rental rate, for a total fee of $5 million payable on a pro-rata
basis at the time of exercise under any lease; (d) 15% of the common stock and
warrants in reorganized Vencor (the Company, in order to qualify as a REIT,
may not hold 10% or more of the total combined voting power or the total
number of shares in Vencor; the Company is evaluating alternatives for dealing
with any Vencor equity ultimately received in excess of the 10% or more
limitation); and (e) a reaffirmation and continuation of Vencor's indemnity
obligations under the Spin Agreements. The Development Agreement and the
Participation Agreement between the Company and Vencor (each, as defined
below) would be terminated, and the Tax Allocation Agreement and the Master
Leases (each, as defined below) would be amended and clarified under the
September 1999 Agreement in Principle. The terms of the September 1999
Agreement in Principle also provided that on the Vencor Effective Date the
Company would also receive approximately $3.4 million, representing reduced
August 1999 minimum monthly base rent ("August 1999 Rent") (approximately
$15.1 million), net of $11.7 million ($3.75 million reduction in rent per
month for May, June and July 1999 rent, plus $0.45 million relating to
previously paid rent for a disputed facility). However, there can be no
assurance that Vencor's plan of reorganization, when filed, will be on the
terms of the September 1999 Agreement in Principle or otherwise will be
acceptable to the
F-21
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company. As a result of delays in the extended Vencor bankruptcy proceeding
and the determination that such amount is uncollectible, the Company wrote off
approximately $34.4 million of rents receivable from tenants (of which
approximately $26.9 million in expense was realized during the fourth quarter
of 1999), primarily consisting of the following:
(1) $18.8 million for an amount due from Vencor that approximates
the $3.75 million per month difference for August 1999 through
December 1999 between the minimum monthly base rent due the
Company under the current terms of the Master Leases with
Vencor and the minimum monthly base rent that would be due
under leases based on the September 1999 Agreement in
Principle;
(2) a $15.1 million write-off of the balance of the unpaid minimum
monthly base rent for August 1999 that is a claim in the
extended Vencor bankruptcy proceedings;
(3) a $0.2 million charge for rent due under a lease with Vencor
which is under dispute; and
(4) a $0.3 million charge to earnings for rent and other items due
from non-Vencor tenants.
Other terms of the September 1999 Agreement in Principle for Vencor include:
(a) the principal amount of Vencor senior bank debt would be reduced from
approximately $520 million to approximately $320 million in exchange for 56%
of the common stock in the restructured Vencor, and (b) Vencor's senior
subordinated notes would be converted into approximately 29% of the common
stock in restructured Vencor, and the holders of such debt would receive
warrants in the restructured company. The Company believes that the best
outcome for the Company, Vencor and their respective banks and other creditors
is a global restructuring of Vencor's financial obligations in connection with
Vencor's chapter 11 bankruptcy filing.
Ventas and Vencor continue to be engaged in advanced settlement discussions
with the federal government seeking to resolve all federal civil and
administrative claims against them arising from the participation of Vencor
facilities in various federal health benefit programs. The majority of these
claims arise from lawsuits filed under the qui tam, or whistleblower,
provision of the Federal Civil False Claims Act, which allows private citizens
to bring suit in the name of the United States. The United States Department
of Justice, Civil Division, filed two proofs of claim in the Vencor bankruptcy
court covering the United States claims and the qui tam suits. The United
States asserted approximately $1.3 billion, including triple damages, against
Vencor in these proofs of claim. The Department of Justice has informed the
Company that it is the Department of Justice's position that, if liability
exists, the Company and Vencor will be jointly and severally liable for the
portion of such claims related to the period prior to the date of the 1998
Spin Off. If the United States, Vencor and the Company reach a settlement, any
liability of the Company and Vencor related to these matters would likely be
resolved in the settlement. There can be no assurance that a settlement will
be reached regarding these claims and suits or, if reached, that the
settlement will be on terms acceptable to the Company. See "Note 11--
Litigation."
There can be no assurance that Vencor will be successful in obtaining the
approval of its creditors for a restructuring plan, that any such plan will be
on the terms of the September 1999 Agreement in Principle or on other terms
acceptable to the Company, Vencor and its creditors, or that any restructuring
plan will not have a Material Adverse Effect on the Company. Nor can there be
any assurance that Vencor and the Company will be able to reach a settlement
with the Department of Justice, or that any such settlement will be on terms
acceptable to Vencor, Vencor's creditors and the Company. The Company, Vencor
and its creditors are not legally bound by the terms of the September 1999
Agreement in Principle, and the terms of the September 1999 Agreement in
Principle: (i) are mutually interdependent, (ii) are subject to agreement on a
satisfactory plan of reorganization and confirmation thereof and (iii) are
further subject to other conditions (including, but not limited to,
negotiation and execution of definitive documentation). As discussed above,
Vencor has entered into additional negotiations with its various creditors and
Ventas regarding the September 1999 Agreement in Principle. Under the terms of
the Amended Credit Agreement, it is an event of default if Vencor's plan of
reorganization is not effective on or before December 31, 2000. See "Note 4--
Borrowing Arrangements."
F-22
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Stipulation
In connection with the bankruptcy filing by Vencor, the Company and Vencor
entered into a stipulation (the "Stipulation") for the payment by Vencor to
the Company of approximately $15.1 million per month starting in September
1999, to be applied against the total amount of minimum monthly base rent that
is due and payable under the Master Leases. The Stipulation was approved by
the bankruptcy court. During the period in which the Stipulation is in effect,
Vencor has agreed to fulfill all of its obligations under the Spin Agreements
as such obligations become due, including its obligation to indemnify and
defend Ventas from and against all claims arising out of the Company's former
health care operations or assets or liabilities transferred to Vencor in the
1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to seek to reject such agreements pursuant and
subject to the applicable provisions of the Bankruptcy Code. A termination of
the Stipulation and/or rejection by Vencor of the Spin Agreements could have a
Material Adverse Effect on the Company.
The payments under the Stipulation are required to be made by the fifth day
of each month, or on the first business day thereafter. Starting in September,
1999, the difference between the amount of minimum monthly base rent due under
the Company's Master Leases with Vencor and the monthly payment of
approximately $15.1 million accrues as a superpriority administrative expense
in Vencor's bankruptcy, junior in right only to the following: (i) any liens
or superpriority claims provided to lenders under Vencor's debtor-in-
possession credit agreement (the "DIP facility"); (ii) any fees due to the
Office of the United States Trustee; (iii) certain fees of Vencor's
professionals; (iv) any liens or superpriority claims granted to pre-petition
secured creditors as adequate protection for their claims under the interim
DIP order issued by the bankruptcy court and the final DIP order; and (v) pre-
petition liens granted to the lenders under Vencor's credit agreement, as
amended, and related agreements, to the extent such pre-petition claims are
allowed as secured, subject to challenge in the Vencor bankruptcy proceeding.
The monthly payment of approximately $15.1 million under the Stipulation is
not subject to offset, recoupment or challenge. August 1999 Rent in the amount
of approximately $18.9 million remains unpaid and will be asserted as a claim
in Vencor's chapter 11 case.
The Stipulation by its terms initially would have expired on October 31,
1999, but automatically renews for one-month periods unless either party
provides a fourteen-day notice of its election to terminate the Stipulation.
To date, no such notice of termination has been given. The Stipulation may
also be terminated prior to its expiration upon a payment default by Vencor,
the consummation of a plan of reorganization for Vencor, or the occurrence of
certain events under the DIP facility. There can be no assurance as to how
long the Stipulation will remain in effect or that Vencor will continue to
perform under the terms of the Stipulation.
The Stipulation also addresses an agreement by Ventas and Vencor concerning
any statutes of limitations and other time constraints. See "--The Tolling
Agreement" below.
The Second Standstill Agreement
On April 12, 1999, the Company entered into a Second Standstill Agreement
with Vencor, which was subsequently amended on May 5, May 8, June 6, July 6,
August 5, and September 3, 1999 (as amended, the "Second Standstill
Agreement"). The Second Standstill Agreement terminated on September 9, 1999.
Under the Second Standstill Agreement, the Company agreed not to exercise its
remedies under the Master Leases based on any default arising from or relating
to disclosures made by Vencor to the Company, and to accept the payment of
April, May, June and July 1999 rent pursuant to a specified schedule. These
payments represent the full amount of rent that was due for each month's rent
under the Master Leases. Vencor made all rent payments required by the Second
Standstill Agreement with respect to the April, May, June and July 1999 lease
payments. August 1999 Rent remains unpaid and will be asserted as a claim in
Vencor's chapter 11 bankruptcy case.
F-23
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also, under the Second Standstill Agreement, each of the Company and Vencor
agreed not to pursue any claims against the other or any third party relating
to the agreements entered into in connection with the 1998 Spin Off, or any of
the Master Leases, or with respect to certain specified disputes, during a
defined period that terminated on September 9, 1999.
The Tolling Agreement
The Company and Vencor have also entered into an agreement (the "Tolling
Agreement") pursuant to which they have agreed that any statutes of
limitations or other time constraints in a bankruptcy proceeding, including
the assertion of certain "bankruptcy avoidance provisions" that might be
asserted by one party against the other, are extended or tolled for a
specified period. That period currently terminates on the termination date of
the Stipulation. Pursuant to the Stipulation, the Tolling Agreement does not
shorten any time period otherwise provided under the Bankruptcy Code.
The 1998 Spin Off
In order to govern certain of the relationships between the Company and
Vencor after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the 1998 Spin Off, including the Master Leases (the "Spin Agreements"). In
connection with the 1998 Spin Off, an Independent Committee of the Board of
Directors of the Company was formed. The function of the Independent Committee
was 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 a new director to the Independent
Committee and the committee appointed him Chairman of the Independent
Committee. As of the date hereof, the Company and Vencor have no common
directors, officers or, to the Company's knowledge, common ownership by
stockholders owning greater than 10% of both companies. During 1999, the
Company moved its offices from space it shared with Vencor and no longer
requires administrative support from Vencor. However, as discussed below,
Vencor assisted in the preparation of certain Securities and Exchange
Commission (the "Commission") filings and tax returns and continues to provide
certain information in connection with related audits of tax matters for the
Company and to defend certain litigation to which the Company is or may become
a party.
As described above in "--Recent Developments Regarding Vencor," under the
automatic stay provisions of the Bankruptcy Code, the Company is currently
prevented from exercising certain rights and remedies under the Spin
Agreements and from taking certain enforcement actions against Vencor. In
addition, certain provisions of the Spin Agreements are currently governed by
the terms of the Stipulation. If a Vencor plan of reorganization is
consummated according to the terms of the September 1999 Agreement in
Principle, the Company expects that the terms of the Master Leases and certain
other Spin Agreements will be substantially amended and reflected in the terms
of new agreements and that certain of the Spin Agreements will be terminated.
Certain material terms of the Master Leases and certain of the other Spin
Agreements are described below.
Master Lease Agreements
In the 1998 Spin Off, the Company retained substantially all of its real
property, buildings and other improvements (primarily long-term acute care
hospitals and nursing facilities) and leased nearly all these facilities to
Vencor under four Master Leases. A single nursing facility in Corydon, Indiana
was leased by the Company to Vencor in August, 1998 under the terms of a fifth
Master Lease. The Master Leases 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.
F-24
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's ability to exercise certain rights and remedies under the
Master Leases described below has been stayed as a result of Vencor's filing
for protection under chapter 11 of the Bankruptcy Code. The Bankruptcy Code,
however, generally provides that a landlord is entitled to receive rent during
the pendency of a tenant's bankruptcy proceeding, subject to such tenant's
rights to reject the lease and its other legal defenses and rights. Vencor has
disputed that it is required to pay rent at the rate set forth in the Master
Leases and in the Stipulation has reserved the right to challenge the rate set
forth in the Master Leases in the event the Stipulation is terminated. The
Stipulation discussed above provides for Vencor to pay $15.1 million per month
in minimum base rent under the Master Leases while the Stipulation is in
effect. Various provisions of the Master Leases may ultimately be challenged
in Vencor's chapter 11 bankruptcy case, and certain provisions regarding
payment of rent have been modified by the Stipulation in anticipation of the
contemplated restructuring. The Company expects that the terms of the Master
Leases will be substantially amended and reflected in the the terms of new or
restated master lease agreements in connection with the consummation of
Vencor's plan of reorganization according to the terms of the September 1999
Agreement in Principle. See "--Recent Developments Regarding Vencor."
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all or substantially all insurance, taxes, utilities
and maintenance related to the properties. The base annual contract rent was
approximately $226.6 million and $222.2 million at December 31, 1999 and 1998,
respectively. Base annual rent increases 2% per annum, effective May 1 of each
year, provided Vencor achieves 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.
Under the terms of each Master Lease, except as noted below, upon the
occurrence of an event of default thereunder, the Company may, at its option,
exercise the remedies under a Master Lease on all properties included within
that particular 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 and (iii) 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 reduction in the number of licensed beds at a facility in
excess of 10% or 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 constitutes 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 the same is not dismissed within 90 days of its
institution.
F-25
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 prior written notice and the
opportunity to cure any such event of default within the cure period for
Leasehold Mortgagees set forth in the Master Leases. 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 specified levels of liability,
all risk property and workers' compensation insurance for 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 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 as it relates 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 Spin Agreements, all controversies, claims or disputes
arising out of the Master Leases are subject to mediation between the parties
for a reasonable period of time in an effort to settle such controversy, claim
or dispute. If the parties are unable to reach resolution after such period of
time, then the dispute is to 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. During the year
ended December 31, 1999, the Company did not acquire any facilities under this
agreement. During the period from May 1, 1998 to December 31, 1998, the
Company acquired one skilled nursing facility under the Development Agreement
for $6.2 million and has entered into a separate Master 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. The ability of the Company to
purchase properties pursuant to the terms of the Development Agreement is
restricted by the terms of Amended Credit Agreement. Any such future purchases
would likely require the consent of the "Required Lenders" under the Amended
Credit Agreement, and there can be no assurance that such consent would be
obtained. The Company expects the Development Agreement to be terminated in
the event the Company, Vencor and Vencor's creditors agree on a plan of
reorganization for Vencor and such plan is consummated.
F-26
<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
facility or other health care 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 health care
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. The
ability of the Company to purchase or finance properties pursuant to the terms
of the Participation Agreement is restricted by the terms of the Company's
Amended Credit Agreement. Any such future purchases or financings would likely
require the consent of the "Required Lenders" under the Amended Credit
Agreement, and there can be no assurance that such consent would be obtained.
The Company expects the Participation Agreement to be terminated in the event
the Company, Vencor and Vencor's creditors agree on a plan of reorganization
for Vencor and such plan is consummated.
Tax Allocation Agreement
The Tax Allocation Agreement provides that Vencor will be liable for, and
will hold the Company harmless from and against, (i) any taxes of Vencor and
its then subsidiaries (the "Vencor Group") for periods after the 1998 Spin
Off, (ii) any taxes of the Company and its then subsidiaries (the "Company
Group") or the Vencor Group for periods prior to the 1998 Spin Off (other than
taxes associated with the Spin Off) with respect to the portion of such taxes
attributable to assets owned by the Vencor Group immediately after completion
of the 1998 Spin Off and (iii) any taxes attributable to the 1998 Spin Off to
the extent that Vencor derives certain tax benefits as a result of the payment
of such taxes. Vencor will be entitled to any refund or credit in respect of
taxes owed or paid by Vencor under (i), (ii) or (iii) above. Vencor's
liability for taxes for purposes of the Tax Allocation Agreement will be
measured by the Company's actual liability for taxes after applying certain
tax benefits otherwise available to the Company other than tax benefits that
the Company in good faith determines would actually offset tax liabilities of
the Company in other taxable years or periods. Any right to a refund for
purposes of the Tax Allocation Agreement will be measured by the actual refund
or credit attributable to the adjustment without regard to offsetting tax
attributes of the Company.
The Company will be liable for, and will hold Vencor harmless against, any
taxes imposed on the Company Group or the Vencor Group other than taxes for
which the Vencor Group is liable as described in the above paragraph. The
Company will be entitled to any refund or credit for taxes owed or paid by the
Company as described in this paragraph. The Company's liability for taxes for
purposes of the Tax Allocation Agreement will be measured by the Vencor
Group's actual liability for taxes after applying certain tax benefits
otherwise available to the Vencor Group other than tax benefits that the
Vencor Group in good faith determines would actually offset tax liabilities of
the Vencor Group in other taxable years or periods. Any right to a refund will
be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Vencor Group. See "Note 7--
Income Taxes."
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to
F-27
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vencor (the "Third Party Leases"). The lessors of these properties may claim
that the Company remains liable on the Third Party Leases 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
Leases assigned by the Company to Vencor. Either prior to or following the
1998 Spin Off, the tenant's rights under a subset of the Third Party Leases
were assigned or sublet to unrelated third parties (the "Subleased Third Party
Leases"). If Vencor or such third party subtenants are unable to satisfy the
obligations under any Third Party Lease assigned by the Company to Vencor, and
if the lessors prevail in a claim against the Company under the Third Party
Leases, then the Company may be liable for the payment and performance of the
obligations under any such Third Party Lease. In that event, the Company may
be entitled to receive revenues from those properties that would mitigate the
costs incurred in connection with the satisfaction of such obligations. The
Third Party Leases relating to nursing facilities, hospitals, offices and
warehouses have remaining terms (excluding renewal periods) of 1 to 11 years
and total aggregate remaining minimum rental payments under those leases
amount to $114.0 million. The Third Party Leases relating to ground leases
have remaining terms from 1 to 81 years and total aggregate remaining minimum
rental payments under those leases amount to $33.6 million. The annual minimum
rental payments under all of these leases for 2000 equals approximately $35.3
million. Pursuant to the Stipulation, Vencor agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Leases during the period in
which the Stipulation is in effect, and, except for disputes with Health Care
Property Investors discussed in "Note 9--Commitments and Contingencies," has
to date performed its obligations.
The total aggregate remaining minimum rental payments under these leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Sub-
Leased
Skilled Third
Nursing Office Party
Facilities Hospitals Land Leases Leases Other Total
---------- --------- ------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
2000............ $22,619 $ 2,857 $ 1,211 $536 $ 7,660 $ 416 $ 35,299
2001............ 16,246 2,870 1,203 397 5,726 322 26,764
2002............ 9,948 2,726 1,165 50 2,782 296 16,967
2003............ 5,831 2,225 1,144 -- 2,587 265 12,052
2004............ 2,204 2,225 1,139 -- 2,017 265 7,850
Thereafter...... 4,057 4,999 27,717 -- 11,525 354 48,652
------- ------- ------- ---- ------- ------ --------
$60,905 $17,902 $33,579 $983 $32,297 $1,918 $147,584
======= ======= ======= ==== ======= ====== ========
</TABLE>
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Vencor (the "Third Party Guarantees"). The
Company may remain liable on 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 assigned by the Company to
Vencor, then the Company may be liable for the payment and performance of the
obligations under any such agreement. The Third Party Guarantees were entered
into in connection with certain acquisitions and financing transactions. The
aggregate exposure under these guarantees is approximately $49.8 million. Of
that amount, Atria Communities, Inc. ("Atria") also has directly guaranteed
and agreed to indemnify and hold the Company harmless from and against all
claims against the Company arising out of one of the Third Party Guarantees,
in an aggregate principal amount of approximately $34.5 million. There can be
no assurance that the Company will be successful in its attempt to be released
from this liability.
F-28
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
period from May 1, 1998 to 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 were no
longer provided by Vencor. During 1999, Vencor assisted in the preparation of
Commission filings and certain tax returns and other tax filings made on
behalf of the Company for the period ending on or before December 31, 1998 and
is continuing to assist the Company under the terms of the Tax Allocation
Agreement and the other Spin Agreements by providing certain information in
connection with the Company's fixed asset records, ongoing audits of tax
matters and defending certain litigation to which the Company is or may become
liable.
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, 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 health care operations either before or after
the date of the 1998 Spin Off. 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 health care operations. In
addition, at the time of the 1998 Spin Off, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that were pending at the time
of the 1998 Spin Off, and which arose out of the ownership or operation of the
health care operations. Vencor also agreed to defend, on behalf of the
Company, any claims asserted after the 1998 Spin Off which arise out of the
ownership and operation of the health care 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 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. For example, Vencor has not
agreed to assume the Spin Agreements and has reserved its right to seek to
reject such agreements pursuant and subject to the applicable provisions of
the Bankruptcy Code. If Vencor does not satisfy or otherwise honor the
obligations under these arrangements, then the Company may be liable for the
payment and performance of such obligations and may have to assume the defense
of such claims. In addition, if Vencor's plan of reorganization is
consummated, it is likely that the Company will be required to make payments
to settle certain government claims which will not be subject to recovery from
or indemnification by Vencor.
9. Commitments and Contingencies
On August 3, 1999, Health Enterprises of Michigan, Inc. ("HEM"), the
Company's tenant at three of its facilities in Michigan, filed a petition for
relief under the United States Bankruptcy Code. The three leases to HEM
provided for annual rental for the three Michigan facilities of approximately
$1.05 million. The Company's leases with HEM were rejected by HEM in the
bankruptcy proceeding. The Company has entered into leases for the three
facilities with substitute tenants. The initial aggregate annual rental for
the facilities under the leases with the new tenants is expected to be
approximately $639,000. The Company has asserted a claim against HEM in the
bankruptcy proceeding for the fees, costs, expenses and damages resulting from
HEM's rejection of the leases for the three Michigan facilities. The amount of
any such recovery against HEM will be limited by applicable bankruptcy law. In
addition, there can be no assurance the Company would prevail in a claim
against HEM or that HEM would have sufficient assets to satisfy such claim.
Mr. Peter C. Kern guaranteed HEM's performance under the leases for two of the
three Michigan facilities. The Company also has asserted claims
F-29
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
against Mr. Kern for HEM's failure to perform under the terms of the leases
for the two applicable Michigan facilities. There can be no assurance the
Company will prevail in a claim against Mr. Kern or whether Mr. Kern will have
sufficient assets to satisfy any such claim. The Company has determined that
these developments will not have any effect on the carrying value of the three
Michigan facilities in the accompanying Consolidated Financial Statements.
In addition, HEM or its parent company, Texas Health Enterprises, Inc., also
operates, or is otherwise a sub-tenant of, nine facilities under sub-leases of
primary leases (the "HEM Primary Leases"). The sub-leases and the HEM Primary
Leases were assigned by the Company to Vencor; however, the Company may be
liable to the landlord under the HEM Primary Leases, which are part of the
Third Party Subleases discussed above. The annual lease payments on these nine
facilities is approximately $2.2 million and the estimated remaining total
lease payments are approximately $7.8 million. The sub-tenant filed a motion
to reject six of the sub-lease agreements, which motion was granted. The
annual lease payments on these six facilities approximate $1.5 million and the
estimated total remaining lease payments are approximately $3.6 million. In
conjunction with the 1998 Spin Off, Vencor indemnified the Company and agreed
to hold the Company harmless from and against all claims against the Company
arising from any of these obligations. Pursuant to its indemnification of the
Company and the Stipulation, Vencor has either assumed operation of these six
facilities or relet the facilities to another operator, and therefore the
Company is not currently bearing any of the costs relating to such facilities.
However, there can be no assurance that Vencor will continue to pay, indemnify
and defend the claims or have sufficient assets, income and access to
financing to enable it to satisfy such claims.
The Company received demands for payment from Health Care Property
Investors. ("HCPI") by letters dated October 19, 1999, February 4, 2000 and
March 7, 2000 for obligations alleged to be due under lease agreements which
were assigned to and assumed by Vencor in connection with the 1998 Spin Off.
The aggregate amount alleged to be due to HCPI in such demand letters is
approximately $3.7 million. In addition, by letter dated February 9, 2000,
HCPI notified the Company and Vencor that HCPI intends to exercise its right
to have the Company or Vencor purchase two facilities owned by HCPI (one in
Evansville, Indiana and one in Kansas City, Missouri) and leased by Vencor
under lease agreements that were assigned to and assumed by Vencor in
connection with the 1998 Spin Off. The two facilities have allegedly been
closed and HCPI has stated that if the facilities were not reopened within the
required period of time, HCPI would demand that the Company or Vencor purchase
the facility not so reopened for the greater of the minimum repurchase price
or the fair value. The minimum repurchase price is approximately $8.5 million
for the Evansville facility and $3.8 million for the Kansas City facility.
HCPI contends that the Evansville facility must be reopened on or before April
24, 2000 and the Kansas City facility must be reopened on or before April 22,
2000. Vencor responded to the HCPI claims and demands and requested supporting
documentation and clarification relating to certain claims, disputed the
validity and enforceability of HCPI's ability to require the repurchase of the
Evansville and Kansas City facilities, and agreed to pay a portion of the
amounts alleged to be due to HCPI. In accordance with the terms of the 1998
Spin Off and the Stipulation, the Company has issued written demand to Vencor
for payment, performance, indemnification and defense of the claims,
obligations and allegations asserted by HCPI. There can be no assurance that
Vencor will pay, indemnify and defend these claims or that Vencor will have
sufficient assets, income and access to financing to enable it to satisfy such
claims.
Lenox Healthcare, Inc. and its subsidiaries (collectively, "Lenox") filed
for protection under chapter 11 of the Bankruptcy Code on November 3, 1999.
Lenox operates eight facilities under subleases of primary leases (the "Lenox
Primary Leases"), which are part of the Third Party Subleases discussed above.
In connection with the 1998 Spin Off, the Company assigned the subleases and
Lenox Primary Leases to Vencor; however, the respective lessors may claim that
the Company remains liable to them under the Lenox Primary Leases. The annual
lease payments on these eight facilities approximate $2.4 million and the
estimated total remaining lease payments are approximately $26.0 million
(assuming Vencor exercises all available renewal rights). Lenox has
F-30
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rejected three of the subleases. The annual lease payments on these three
facilities is approximately $1.9 million and the estimated total remaining
lease payments are approximately $5.6 million (assuming the tenant thereunder
exercises all available renewal rights). Pursuant to its indemnification of
the Company and the Stipulation, Vencor has either assumed operation of these
three facilities or relet the facilities to another operator, and therefore
the Company is not currently bearing any of the costs relating to such
facilities. Lenox has not yet affirmed or rejected the five remaining
subleases. In conjunction with the 1998 Spin Off, Vencor indemnified the
Company and agreed to hold the Company harmless from and against all claims
against the Company arising from any of these obligations. However, there can
be no assurance that Vencor will continue to pay, indemnify or defend these
claims or that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy such obligations.
Based upon actions taken by Vencor in the past under its indemnity
obligations related to these matters and similar matters, the agreement by
Vencor under the Stipulation to continue to perform its indemnity obligations
under the Spin Agreements, and the expected reaffirmation and continuation of
Vencor's indemnity obligations in the contemplated restructuring between the
Company, Vencor and Vencor's creditors, there have been no adjustments
recorded in the accompanying Consolidated Financial Statements relating to the
uncertainties regarding the HEM Primary Leases, the Lenox Primary Leases or
the HCPI demand.
Sun Healthcare Group, Inc. ("Sun") filed a petition for relief under the
Bankruptcy Code in October 1999. Sun leases a single nursing facility in
Toledo, Ohio from the Company. The annual rent under the Company's lease with
Sun is $248,000. Sun currently is not in default in the payment of rent under
the Company's lease, nor has it sought to reject such lease. In its bankruptcy
proceeding, Sun may seek either to reject or assume the Company's lease. If
Sun rejects the Company's lease, then the Company will have to locate a
substitute tenant for the facility. There can be no assurance that the Company
would be able to locate a satisfactory substitute tenant for the facility on
terms that would be acceptable to the Company. Should the Company fail to
locate a substitute tenant on terms acceptable to the Company, then the
Company would have to assume operations at the facility, sell the facility or
close the facility. The Company has determined that Sun's rejection of the
lease, if it occurs, will not have any significant effect on the carrying
value of this facility in the accompanying Consolidated Financial Statements.
Integrated Health Services, Inc. and a number of its subsidiaries filed a
petition for relief under the Bankruptcy Code in February 2000. IHS
Acquisition No. 151, Inc. and Integrated Health Services of Naples, Inc.
(collectively, "IHS"), affiliates of Integrated Health Services, Inc. included
in the bankruptcy filings, each lease a nursing facility from the Company. The
aggregate annual rental under the two leases is approximately $784,000. IHS is
at least one month in arrears on the monthly rental payments on both of the
facilities. In its bankruptcy proceeding, IHS may seek either to reject or
assume the Company's leases. If IHS rejects either of the leases, then the
Company will have to locate a substitute tenant for the facility. There can be
no assurance that the Company would be able to locate satisfactory substitute
tenants for the facilities on terms that are acceptable to the Company. Should
the Company fail to locate substitute tenants on terms acceptable to the
Company, then the Company would have to assume operations at the facilities,
sell the facilities or close the facilities. The Company expects IHS will
reject the lease on one of the two facilities, and accordingly, the Company
has sought to locate an operator for that facility. The Company has not yet
located a new operator for the affected facility and has recorded a real
estate impairment loss of $1.9 million to write down the asset to its
estimated fair value.
On November 10, 1999, one of the Company's nursing facilities was damaged by
a casualty of unconfirmed origin or cause. The nursing facility is located in
Flint, Michigan and is leased and operated by Continuum of Flint, Inc. Three
patients at the facility and two employees of Continuum of Flint, Inc. died as
a result of the casualty. Under the terms of the lease agreement, Continuum of
Flint, Inc. is required to maintain property and business interruption, steam
boiler/pressure vessels, workers' compensation and general and professional
liability
F-31
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
insurance with respect to the facility. The Company is named on the related
policies as an additional insured and loss payee. All rental payments which
have come due for this facility since the date of the casualty have been paid
to the Company by Continuum of Flint, Inc.'s insurers. The Company also
maintains general liability insurance. The Company notified its general
liability carriers of the occurrence of this casualty. At this time the
Company does not believe this casualty will have a Material Adverse Effect on
the Company.
Except for the $1.9 million real estate impairment loss, as discussed above,
no adjustments or additional provision for liability, if any, resulting from
the matters discussed above has been recorded in the Consolidated Financial
Statements at December 31, 1999.
10. Earnings Per Share
The following table shows the amounts used in computing basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
Year Ended May 1, 1998 to
December 31, December 31,
1999 1998
------------ --------------
<S> <C> <C>
Numerator for Basic and Diluted Earnings Per Share:
Income before Extraordinary Item................. $42,535 $34,809
Extraordinary Item............................... -- (8,051)
------- -------
Net Income....................................... $42,535 $26,758
======= =======
Denominator:
Denominator for Basic Earnings Per Share--
Weighted Average Shares......................... 67,754 67,681
Effect of Dilutive Securities:
Stock Options.................................. 15 46
Time Vesting Restricted Stock Awards........... 220 138
------- -------
Dilutive Potential Common Stock................ 235 184
------- -------
Denominator for Diluted Earnings Per Share--
Adjusted Weighted Average....................... $67,989 $67,865
======= =======
Basic Earnings Per Share
Income before Extraordinary Item................. $ 0.63 $ 0.51
Extraordinary Item............................... -- (0.12)
------- -------
Net Income....................................... $ 0.63 $ 0.39
======= =======
Diluted Earnings Per Share
Income before Extraordinary Item................. $ 0.63 $ 0.51
Extraordinary Item............................... -- (0.12)
------- -------
Net Income....................................... $ 0.63 $ 0.39
======= =======
</TABLE>
Options to purchase 5.1 million shares of common stock ranging from $5.890
to $27.8200, were outstanding at December 31, 1999 but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. Options to purchase 5.3 million
shares of common stock ranging from $13.130 to $27.8200, were outstanding at
December 31, 1998 but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive.
F-32
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Litigation
Legal Proceedings Defended and Indemnified by Vencor Under the Spin Agreements
The following litigation and other matters arose from the Company's
operations prior to the 1998 Spin Off or relate to assets or liabilities
transferred to Vencor in connection with the 1998 Spin Off. Under the Spin
Agreements, Vencor agreed to assume the defense, on behalf of the Company, of
any claims that (a) were pending at the time of the 1998 Spin Off and which
arose out of the ownership or operation of the healthcare operations or (b)
were asserted after the 1998 Spin Off and which arose out of the ownership and
operation of the healthcare operations or any of the assets or liabilities
transferred to Vencor in connection with the 1998 Spin Off, and to indemnify
the Company for any fees, costs, expenses and liabilities arising out of such
operations (the "Indemnification"). Vencor is presently defending the Company
in the following matters. Under the Stipulation (see "Note 8--Transactions
with Vencor"), Vencor agreed to abide by the Indemnification and to continue
to defend the Company in these and other matters as required under the Spin
Agreements while the Stipulation is in effect. However, there can be no
assurance that Vencor will continue to defend the Company in such matters 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 1998 Spin Off. In addition, many of the following
descriptions are based primarily on information included in Vencor's public
filings and information provided to the Company by Vencor. There can be no
assurance that Vencor has provided the Company with complete and accurate
information in all instances.
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 Hospital
Corporation ("Transitional") common stock during the period from February 26,
1997 through May 4, 1997, inclusive. Transitional was, prior to the 1998 Spin-
Off, a subsidiary of the Company. Transitional has been a subsidiary of Vencor
since the 1998 Spin-Off. 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and common law principles of negligent misrepresentation and names as
defendants Transitional as well as certain former senior executives and
directors of Transitional. The plaintiff seeks class certification,
unspecified damages, attorneys' fees and costs. In June 1998, the court
granted Vencor's motion 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, after which
Vencor filed a motion for reconsideration. On March 23, 1999, the court
granted Vencor's motion to dismiss all remaining claims and the case has been
dismissed. The plaintiff has appealed this ruling. Vencor has informed the
Company that it intends to defend 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 putative 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
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 between
February and October 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 acquisitions and prospective
earnings per share for 1997 and 1998 which the Company knew lacked any
reasonable basis and were not being achieved. The suit seeks damages in an
amount to be proven at trial, pre-judgment and post-judgment interest,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the plaintiff has an effective remedy. In January 1999 the United
States District Court for the Western District of Kentucky entered a judgment
dismissing the action in its entirety as to all defendants in the case. The
plaintiff has appealed the ruling to the United States Court of Appeals for
the Sixth Circuit. The appeal has been fully briefed and was argued on
December 15, 1999, and the Company is awaiting the Sixth Circuit decision.
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. 98 C103669 was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
purports to have been 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, among other things, that the defendants
damaged Vencor and the Company by engaging in violations of the securities
laws, including 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 largely based
on substantially similar assertions to those made in the class action lawsuit
entitled A. Carl Helwig v. Vencor, Inc., et al., discussed above. The suit
seeks unspecified damages, interest, punitive damages, reasonable attorneys'
fees, expert witness fees and other costs, and any extraordinary equitable
and/or injunctive relief permitted by law or equity to assure that the
plaintiff has an effective remedy. The parties have entered into a series of
stipulations to stay all proceedings in the action. The current stipulation
will expire upon the conclusion of the Vencor bankruptcy proceeding, at which
point the plaintiff may file an amended complaint. The Company believes that
the allegations in the complaint are without merit. Vencor has informed the
Company that it also believes the allegations in the complaint are without
merit, and that it intends to vigorously defend this action for and on behalf
of the Company.
A class action lawsuit styled Gary Hibbeln et al. v. Vencor, Incorporated,
et al., was filed in Jefferson Circuit Court in Kentucky on April 28, 1999.
The complaint alleges direct or indirect assertion of untrue statement or
statements of material facts, and/or omission of material facts in connection
with the sale of securities by the defendant to plaintiffs. This action was
dismissed with prejudice on July 26, 1999.
TheraTx, Incorporated ("TheraTx") was a subsidiary of the Company prior to
the 1998 Spin Off. The Company transferred all of its interest in TheraTx to
Vencor in the 1998 Spin Off. TheraTx is a plaintiff in a declaratory judgment
action entitled TheraTx, Incorporated v. James W. Duncan, Jr., et al., Case
No. 1:95-CV-3193 currently pending in the United States District Court for the
Northern District of Georgia. The defendants in this lawsuit have asserted
counterclaims against TheraTx under breach of contract, securities fraud,
negligent misrepresentation and fraud theories for allegedly not performing as
promised under a merger agreement related to TheraTx's purchase of a company
called PersonaCare, Inc. and for allegedly failing to inform the
defendants/counterclaimants prior to the merger that TheraTx's possible
acquisition of Southern Management Services, Inc. might cause the suspension
of TheraTx's shelf registration under relevant rules of the Securities and
Exchange Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $700,000. Vencor and the
defendants/counterclaimants both have appealed the court's rulings.
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 Vencor's Tampa nursing facility and
other residents in Vencor's nursing facilities nationwide (whose operations
were transferred by the Company to Vencor in the 1998 Spin Off). The complaint
alleges various breaches of contract, and statutory and regulatory violations
including violations of federal and state RICO statutes. The original
complaint has been amended to delineate several purported subclasses. The
plaintiffs seek class certification, unspecified damages, attorneys' fees and
costs. The action was dismissed without prejudice on July 5, 1999.
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 facilities in Savannah, Georgia. The Company
transferred the operations of the subject nursing facility to Vencor at the
1998 Spin-Off. The state recommended a Federal fine of $543,000 for these
violations, which HCFA has imposed. Vencor has appealed this fine.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of
Los Angeles, California by Lenox Healthcare, Inc. ("Lenox") asserting various
causes of action arising out of the Company's sale and lease of several
nursing facilities to Lenox in 1997. Lenox subsequently removed certain of its
causes of action and refiled these claims before the United States District
Court for the Western District of Kentucky in a case entitled Lenox
Healthcare, Inc. v. Vencor, Inc., et al., Case No. 3:99 CV-348-H. Vencor, on
behalf of itself and the Company, has asserted counterclaims, including RICO
claims, against Lenox in the Kentucky action. The Company believes that the
allegations made by Lenox in both complaints are without merit. Vencor, on
behalf of itself and the Company, intends to defend these actions vigorously.
Lenox and its subsidiaries filed for protection under Chapter 11 of the
Bankruptcy Code on November 3, 1999. An order was entered in the Kentucky
action on September 21, 1999, staying the Kentucky action until further order
of the court. On September 23, 1999, the Superior Court in the California
action issued an order staying the California case, which stay was extended
for six months by order of the court entered on February 28, 2000.
A lawsuit styled Excelsior Care Centers, Inc. v. Ventas, Inc. and Lenox
Healthcare, Inc. was filed in Page County Circuit Court in Virginia on October
8, 1999. The complaint alleges that the Company and Lenox permitted a nursing
facility to fall into a state of disrepair, thereby willfully breaching the
terms of a lease agreement with Excelsior Care Centers. The complaint further
alleges that the Company breached the terms of a guaranty of the lease
agreement and makes a statutory claim for waste against the Company and Lenox.
Until November 1, 1999, the facility was operated by Lenox or one of its
affiliates under a management agreement with the Company. The Company assigned
the subject management agreement and lease agreement with Excelsior Care
Centers to Vencor in connection with the 1998 Spin Off. The Company disputes
the allegations contained in the complaint and the Company or Vencor, on
behalf of the Company, intends to defend this action vigorously. Vencor has
advised the Company that, effective November 1, 1999, Vencor began operating
the facility.
Vencor and the Company have been informed by the Department of Justice that
they are the subject of ongoing investigations into various aspects of claims
for reimbursement from government payers, billing practices and various
quality of care issues in the hospitals and nursing facilities formerly
operated by the Company and presently operated by Vencor. These investigations
cover the Company's former healthcare
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operations prior to the date of the 1998 Spin Off, and include matters arising
out of the qui tam actions described below and additional potential claims.
Certain of the complaints described below name other defendants in addition to
the Company. The United States Department of Justice, Civil Division filed two
proofs of claim in the Vencor bankruptcy court covering the United States'
claims and the qui tam suits. The United States asserted approximately $1.3
billion, including triple damages, against Vencor in these proofs of claim.
The Department of Justice has informed the Company that it is the Department
of Justice's position that if liability exists in connection with such
investigations or qui tam actions, the Company and Vencor will be jointly and
severally liable for the portion of such claims related to the period prior to
the date of the 1998 Spin Off. Any liability the Company may incur in
connection with these matters will be subject to the Company's rights under
the Indemnification and Vencor's ability and willingness to perform
thereunder.
American X-Rays, Inc. ("AXR") was a subsidiary of the Company prior to the
1998 Spin Off. The Company transferred all of its interest in AXR to Vencor in
the 1998 Spin Off. AXR is the defendant in a civil qui tam lawsuit which was
filed in the United States District Court for the Eastern District of Arkansas
and served on the Company on July 7, 1997. The lawsuit is styled United States
ex rel. Doe v. American X-Ray, Inc., No. LR-C-95-332 (E.D. Ark.). The United
States of America 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 at the time) and
other healthcare providers. The Company acquired an interest in AXR when The
Hillhaven Corporation ("Hillhaven") was merged into the Company in September
1995 and purchased the remaining interest in AXR in February 1996. The civil
lawsuit alleges that AXR submitted false claims to the Medicare and Medicaid
programs. The suit seeks damages in an amount of not less than $1,000,000,
treble damages and civil penalties. In a related criminal investigation, the
United States Attorney's Office for the Eastern District of Arkansas indicted
four former employees of AXR; those individuals were convicted of various
fraud related counts in January 1999. The Company and Vencor have received
several grand jury subpoenas for documents and witnesses which Vencor, on
behalf of the Company has moved to quash. On May 4, 1999, the United States of
America amended its civil complaint to include Vencor and the Company as
defendants. Vencor and the Company have moved to dismiss the amended
complaint. Vencor, on behalf of the Company, is defending this action
vigorously.
On November 24, 1997, a civil qui tam lawsuit was filed against the Company
in the United States District Court for the Middle District of Florida. This
lawsuit was brought under the Federal Civil False Claims Act and is styled
United States of America, ex rel. Virginia Lee Lanford and Gwendolyne
Cavanaugh v. Vencor, Inc., et al, No. 97-CV-2845. The United States of America
intervened in the lawsuit on May 17, 1999. On July 23, 1999, the United States
filed its Amended Complaint in the lawsuit. The lawsuit alleges that the
Company and Vencor knowingly submitted false claims and false statements to
the Medicare and Medicaid programs, including, but not limited to, claims for
reimbursement of costs for certain ancillary services performed in Vencor's
nursing facilities and for third party nursing facility operators that the
United States of America claims are not reimbursable costs. The lawsuit
involves the Company's former healthcare operations. The complaint does not
specify the amount of damages claimed by the plaintiffs. The Company disputes
the allegations contained in the complaint and the Company and/or Vencor, on
behalf of the Company, intends to defend this action vigorously.
In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et al., No.
97-10400-GAO, filed in the United States District Court for the District of
Massachusetts on October 15, 1998, Transitional, the Company's former
subsidiary which was transferred to Vencor in the 1998 Spin Off, and two
unrelated entities, Gambro Healthcare, Inc. and Dialysis Holdings, Inc., are
defendants. This suit alleges that the defendants violated the Federal Civil
False Claims Act and the Anti-Kickback Statute and committed common law fraud,
unjust enrichment and payment by mistake of fact. Specifically, the complaint
alleges that a predecessor to Transitional formed a joint venture with Damon
Clinical Laboratories to create and operate a clinical testing laboratory in
Georgia that was then used to provide lab testing for dialysis patients, and
that the joint venture billed at below
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<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cost in return for referral of substantially all non-routine testing in
violation of the Anti-Kickback Statute. It is further alleged that a
predecessor to Transitional and Damon Clinical Laboratories used multiple
panel testing of end stage renal disease rather than single panel testing that
allegedly resulted in the generation of additional revenues from Medicare and
that the entities allegedly added non-routine tests to tests otherwise ordered
by physicians that were not requested or medically necessary but resulted in
additional revenue from Medicare in violation of the Anti-Kickback Statute.
Transitional has moved to dismiss the case. Transitional disputes the
allegations in the complaint and is defending the action vigorously.
On or about January 7, 2000 the United States of America intervened in each
of the following previously sealed (and therefore previously non-public) qui-
tam cases with respect to the claims against the Company and/or Vencor: United
States ex rel George Mitchell et al. v. Vencor, Inc. et al (S.D. Ohio); United
States ex rel. Danley v. Medisave Pharmacies, Inc., Hillhaven Corp., and
Vencor, Inc., Civil No. CV-N-96-00170-HDM (D. Nev., Reno Div.); United States
ex rel. Roberts v. Vencor, Inc. et al., Civil Action No. 3:97CV-349-J, (W.D.
Kan.) consolidated with United States ex rel. Meharg, et al. v. Vencor, Inc.,
et al., Civil Action No. 3:98SC-737-H, (M.D. Fla.); United States ex rel.
Huff, et. al. v. Vencor, Inc., et al., Civil No. 97-4358 AHM (MCX); United
States ex rel Brzycki v. Vencor, Inc., Civil No. 97-451-JD; United States, et
al., ex rel., Phillips-Minks, et al. v. Transitional Hospitals Corp., et al.;
United States ex rel. Harris and Young v. Vencor, Inc., et. al., (E.D. Mo.)
4:99CB00842 and Gary Graham on Behalf of the United States of America v.
Vencor Operating, Inc. et. al., (S.D. Fla.). Except for the order in United
States ex rel. Harris and Young, which is described below, the order granting
the United States' motions to intervene in these lawsuits state that the
United States is intervening for the purpose of representing the United
States' interests in the Vencor bankruptcy proceeding and to effectuate any
settlement reached between the United States and, Vencor and/or the Company.
The courts have ordered these lawsuits unsealed, but the Company has not been
formally served with a complaint in any of these lawsuits. Each of these
lawsuits is described in more detail immediately below.
United States ex rel. George Mitchell et al. v. Vencor, Inc. et al (S.D.
Ohio), filed on August 13, 1999, was brought under the Federal Civil False
Claims Act. The lawsuit alleges that the Company and its former subsidiaries,
Vencare, Inc. ("Vencare") and Vencor Hospice, Inc. (the Company transferred
both subsidiaries to Vencor in the 1998 Spin-Off), submitted false statements
to the Medicare program for, among other things, reimbursement for costs for
patients who were not "hospice appropriate." The complaint alleges damages in
excess of $1,000,000. The Company disputes the allegations contained in the
complaint. If the United States and, Vencor and/or the Company, do not reach a
settlement or should the complaint in this lawsuit be served on the Company,
the Company and/or Vencor, on behalf of the Company, intends to defend this
action vigorously.
In United States ex rel. Danley v. Medisave Pharmacies, Inc., Hillhaven
Corp., and Vencor, Inc., Civil No. CV-N-96-00170-HDM (D. Nev., Reno Div.),
filed on March 15, 1996, it is alleged that Medisave Pharmacies, Inc.
("Medisave"), a former subsidiary of the Company and now a subsidiary of
Vencor, (1) charged the Medicare program for unit dose drugs when bulk drugs
were administered and charged skilled nursing facilities more for the same
drugs for Medicare patients than for non-Medicare patients; (2) improperly
claimed special dispensing fees that it was not entitled to under Medicaid;
and (3) recouped unused drugs from skilled nursing facilities and returned
these drugs to its stock without crediting Medicare or Medicaid, all in
violation of the Federal Civil False Claims Act. It also alleged that Medisave
had a policy of offering kickbacks such as free equipment to skilled nursing
facilities to secure and maintain their business. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorney's fees and other
costs. The Company disputes the allegations contained in the complaint. If the
United States and, Vencor and/or the Company, do not reach a settlement or
should the complaint in this lawsuit be served on the Company, the Company
and/or Vencor, on behalf of the Company, intends to defend this action
vigorously.
In the lawsuits styled United States ex rel. Roberts v. Vencor, Inc. et al.,
Civil Action No. 3:97CV-349-J (W.D. Kan.), filed on June 25, 1996,
consolidated with United States ex rel. Meharg, et al. v. Vencor, Inc., et
al., Civil Action No. 3:98SC-737-H, (M.D. Fla.), filed on June 4, 1998, it is
alleged that the Company, Vencor and
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vencare, among others, submitted and conspired to submit false claims to the
Medicare program in connection with their purported provision of respiratory
therapy services to skilled nursing facility residents. The Company and
Vencare allegedly billed Medicare for respiratory therapy services and
supplies when those services were not medically necessary, billed for services
not provided, exaggerated the time required to provide services or exaggerated
the productivity of its therapists. It is further alleged that the Company and
Vencare presented false claims and statements to the Medicare program in
violation of the Federal Civil False Claims Act, by, among other things,
allegedly causing skilled nursing facilities with which they had respiratory
therapy contracts, to present false claims to Medicare for respiratory therapy
services and supplies. The complaint seeks treble damages, other unspecified
damages, civil penalties, attorney's fees and other costs. The Company
disputes the allegations contained in the complaint. If the United States and,
Vencor and/or the Company, do not reach a settlement or should the complaint
in this lawsuit be served on the Company, the Company and/or Vencor, on behalf
of the Company, intends to defend this action vigorously.
The Company is a defendant in the case captioned United States ex rel. Huff,
et. al. v. Vencor, Inc., et al., Civil No. 97-4358 AHM(MCX) filed in the
United States District Court for the Central District of California on June
13, 1997. The complaint alleges, among other things, that the defendants
violated the Federal Civil False Claims Act by submitting false claims to
Medicare, Medicaid and CHAMPUS programs by allegedly (1) falsifying patient
bills and submitting the bills to Medicare, Medicaid and CHAMPUS programs, (2)
submitting bills for intensive and critical care not actually administered to
patients, (3) the falsifying of patient charts in relation to the billing, (4)
charging for physical therapy services allegedly not provided and pharmacy
services allegedly provided by non-pharmacists, and (5) billing for sales
calls made by nurses to prospective patients. The complaint further alleges
the improper establishment of TEFRA rates. The complaint seeks treble damages,
other unspecified damages, civil penalties, attorney's fees and other costs.
The Company disputes the allegations contained in the complaint. If the United
States and, Vencor and/or the Company, do not reach a settlement or should the
complaint in this lawsuit be served on the Company, the Company and/or Vencor,
on behalf of the Company, intends to defend this action vigorously.
The Company is a defendant in the proceeding captioned United States ex rel
Brzycki v. Vencor, Inc., Civil No. 97-451-JD, filed in the United States
District Court for the District of New Hampshire on September 8, 1997. In this
lawsuit the Company is accused of knowingly violating the Federal Civil False
Claims Act by submitting and conspiring to submit false claims to the Medicare
program. The complaint includes allegations that the Company (1) fabricated
diagnostic codes by ordering and providing medically unnecessary ancillary
services (such as respiratory therapy), (2) changed referring physicians'
diagnoses in order to qualify for Medicare reimbursement; (3) billed for
products or services not received or not received in the manner billed, and
(4) paid illegal kickbacks to referring health care professionals in the form
of medical consulting service agreements as an alleged inducement to refer
patients in violation of the Anti-Kickback Act and Stark laws. The complaint
seeks unspecified damages, civil penalties, attorney's fees and other costs.
The Company disputes the allegations contained in the complaint. If the United
States and, Vencor and/or the Company, do not reach a settlement or should the
complaint in this lawsuit be served on the Company, the Company and/or Vencor,
on behalf of the Company, intends to defend this action vigorously.
In United States, et al., ex rel., Phillips-Minks, et al. v. Transitional
Hospitals Corp., et al., filed in the Southern District of California on July
23, 1998, it is alleged that the defendants, including Transitional and the
Company, submitted and conspired to submit false claims and statements to
Medicare, Medicaid, and other federally and state funded programs during a
period commencing in 1993 and certain other state law claims. The conduct
complained of allegedly violates the Federal False Claims Act, the California
False Claims Act, the Florida False Claims Act, the Tennessee Health Care
False Claims Act, and the Illinois Whistleblower Reward and Protection Act.
Defendants allegedly submitted improper and erroneous claims to Medicare,
Medicaid and other programs, for improper, unnecessary and false services,
excess collections associated with billing and collecting bad debts, inflated
and nonexistent laboratory charges, false and inadequate documentation of
claims,
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
splitting charges, shifting revenues and expenses, transferring patients to
hospitals that reimburse at a higher level, and improperly allocating hospital
insurance expenses. In addition, the complaint avers that defendants were
inconsistent in their reporting of cost report data, paid out kickbacks to
increase patient referrals to defendant hospitals, and incorrectly reported
employee compensation resulting in inflated employee 401(k) contributions. The
complaint seeks unspecified damages and expenses. The Company disputes the
allegations contained in the complaint. If the United States and, Vencor
and/or the Company, do not reach a settlement or should the complaint in this
lawsuit be served on the Company, the Company and/or Vencor, on behalf of the
Company, intends to defend this action vigorously.
The lawsuit styled United States ex rel. Harris and Young v. Vencor, Inc.,
et. al., 4:99CB00842 (E.D. Mo.), filed on May 25, 1999, was brought under the
Federal Civil False Claims Act. The lawsuit alleges that the defendants
submitted or cause to be submitted false claims for reimbursement to the
Medicare and CHAMPUS programs. Vencare, the Company's former subsidiary and
the current subsidiary of Vencor, allegedly (1) over billed for respiratory
therapy services, (2) rendered medically unnecessary treatment, and (3)
falsified supply, clinical and equipment records. The defendants also
allegedly encouraged or instructed therapist to falsify clinical records and
over prescribe therapy services. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorney's fees and other costs. The
Company disputes the allegations contained in the complaint. If the United
States and, Vencor and/or the Company, do not reach a settlement or should the
complaint in this lawsuit be served on the Company, the Company and/or Vencor,
on behalf of the Company, intends to defend this action vigorously.
In Gary Graham on Behalf of the United States of America v. Vencor
Operating, Inc. et. al., (S.D. Fla.), filed on or about June 8, 1999, it is
alleged that the defendants, including the Company, presented or caused to be
presented false or fraudulent claims for payment to the United States under
the Medicare program in violation of, among other things, the Federal Civil
False Claims Act. The complaint claims that Medisave, a former subsidiary of
the Company which was transferred to Vencor in the 1998 Spin Off,
systematically up-charged for drugs and supplies dispensed to Medicare
patients. The complaint seeks unspecified damages, civil penalties, interest,
attorney's fees and other costs. The Company disputes the allegations
contained in the complaint. If the United States and, Vencor and/or the
Company, do not reach a settlement or should the complaint in this lawsuit be
served on the Company, the Company and/or Vencor, on behalf of the Company,
intends to defend this action vigorously.
If the Department of Justice investigations and the qui tam claims were
ultimately decided in a manner adverse to the Company, such adverse decisions
could have a Material Adverse Effect on the Company. Although the Company
believes it has numerous good faith, valid legal and factual defenses to the
Department of Justice's and the qui tam claims, the Company and Vencor
continue to be engaged in discussions with the Department of Justice regarding
a settlement of the investigations and the qui tam actions. The United States
has intervened in the Mitchell, Danley, Meharg, Roberts, Phillips-Minks,
Bryzcki, Huff, Harris and Graham qui tam lawsuits described above for the
purpose of facilitating any such settlement. Such a settlement, if reached,
would resolve all of the actions in which the Department of Justice has
intervened and other claims by the Department of Justice, and could involve
the payments of amounts by the Company that would be material to the business,
financial condition, results of operations and liquidity of the Company. There
can be no assurance that the Company, Vencor and the Department of Justice
will reach a settlement relative to all or any such claims.
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 the United States
Health Care Financing Administration ("HCFA") or other regulatory agencies
will not initiate additional investigations related to
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<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Company.
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 prior healthcare 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. The Company is party to various other
lawsuits, both as defendant and plaintiff, arising in the normal course of
business. It is the opinion of management that, except as set forth in this
Note 11, the disposition of these other lawsuits will not, individually or in
the aggregate, have a Material Adverse Effect on the Company. If management's
assessment of the Company's liability with respect to these actions is
incorrect, such actions could have a Material Adverse Effect on the Company.
Legal Proceedings Being Defended by the Company
The Company is a plaintiff in an action seeking a declaratory judgment and
damages entitled Ventas Realty, Limited Partnership et al. v. Black Diamond
CLO 1998-1 Ltd., et al., Case No. 99C107076, filed November 22, 1999 in the
Circuit Court of Jefferson County, Kentucky. Two of the three defendants in
that action, Black Diamond International Funding, Ltd. and BDC Finance, LLC
(collectively "Black Diamond") have asserted counterclaims against the Company
under theories of breach of contract, tortious interference with contract and
abuse of process. These counterclaims allege, among other things, that the
Company wrongfully, and in violation of the terms of the Bank Credit
Agreement, (1) failed to recognize an assignment of certain notes to Black
Diamond, (2) failed to issue new notes to Black Diamond and (3) executed the
Waiver and Extension Agreement dated October 29, 1999 between the Company and
its lenders. The counterclaims further claim that the Company acted tortiously
in commencing the action against the defendants. The counterclaims
specifically allege that the foregoing actions wrongfully interfered with
Black Diamond's profitable ongoing business relations with a third party and
seek damages of $11,796,875 (the principal amount of the Company's Bridge Loan
under the Bank Credit Agreement claimed to have been held by Black Diamond),
plus interest, costs, and fees and additional unspecified amounts to be proven
at trial; in addition Black Diamond is seeking a declaration that the Waiver
and Extension Agreement is void and unenforceable. The Company disputes the
material allegations contained in Black Diamond's counterclaims and the
Company intends to pursue its claims and defend the counterclaims vigorously.
The defendants have recently filed a motion for summary judgment on the
Company's claims, contending that all such claims were released by the Company
as part of the Amended Credit Agreement, to which defendants Black Diamond CLO
1998-1 Ltd. and Black Diamond International Funding Ltd. (but not defendant
BDC Finance LLC) were signatories. The Company has not yet responded to this
motion but intends to dispute it vigorously.
Unasserted Claims--Potential Liabilities Due to Fraudulent Transfer
Considerations, Legal Dividend Requirements and Other Claims
The Company
The 1998 Spin Off, including the simultaneous distribution of the Vencor
common stock to the Ventas stockholders (the "Distribution"), is subject to
review under 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
F-40
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in bankruptcy of the Company or any of its respective subsidiaries) were to
determine that, as of the 1998 Spin Off, the Company did not receive fair
consideration or reasonably equivalent value for distributing the stock
distributed in the 1998 Spin Off and, at the time of the 1998 Spin Off, 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 among other things order the
holders of the stock distributed in the 1998 Spin Off to return the value of
the stock and any dividends paid thereon and/or invalidate, in whole or in
part, the 1998 Spin Off as a fraudulent conveyance.
Vencor
Although Vencor has not formally asserted a claim, Vencor's legal counsel
has raised questions relating to potential fraudulent conveyance or obligation
issues and other claims relating to the 1998 Spin Off. At the time of the 1998
Spin Off, the Company obtained an opinion from an independent third party that
addressed issues of solvency and adequate capitalization. Nevertheless, if a
fraudulent conveyance or obligation claim or other claim is ultimately
asserted by Vencor, its creditors, or others, the ultimate outcome of any such
claim cannot presently be determined. The Company intends to defend these
claims vigorously if they are asserted in a court, arbitration or mediation
proceeding. If a Vencor plan of reorganization is confirmed according to the
terms of the September 1999 Agreement in Principle, the potential claims
relating to the 1998 Spin Off will be released. However, there can be no
assurance that Vencor will be successful in achieving a plan of reorganization
or that such releases will be included in a Vencor plan of reorganization
which may be confirmed. If these claims were to prevail, it could have a
Material Adverse Effect on the Company.
Legal Dividend Requirements
In addition, the 1998 Spin Off 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 1998
Spin Off, were able to repay their debts as they matured following the 1998
Spin Off and had sufficient capital to carry on their respective businesses
and (ii) the 1998 Spin Off was consummated entirely in compliance with
Delaware law. 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 1998 Spin Off or whether lawful funds were
available for the 1998 Spin Off.
The Spin Agreements
The Spin Agreements provide for the allocation, immediately prior to the
1998 Spin Off, of certain debt of the Company. Further, pursuant to the Spin
Agreements, from and after the date of the 1998 Spin Off, 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 1998 Spin Off. 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.
No provision for liability, if any, resulting from the aforementioned
litigation has been made in the financial statements at December 31, 1999.
F-41
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Capital Stock
The authorized capital stock of the Company at December 31, 1998 and 1999
consisted of 180,000,000 shares of Common Stock, par value of $0.25 per share,
and 10,000,000 shares of preferred stock of which 300,000 shares have been
designated Series A Participating Preferred Stock.
In order to preserve the Company's ability to elect and maintain REIT
status, the Company's certificate of incorporation provides that if a person
acquires beneficial ownership of greater than 9% of the outstanding stock of
the Company, the shares that are beneficially owned in excess of such 9% limit
are deemed to be "Excess Shares." Excess Shares are automatically deemed
transferred to a trust for the benefit of a charitable institution or other
qualifying organization selected by the Board of Directors of the Company. The
trust is entitled to all dividends with respect to the Excess Shares and the
trustee may exercise all voting power over the Excess Shares.
The Company has the right to buy the Excess Shares for a purchase price
equal to the lesser of (1) the price per share in the transaction that created
the Excess Shares, or (2) the market price on the date the Company buys the
shares. The Company has the right to defer payment of the purchase price for
the Excess Shares for up to five years. If the Company does not purchase the
Excess Shares, the trustee of the trust is required to transfer the Excess
Shares at the direction of the Board of Directors. The owner of the Excess
Shares is entitled to receive the lesser of the proceeds from the sale of the
Excess Shares or the original purchase price for such Excess Shares, any
additional amounts are payable to the beneficiary of the trust.
The Board of Directors is empowered to grant waivers from the Excess Share
provision of the Certificate of Incorporation, and certain holders of in
excess of 9% of the common stock prior to the 1998 Spin Off are subject to
different limitations. Subsequent to the 1998 Spin Off, the Board of Directors
has granted such waivers to certain holders of the Company's Common Stock.
The Company has issued Preferred Stock Purchase Rights (the "Rights")
pursuant to the terms of Rights Agreement, dated July 20, 1993, as amended,
with National City Bank as Rights Agent (the "Rights Agreement"). Under the
terms of the Rights Agreement, the Company declared a dividend of one Right
for each outstanding share of Common Stock of the Company to common
stockholders of record on August 1, 1993. Each Right entitles the holder to
purchase from the Company one-hundredth of a share of Series A Preferred Stock
at a purchase price of $110.
The Rights have certain anti-takeover effects and are intended to cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of the Rights being acquired.
Under the terms of the Rights Agreement, if at such time as any person
becomes the beneficial owner of 9.9% or more of the Common Stock (an
"Acquiring Person"), (i) the Company is involved in a merger or other business
combination in which the Common Stock is exchanged or changed (other than a
merger with a person or group which both (a) acquired Common Stock pursuant to
a Permitted Offer (as defined below) and (b) is offering not less than the
price paid pursuant to the Permitted Offer and the same form of consideration
paid in the Permitted Offer) or (ii) 50% or more of the Company's assets or
earning power are sold, the Rights become exercisable for that number of
shares of common stock of the acquiring company which at the time of such
transaction would have a market value of two times the exercise price of the
Right (such right being called the "Flip-over"). A "Permitted Offer" is a
tender or exchange offer which is for all outstanding shares of Common Stock
at a price and on terms determined, prior to the purchase of shares under such
tender or exchange offer, by at least a majority of the members of the Board
of Directors who are not officers of the Company and who are not Acquiring
Persons or affiliates, associates, nominees or representatives of an Acquiring
Person, to be adequate and otherwise in the best interests of the Company and
its stockholders (other than the person or any affiliate or associate thereof
on whose behalf the offer is being made) taking into account all factors that
such directors deem relevant.
F-42
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the event any person becomes an Acquiring Person, for a 60 day period
after such event, if the Flip-over right is not also triggered, the Rights
become exerciseable for that number of shares of Common Stock having a market
value of two times the exercise price of the Right, to the extent available,
and then (after all authorized and unreserved shares of Common Stock have been
issued), a common stock equivalent having a market value of two times the
exercise price of the Right.
Upon any person becoming an Acquiring Person (other than pursuant to a
Permitted Offer), any rights issued to or beneficially owned by such Acquiring
Person become null and void and thereafter may not be transferred to any other
person.
Certain persons and transactions are exempted from the operation of the
Rights. Prior to a person becoming an Acquiring Person, the Board has the
power to amend the Rights Agreement or cause the redemption of the Rights, at
a purchase price of $0.01 in cash per Right. After the time a person becomes
an Acquiring Person, the Board can only amend the Rights Agreement to make
changes that do not adversely affect the interests of the holders of Rights.
For purposes of the Rights Agreement a person is not deemed to be the
beneficial owner of securities designated as Excess Shares under the Company's
Certificate of Incorporation.
13. Related Party Transactions
At December 31, 1999 and 1998, the Company had receivables of approximately
$3.6 and $4.0 million, respectively, due from certain current and former
executive officers of the Company. The loans include interest provisions (with
a 5.7% average rate) and were to finance the income taxes payable by the
executive officers primarily as a result of the 1998 Spin Off. The loans are
payable over periods ranging from four years to ten years with the majority of
the obligations amortizing quarterly. Interest expense on each note is
forgiven on a periodic basis, provided that the officer remains an employee of
the Company. In the event of a change in control of the Company (as defined in
the note), the principal balance of the note is forgiven provided that the
officer is still an employee of the Company.
On October 15, 1998, the Company acquired eight personal care facilities and
related facilities for approximately $7.1 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 and another director of the Company is a member of
its board of directors. The Company leases the Tangram facilities to Tangram
pursuant to a master lease agreement which is guaranteed by Res-Care. For the
year ended December 31, 1999 and the period from May 1, 1998 to December 31,
1998, Tangram has paid the Company approximately $733,800 and $155,000,
respectively, in rent payments.
On February 29, 2000, the Company entered into a Separation and Release
Agreement (the "Separation Agreement") with the former Executive Vice
President and Chief Financial Officer ("CFO") of the Company. The Separation
Agreement was entered into in connection with his resignation as Executive
Vice President and CFO of the Company, effective February 9, 2000 (the
"Termination Date"). The Separation Agreement provides for a lump sum
severance payment of approximately $510,000 and certain other consideration
from the Company, and an extension of certain employee benefits for a one-year
period following the Termination Date.
The Company entered into a Separation Agreement and Release of Claims (the
"Ladt Separation Agreement") with Thomas T. Ladt pursuant to which Mr. Ladt
resigned as President, Chief Executive Officer and Chief Operating Officer of
the Company and from the Board of Directors of the Company as of March 5,
1999. The Ladt Separation Agreement provides for a lump sum payment of
approximately $1.3 million and certain other consideration from the Company,
and an extension of certain employee benefits for a two-year period following
the date of his resignation. The Company further agreed to amend a tax loan
that the Company had made to Mr. Ladt to provide that no principal or interest
payments would be due under such tax loan prior to March 5, 2004.
F-43
<PAGE>
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Quarterly Financial Information (Unaudited)
Summarized unaudited consolidated quarterly information for the year ended
December 31, 1999 and the period from May 1, 1998 to December 31, 1998 is
provided below (amounts in thousands, except per share amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues
Year end December 31, 1999......... $56,663 $57,909 $59,311 $ 59,392
Period from May 1, 1998 to December
31, 1998.......................... N/A $37,356 $56,168 $ 56,409
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999....... $20,338 $20,166 $13,027 $(10,996)(2)
Period from May 1, 1998 to December
31, 1998.......................... N/A $ 8,198 (1) $12,958 $ 13,653
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999....... -- -- -- --
Period from May 1, 1998 to December
31, 1998.......................... N/A $(7,970)(1) $ (81) --
Net Income (Loss)
Year ended December 31, 1999....... $20,338 $20,166 $13,027 $(10,996)(2)
Period from May 1, 1998 to December
31, 1998.......................... N/A $ 228 (1) $12,877 $ 13,653
Earnings per share
Basic
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... $ N/A $ .12 (1) $ .19 $ .20
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999..... $ -- $ -- $ -- $ --
Period from May 1, 1998 to
December 31, 1998............... N/A $ (.12)(1) $ -- $ --
Net Income (Loss)
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ -- (1) $ .19 $ .20
Diluted
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ .12 (1) $ .19 $ .20
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999..... -- $ -- $ -- $ --
Period from May 1, 1998 to
December 31, 1998............... $ N/A $ (.12)(1) $ -- $ --
Net Income (Loss)
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ -- (1) $ .19 $ .20
</TABLE>
- --------
(1) Reflects operations since May 1, 1998.
(2) Reflects the write-off of uncollectible amounts due from tenants and loss
from impairment of assets as described in Notes 2 and 8.
F-44
<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 29, 2000
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 March 29, 2000
______________________________________
Walter F. Beran
/s/ Douglas Crocker II Director March 29, 2000
______________________________________
Douglas Crocker II
/s/ Ronald G. Geary Director March 29, 2000
______________________________________
Ronald G. Geary
/s/ R. Gene Smith Director March 29, 2000
______________________________________
R. Gene Smith
/s/ W. Bruce Lunsford Chairman of the Board and March 29, 2000
______________________________________ Director
W. Bruce Lunsford
/s/ Debra A. Cafaro Chief Executive Officer, March 29, 2000
______________________________________ President (Principal
Debra A. Cafaro Executive Officer, Acting
Principal Financial
Officer and Acting
Principal Accounting
Officer) and Director
</TABLE>
<PAGE>
VENTAS, INC.
SCHEDULE III*
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- -------------------------------------- ------------------- Capitalized -------------------
Buildings Subsequent Buildings
and Improve- to and Improve- 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 $1,439 1968 1998
Rehab. &
Healthc. Ctr. of
Birmingham Birmingham AL -- 1,921 -- -- 1,921 859 1971 1998
Rehab. &
Healthcare Ctr.
Of Mobile Mobile AL 5 2,981 -- 5 2,981 839 1967 1998
Valley
Healthcare &
Rehab. Center Tucson AZ 383 1,954 -- 383 1,954 596 1964 1998
Sonoran Rehab &
Care Center Phoenix AZ 781 2,755 -- 781 2,755 645 1962 1998
Desert Life
Rehab & Care
Center Tucson AZ 611 5,117 -- 611 5,117 2,225 1979 1998
Villa Campana
Health Center Tucson AZ 533 2,201 -- 533 2,201 528 1983 1998
Kachina Point
Health Care &
Rehab. Sedona AZ 364 4,179 -- 364 4,179 1,526 1983 1998
Nob Hill
Healthcare
Center San Francisco CA 1,902 7,531 -- 1,902 7,531 2,118 1967 1998
Canyonwood
Nursing & Rehab.
Ctr. Redding CA 401 3,784 -- 401 3,784 902 1989 1998
Californian Care
Center Bakersfield CA 1,438 5,609 -- 1,438 5,609 1,064 1988 1998
Magnolia Gardens
Care Center Burlingame CA 1,832 3,186 -- 1,832 3,186 873 1955 1998
Lawton
Healthcare
Center San Francisco CA 943 514 -- 943 514 188 1962 1998
Valley Gardens
HC & Rehab. Stockton CA 516 3,405 -- 516 3,405 950 1988 1998
Alta Vista
Healthcare
Center Riverside CA 376 1,669 -- 376 1,669 519 1966 1998
Maywood Acres
Healthcare
Center Oxnard CA 465 2,363 -- 465 2,363 632 1964 1998
La Veta
Healthcare
Center Orange CA 47 1,459 -- 47 1,459 408 1964 1998
Bay View Nursing
& Rehab. Center Alameda CA 1,462 5,981 -- 1,462 5,981 1,646 1967 1998
Village Square
Nsg. & Rehab.
Ctr. San Marcos CA 766 3,507 -- 766 3,507 576 1989 1998
Cherry Hills
Health Care
Center Englewood CO 241 2,180 -- 241 2,180 768 1960 1998
Aurora Care
Center Aurora CO 197 2,328 -- 197 2,328 631 1962 1998
Castle Garden
Care Center Northglenn CO 501 8,294 -- 501 8,294 2,102 1971 1998
Brighton Care
Center Brighton CO 282 3,377 -- 282 3,377 864 1969 1998
Andrew House
Healthcare New Britain CT 247 1,963 -- 247 1,963 485 1967 1998
Camelot Nursing
& Rehab. Center New London CT 202 2,363 -- 202 2,363 532 1969 1998
Hamilton Rehab.
& Healthcare
Center Norwich CT 456 2,808 -- 456 2,808 737 1969 1998
Windsor Rehab. &
Healthcare
Center Windsor CT 368 2,520 -- 368 2,520 668 1965 1998
Nutmeg Pavilion
Healthcare New London CT 401 2,777 -- 401 2,777 781 1968 1998
Parkway Pavilion
Healthcare Enfield CT 337 3,607 -- 337 3,607 973 1968 1998
Courtland
Gardens Health
Ctr., Inc. Stamford CT 1,126 9,399 -- 1,126 9,399 637 1956 1998
Homestead Health
Center Stamford CT 511 2,764 -- 511 2,764 200 1959 1998
East Manor
Medical Care
Center Sarasota FL 390 5,499 -- 390 5,499 1,432 1966 1998
Healthcare &
Rehab Ctr of
Sanford Sanford FL 329 3,074 -- 329 3,074 822 1965 1998
Titusville
Rehab. & Nursing
Center Titusville FL 398 3,810 -- 398 3,810 1,030 1966 1998
Bay Pointe
Nursing Pavilion St. Petersburg FL 750 4,392 -- 750 4,392 744 1984 1998
Colonial Oaks
Rehab. Ctr-Ft.
Myers Ft. Meyers FL 1,058 5,754 -- 1,058 5,754 621 1995 1998
Carrollwood Core
Center Tampa FL 268 4,128 -- 268 4,128 1,167 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
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 Improve- to and Improve- 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 3,566 827 1988 1998
Rehab. &
Healthcare Ctr.
of Tampa Tampa FL 355 8,291 -- 355 8,291 1,630 1969 1998
Rehab & Health
Ctr. of Cape
Coral Cape Coral FL 1,002 4,153 -- 1,002 4,153 1,082 1978 1998
Windsor Woods
Convalescent
Center Hudson FL 859 3,172 -- 859 3,172 789 N/A 1998
Casa Mora Rehab.
& Ext Care Bradenton FL 823 6,093 -- 823 6,093 427 1977 1998
North Broward
Rehab. & Nsg.
Ctr. Pompano Beach FL 1,360 5,913 -- 1,360 5,913 383 1965 1998
Highland Pines
Rehab. Center Clearwater FL 863 5,793 -- 863 5,793 394 1965 1998
Pompano
Rehab/Nursing
Ctr. Pompano Beach FL 890 3,252 -- 890 3,252 209 1975 1998
Abbey Rehab. &
Nsg. Center St. Petersburg FL 563 2,842 -- 563 2,842 360 1962 1998
Savannah Rehab.
& Nursing Center Savannah GA 213 2,772 -- 213 2,772 753 1968 1998
Specialty Care
of Marietta Marietta GA 241 2,782 -- 241 2,782 836 1968 1998
Savannah
Specialty Care
Center Savannah GA 157 2,219 -- 157 2,219 698 1972 1998
Lafayette Nsg. &
Rehab. Ctr. Fayetteville GA 598 6,623 -- 598 6,623 882 1989 1998
Tucker Nursing
Center Tucker GA 512 8,153 -- 512 8,153 586 1972 1998
Hillcrest Rehab.
Care Center Boise ID 256 3,593 -- 256 3,593 499 1977 1998
Cascade Care
Center Caldwell ID 312 2,050 -- 312 2,050 263 1974 1998
Emmett
Rehabilitation
and Healthcare Emmett ID 185 1,670 -- 185 1,670 1,006 1960 1998
Lewiston
Rehabilitation
and Care Ctr. Lewiston ID 133 3,982 -- 133 3,982 1,171 1964 1998
Nampa Care
Center Nampa ID 252 2,810 -- 252 2,810 1,647 1950's 1998
Weiser
Rehabilitation
and Care Ctr. Weiser ID 157 1,760 -- 157 1,760 1,175 1963 1998
Moscow Care
Center Moscow ID 261 2,571 -- 261 2,571 951 1955 1998
Mountain Valley
Care and Rehab. Kellogg ID 68 1,281 -- 68 1,281 787 1971 1998
Rolling Hills
Health Care
Center New Albany IN 81 1,894 -- 81 1,894 484 1984 1998
Royal Oaks
Healthcare &
Rehab Ctr. Terre Haute IN 418 5,779 -- 418 5,779 602 1995 1998
Southwood Health
& Rehab Center Terre Haute IN 90 2,868 -- 90 2,868 629 1988 1998
Vencor Corydon Corydon IN 125 6,068 -- 125 6,068 199 N/A 1998
Valley View
Health Care
Center Elkhart IN 87 2,665 -- 87 2,665 646 1985 1998
Wildwood
Healthcare
Center Indianapolis IN 134 4,983 -- 134 4,983 1,120 1988 1998
Meadowvale
Health & Rehab.
Ctr. Bluffton IN 7 787 -- 7 787 79 1962 1998
Columbia
Healthcare
Facility Evansville IN 416 6,317 -- 416 6,317 1,436 1983 1998
Bremen Health
Care Center Bremen IN 109 3,354 -- 109 3,354 518 1982 1998
Windsor Estates
Health & Rehab
Ctr Kokomo IN 256 6,625 -- 256 6,625 1,116 1962 1998
Muncie Health
Care & Rehab. Muncie IN 108 4,202 -- 108 4,202 830 1980 1998
Parkwood Health
Care Center Lebanon IN 121 4,512 -- 121 4,512 949 1977 1998
Wedgewood
Healthcare
Center Clarksville IN 119 5,115 -- 119 5,115 669 1985 1998
Westview Nursing
& Rehab. Center Bedford IN 255 4,207 -- 255 4,207 941 1970 1998
Columbus Health
& Rehab. Center Columbus IN 345 6,817 -- 345 6,817 2,206 1966 1998
Rosewood Health
Care Center Bowling Green KY 248 5,371 -- 248 5,371 1,636 1970 1998
Oakview Nursing
& Rehab. Ctr. Calvert City KY 124 2,882 -- 124 2,882 874 1967 1998
Cedars of
Lebanon Nursing
Center Lebanon KY 40 1,253 -- 40 1,253 382 1930 1998
Winchester
Centre for
Health/Rehab. Winchester KY 137 6,120 -- 137 6,120 1,844 1967 1998
Riverside Manor
Health Care Calhoun KY 103 2,119 -- 103 2,119 650 1963 1998
Maple Manor
Healthcare
Center Greenville KY 59 3,187 -- 59 3,187 974 1968 1998
Danville Centre
for Health &
Rehab. Danville KY 322 3,538 -- 322 3,538 765 1962 1998
Lexington Centre
for Health &
Rehab. Lexington KY 647 4,892 -- 647 4,892 1,349 1963 1998
North Centre for
Health & Rehab. Louisville KY 285 1,555 -- 285 1,555 542 1969 1998
Hillcrest Health
Care Center Owensboro KY 544 2,619 -- 544 2,619 1,860 1963 1998
<CAPTION>
Life on
Which
Depreciation
in 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 Improve- to and Improve- 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 1,252 1969 1998
Harrodsburg
Health Care
Center Harrodsburg KY 137 1,830 -- 137 1,830 795 1974 1998
Laurel Ridge
Rehab. & Nursing
Ctr. Jamaica Plain MA 194 1,617 -- 194 1,617 588 1968 1998
Blue Hills
Alzheimer's Care
Center Stoughton MA 511 1,026 -- 511 1,026 727 1965 1998
Brigham Manor
Nursing & Rehab
Ctr Newburyport MA 126 1,708 -- 126 1,708 675 1806 1998
Presentation
Nursing & Rehab.
Ctr. Brighton MA 184 1,220 -- 184 1,220 782 1968 1998
Country Manor
Rehab. & Nsg.
Center Newburyport MA 199 3,004 -- 199 3,004 1,196 1968 1998
Crawford Skilled
Nsg. & Rehab.
Ctr. Fall River MA 127 1,109 -- 127 1,109 649 1968 1998
Hallmark Nursing
& Rehab. Ctr. New Bedford MA 202 2,694 -- 202 2,694 1,105 1968 1998
Sachem Nursing &
Rehab. Ctr. East Bridgewater MA 529 1,238 -- 529 1,238 834 1968 1998
Hammersmith
House Nsg. Care
Ctr. Saugus MA 112 1,919 -- 112 1,919 701 1965 1998
Oakwood Rehab. &
Nursing Center Webster MA 102 1,154 -- 102 1,154 663 1967 1998
Timberlyn
Heights Nsg. &
Alz. Ctr. Great Barrington MA 120 1,305 -- 120 1,305 674 1968 1998
Star of David
Nsg. & Rehab/Alz
Ctr. West Roxbury MA 359 2,324 -- 359 2,324 1,530 1968 1998
Brittany
Healthcare
Center Natick MA 249 1,328 -- 249 1,328 703 1996 1998
Briarwood Health
Care Nursing Ctr Needham MA 154 1,502 -- 154 1,502 757 1970 1998
Westridge
Healthcare
Center Marlborough MA 453 3,286 -- 453 3,286 1,848 1964 1998
Bolton Manor
Nursing Home Marlborough MA 222 2,431 -- 222 2,431 1,151 1973 1998
Hillcrest
Nursing Facility Fitchburg MA 175 1,461 -- 175 1,461 928 1957 1998
Country Gardens
Sk. Nsg. &
Rehab. Swansea MA 415 2,675 -- 415 2,675 1,017 1969 1998
Quincy Rehab. &
Nursing Center Quincy MA 216 2,911 -- 216 2,911 1,451 1965 1998
West Roxbury
Manor West Roxbury MA 91 1,001 -- 91 1,001 791 1960 1998
Newton and
Wellesley
Alzheimer Ctr. Wellesley MA 297 3,250 -- 297 3,250 1,234 1971 1998
Den-Mar Rehab. &
Nursing Center Rockport MA 23 1,560 -- 23 1,560 733 1963 1998
Eagle Pond
Rehab. & Living
Center South Dennis MA 296 6,896 -- 296 6,896 1,806 1985 1998
Blueberry Hill
Healthcare Beverly MA 129 4,290 -- 129 4,290 1,787 1965 1998
Colony House
Nsg. & Rehab.
Ctr. Abington MA 132 999 -- 132 999 689 1965 1998
Embassy House
Sk. Nsg. &
Rehab. Brockton MA 166 1,004 -- 166 1,004 628 1968 1998
Franklin Sk.
Nsg. & Rehab.
Center Franklin MA 156 757 -- 156 757 528 1967 1998
Great Barrington
Rehab. & Nsg.
Ctr. Great Barrington MA 60 1,142 -- 60 1,142 757 1967 1998
River Terrace Lancaster MA 268 957 -- 268 957 684 1969 1998
Walden Rehab. &
Nursing Center Concord MA 181 1,347 -- 181 1,347 954 1969 1998
Harrington House
Nsg. & Rehab.
Ctr. Walpole MA 4 4,444 -- 4 4,444 874 1991 1998
Eastside Rehab.
and Living
Center Bangor ME 316 1,349 -- 316 1,349 512 1967 1998
Winship Green
Nursing Center Bath ME 110 1,455 -- 110 1,455 591 1974 1998
Brewer
Rehabilitation &
Living Center Brewer ME 228 2,737 -- 228 2,737 965 1974 1998
Augusta
Rehabilitation
Center Augusta ME 152 1,074 -- 152 1,074 516 1968 1998
Kennebunk
Nursing Center Kennebunk ME 99 1,898 -- 99 1,898 690 1977 1998
Norway
Rehabilitation &
Living Center Norway ME 133 1,658 -- 133 1,658 638 1972 1998
Shore Village
Rehab. & Nursing
Ctr. Rockland ME 100 1,051 -- 100 1,051 493 1968 1998
Westgate Manor Bangor ME 287 2,718 -- 287 2,718 981 1969 1998
Brentwood Rehab.
& Nsg. Center Yarmouth ME 181 2,789 -- 181 2,789 1,010 1945 1998
Fieldcrest Manor
Nursing Center Waldoboro ME 101 1,020 -- 101 1,020 500 1963 1998
Park Place
Health Care
Center Great Falls MT 600 6,311 -- 600 6,311 1,732 1963 1998
Parkview Acres
Care & Rehab
Ctr. Dillon MT 207 2,578 -- 207 2,578 703 1965 1998
Pettigrew Rehab.
& Healthcare
Ctr. Durham NC 101 2,889 -- 101 2,889 833 1969 1998
LaSalle
Healthcare
Center Durham NC 140 3,238 -- 140 3,238 781 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 Facility 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 Center 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 Improve- to and Improve- 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 1,115 1971 1998
Blue Ridge
Rehab. &
Healthcare Ctr. Asheville NC 250 3,819 -- 250 3,819 975 1977 1998
Raleigh Rehab. &
Healthcare
Center Raleigh NC 316 5,470 -- 316 5,470 1,804 1969 1998
Rose Manor
Health Care
Center Durham NC 201 3,527 -- 201 3,527 1,113 1972 1998
Cypress Pointe
Rehab & HC
Center Winmington NC 233 3,710 -- 233 3,710 1,095 1966 1998
Winston-Salem
Rehab & HC
Center Winston-Salem NC 305 5,142 -- 305 5,142 1,670 1968 1998
Silas Creek
Manor Winston-Salem NC 211 1,893 -- 211 1,893 521 1966 1998
Lincoln Nursing
Center Lincoln NC 39 3,309 -- 39 3,309 1,260 1976 1998
Guardian Care of
Roanoke Rapids Roanoke Rapids NC 339 4,132 -- 339 4,132 1,320 1967 1998
Guardian Care of
Henderson Henderson NC 206 1,997 -- 206 1,997 551 1957 1998
Rehab. & Nursing
Center of Monroe Monroe NC 185 2,654 -- 185 2,654 879 1963 1998
Guardian Care of
Kinston Kinston NC 186 3,038 -- 186 3,038 807 1961 1998
Guardian Care of
Zebulon Zebulon NC 179 1,933 -- 179 1,933 526 1973 1998
Guardian Care of
Rocky Mount. Rocky Mount NC 240 1,732 -- 240 1,732 403 1975 1998
Rehab. & Health
Center of
Gastonia Gastonia NC 158 2,359 -- 158 2,359 684 1968 1998
Guardian Care of
Elizabeth City Elizabeth City NC 71 561 -- 71 561 380 1977 1998
Chapel Hill
Rehab. &
Healthcare Ctr. Chapel Hill NC 347 3,029 -- 347 3,029 944 1984 1998
Homestead Health
Care & Rehab Ctr Lincoln NE 277 1,528 1,178 277 2,706 1,830 1961 1998
Dover Rehab. &
Living Center Dover NH 355 3,797 -- 355 3,797 1,397 1969 1998
Greenbriar
Terrace
Healthcare Nashua NH 776 6,011 -- 776 6,011 2,030 1963 1998
Hanover Terrace
Healthcare Hanover NH 326 1,825 -- 326 1,825 489 1969 1998
Las Vegas
Healthcare &
Rehab. Ctr. Las Vegas NV 454 1,018 -- 454 1,018 188 1940 1998
Torrey Pines
Care Center Las Vegas NV 256 1,324 -- 256 1,324 375 1971 1998
Franklin Woods
Health Care
Center Columbus OH 190 4,712 -- 190 4,712 1,014 1986 1998
Chillicothe
Nursing & Rehab.
Center Chillicothe OH 128 3,481 -- 128 3,481 1,308 1976 1998
Pickerington
Nursing & Rehab.
Ctr. Pickerington OH 312 4,382 -- 312 4,382 914 1984 1998
Logan Health
Care Center Logan OH 169 3,750 -- 169 3,750 1,013 1979 1998
Winchester Place
Nsg. & Rehab.
Ctr. Canal Winchestr. OH 454 7,149 -- 454 7,149 2,055 1974 1998
Minerva Park
Nursing & Rehab.
Ctr. Columbus OH 210 3,684 -- 210 3,684 469 1973 1998
West Lafayette
Rehab & Nsg Ctr West Lafayette OH 185 3,278 -- 185 3,278 467 1972 1998
Cambridge Health
& Rehab. Center Cambridge OH 108 2,642 -- 108 2,642 668 1975 1998
Coshocton Health
& Rehab. Center Coshocton OH 203 1,979 -- 203 1,979 504 1974 1998
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. Akron OH 341 5,491 -- 341 5,491 1,568 1970 1998
Lebanon Country
Manor Lebanon OH 105 3,617 -- 105 3,617 1,094 1984 1998
Sunnyside Care
Center Salem OR 1,519 2,688 -- 1,519 2,688 746 1981 1998
Medford Rehab. &
Healthcare
Center Medford OR 362 4,610 -- 362 4,610 1,243 N/A 1998
Wyomissing Nsg.
& Rehab. Ctr. Reading PA 61 5,095 -- 61 5,095 360 1966 1998
Health Havens
Nursing & Rehab.
Ctr. E. Providence RI 174 2,643 -- 174 2,643 190 1962 1998
Oak Hill Nursing
& Rehab. Ctr. Pawtucket RI 91 6,724 -- 91 6,724 475 1966 1998
Madison
Healthcare &
Rehab Ctr. Madison TN 168 1,445 -- 168 1,445 412 1968 1998
Cordova Rehab. &
Nursing Center Cordova TN 322 8,830 -- 322 8,830 2,954 1979 1998
Primacy
Healthcare &
Rehab Ctr. Memphis TN 1,222 8,344 -- 1,222 8,344 1,904 1980 1998
Masters Health
Care Center Algood TN 524 4,370 -- 524 4,370 1,404 1981 1998
San Pedro Manor San Antonio TX 602 4,178 -- 602 4,178 326 1985 1998
Wasatch Care
Center Ogden UT 373 597 -- 373 597 366 1964 1998
Crosslands
Rehab. & Health
Care Ctr Sandy UT 334 4,300 -- 334 4,300 798 1987 1998
St. George Care
and Rehab.
Center St. George UT 420 4,465 -- 420 4,465 1,311 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 Improve- to and Improve- 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 2,322 647 1962 1998
Wasatch Valley
Rehabilitation Salt Lake City UT 389 3,545 -- 389 3,545 858 1962 1998
Nansemond Pointe
Rehab. & HC Ctr. Suffolk VA 534 6,990 -- 534 6,990 1,803 1963 1998
Harbour Pointe
Med. & Rehab.
Ctr Norfolk VA 427 4,441 -- 427 4,441 1,232 1969 1998
River Pointe
Rehab. &
Healthc. Ctr. Virginia Beach VA 770 4,440 -- 770 4,440 1,576 1953 1998
Bay Pointe
Medical & Rehab.
Centre Virginia Beach VA 805 2,886 -- 805 2,886 762 1971 1998
Birchwood
Terrace
Healthcare Burlington VT 15 4,656 -- 15 4,656 1,630 1965 1998
Arden
Rehabilitation &
Healthcare Ctr Seattle WA 1,111 4,013 -- 1,111 4,013 1,086 1950's 1998
Northwest
Continuum Care
Center Longview WA 145 2,563 -- 145 2,563 719 1955 1998
Bellingham
Health Care &
Rehab Svc Bellingham WA 441 3,824 -- 441 3,824 1,021 1972 1998
Rainier Vista
Care Center Puyallup WA 520 4,780 -- 520 4,780 1,006 1986 1998
Lakewood
Healthcare
Center Lakewood WA 504 3,511 -- 504 3,511 711 1989 1998
Vencor of
Vancouver HC &
Rehab. Vancouver WA 449 2,964 -- 449 2,964 852 1970 1998
Heritage Health
& Rehab. Center Vancouver WA 76 835 -- 76 835 213 1955 1998
Edmonds Rehab. &
Healthcare Ctr. Edmonds WA 355 3,032 -- 355 3,032 952 1961 1998
Queen Anne
Healthcare Seattle WA 570 2,750 -- 570 2,750 763 1970 1998
San Luis Medical
& Rehab Center Greenbay WI 259 5,299 -- 259 5,299 1,181 N/A 1998
Eastview Medical
& Rehab. Center Antigo WI 200 4,047 -- 200 4,047 1,290 1962 1998
Colonial Manor
Medical & Rehab
Ctr. Wausau WI 169 3,370 -- 169 3,370 1,009 1964 1998
Colony Oaks Care
Center Appleton WI 353 3,571 -- 353 3,571 1,054 1967 1998
North Ridge Med.
& Rehab. Center Manitowoc WI 206 3,785 -- 206 3,785 1,034 1964 1998
Vallhaven Care
Center Neenah WI 337 5,125 -- 337 5,125 1,467 1966 1998
Kennedy Park
Medical & Rehab.
Ctr. Schofield WI 301 3,596 -- 301 3,596 2,076 1966 1998
Family Heritage
Med. & Rehab.
Ctr. Wisconsin Rapids WI 240 3,350 -- 240 3,350 2,119 1966 1998
Mt. Carmel
Medical & Rehab.
Ctr. Burlington WI 274 7,205 -- 274 7,205 1,797 1971 1998
Mt. Carmel
Medical & Rehab.
Ctr. Milwaukee WI 2,356 22,571 -- 2,356 22,571 6,585 1958 1998
Sheridan Medical
Complex Kenosha WI 282 4,910 -- 282 4,910 1,613 1964 1998
Woodstock Health
& Rehab. Center Kenosha WI 562 7,424 -- 562 7,424 2,559 1970 1998
Mountain Towers
Healthcare &
Rehab Cheyenne WY 342 3,814 -- 342 3,814 941 1964 1998
South Central
Wyoming HC. &
Rehab Rawlins WY 151 1,738 -- 151 1,738 462 1955 1998
Wind River
Healthcare &
Rehab. Ctr Riverton WY 179 1,559 -- 179 1,559 409 1967 1998
Sage View Care
Center Rock Springs WY 287 2,392 -- 287 2,392 659 1964 1998
------ ------- ----- ------ ------- -------
TOTAL VENCOR NURSING FACILITIES 74,939 731,367 1,178 74,939 732,545 204,823
<CAPTION>
Life on
Which
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 FACILITIES
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center MI 291 6,187 -- 285 3,095 1,169 N/A 1998
Grayling Health
Care Center MI 76 3,234 -- 76 3,234 1,087 N/A 1998
Clara Barton
Terrace MI 375 2,219 -- 375 2,219 2,009 N/A 1998
Mary Avenue Care
Center MI 162 1,744 -- 162 1,744 1,495 N/A 1998
Woodside
Convalescent
Center MN 639 3,440 56 639 3,496 2,147 N/A 1998
Hillhaven
Convalescent
Center NV 121 1,181 -- 121 1,181 762 N/A 1998
Marigarde-
Sylvania Nursing
Home OH 667 2,428 -- 667 2,428 1,117 N/A 1998
Marietta
Convalescent
Center OH 158 3,266 -- 158 3,266 696 N/A 1998
------ ------- ----- ------ ------- -------
TOTAL NON-VENCOR SKILLED NURSING
FACILITIES 2,489 23,699 56 2,483 20,663 10,482
------ ------- ----- ------ ------- -------
TOTAL FOR SKILLED NURSING
FACILITIES 77,428 755,066 1,234 77,422 753,208 215,305
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center 36 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
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
Initial Cost to Gross Amount Carried
Location Company Cost at Close of Period
- --------------------------------------- --------------------- Capitalized --------------------
Buildings Subsequent Buildings
and Improve- 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 HOSPITALS
Vencor
Hospital--
Phoenix Phoenix AZ 226 3,359 -- 226 3,359 1,005 N/A 1998
Vencor
Hospital--Tucson Tucson AZ 130 3,091 -- 130 3,091 984 N/A 1998
Vencor
Hospital--
Ontario Ontario CA 523 2,988 -- 523 2,988 738 N/A 1998
Vencor
Hospital--San
Leandro San Leandro CA 2,735 5,870 -- 2,735 5,870 2,903 N/A 1998
Vencor
Hospital--Orange
County Westminster CA 728 7,384 -- 728 7,384 2,450 N/A 1998
THC--Orange
County Orange County CA 3,144 2,611 -- 3,144 2,611 189 1990 1998
Vencor
Hospital--San
Diego San Diego CA 670 11,764 -- 670 11,764 2,552 N/A 1998
Recovery Inn of
Menlo Park Menlo Park CA -- 2,799 -- 2,799 983 1992 1998
Vencor
Hospital--Denver Denver CO 896 6,367 -- 896 6,367 2,201 N/A 1998
Vencor
Hospital--Coral
Gables Coral Gables FL 1,071 5,348 -- 1,071 5,348 1,937 N/A 1998
Vencor
Hospital--St.
Petersburg St. Petersburg FL 1,418 17,525 7 1,418 17,532 2,776 1968 1998
Vencor
Hospital--Ft.
Lauderdale Ft. Lauderdale FL 1,758 14,080 -- 1,758 14,080 4,340 N/A 1998
Vencor
Hospital--North
Florida Green Cove Spr. FL 145 4,613 -- 145 4,613 1,012 N/A 1998
Vencor
Hospital--
Central Tampa Tampa FL 2,732 7,676 -- 2,732 7,676 712 1970 1998
Vencor
Hospital--
Hollywood Hollywood FL 605 5,229 -- 605 5,229 695 1937 1998
Vencor
Hospital--
Sycamore Sycamore IL 77 8,549 -- 77 8,549 1,989 N/A 1998
Vencor
Hospital--
Chicago North Chicago IL 1,583 19,980 -- 1,583 19,980 3,889 N/A 1998
Vencor
Hospital--Lake
Shore Chicago IL 1,513 9,525 -- 1,513 9,525 2,123 1995 1998
Vencor
Hospital--
Northlake Northlake IL 850 6,498 -- 850 6,498 2,126 N/A 1998
Vencor
Hospital--
LaGrange LaGrange IN 173 2,330 -- 173 2,330 1,524 N/A 1998
Vencor
Hospital--
Indianapolis Indianapolis IN 985 3,801 -- 985 3,801 1,245 N/A 1998
Vencor
Hospital--
Louisville Louisville KY 3,041 12,330 -- 3,041 12,330 2,536 N/A 1998
Vencor
Hospital--New
Orleans New Orleans LA 648 4,971 -- 648 4,971 2,039 1968 1998
Vencor Hosp--
Boston
Northshore Peabody MA 543 7,568 -- 543 7,568 718 1974 1998
Vencor
Hospital--Boston Boston MA 1,551 9,796 -- 1,551 9,796 3,829 N/A 1998
Vencor
Hospital--
Detroit Detroit MI 355 3,544 -- 355 3,544 1,312 N/A 1998
Vencor
Hospital--Metro
Detroit Detroit MI 564 4,896 -- 564 4,896 361 1980 1998
Vencor
Hospital--
Minneapolis Golden Valley MN 223 8,120 -- 223 8,120 1,412 1952 1998
Vencor
Hospital--Kansas
City Kansas City MO 277 2,914 -- 277 2,914 995 N/A 1998
Vencor
Hospital--St.
Louis St. Louis MO 1,126 2,087 -- 1,126 2,087 871 N/A 1998
Vencor
Hospital--
Greensboro Greensboro NC 1,010 7,586 -- 1,010 7,586 2,199 N/A 1998
Vencor
Hospital--
Albuquerque Albuquerque NM 11 4,253 -- 11 4,253 341 1985 1998
THC--Las Vegas
Hospital Las Vegas NV 1,110 2,177 -- 1,110 2,177 194 1980 1998
Vencor
Hospital--
Oklahoma City Oklahoma City OK 293 5,607 -- 293 5,607 1,454 N/A 1998
Vencor
Hospital--
Philadelphia Philadelphia PA 135 5,223 -- 135 5,223 763 N/A 1998
Vencor
Hospital--
Pittsburgh Oakdale PA 662 12,854 -- 662 12,854 1,831 N/A 1998
Vencor
Hospital--
Chattanooga Chattanooga TN 757 4,415 -- 757 4,415 1,479 N/A 1998
Vencor
Hospital--San
Antonio San Antonio TX 249 11,413 -- 249 11,413 2,805 N/A 1998
Vencor
Hospital--Ft.
Worth Southwest Ft. Worth TX 2,342 7,458 -- 2,342 7,458 1,153 1987 1998
Vencor
Hospital--
Houston
Northwest Houston TX 1,699 6,788 -- 1,699 6,788 886 1986 1998
Vencor
Hospital--
Mansfield Mansfield TX 267 2,462 -- 267 2,462 725 N/A 1998
Vencor
Hospital--Ft.
Worth West Ft. Worth TX 648 10,608 -- 648 10,608 2,207 N/A 1998
Vencor
Hospital--
Houston Houston TX 33 7,062 -- 33 7,062 1,957 N/A 1998
Vencor
Hospital--
Arlington, VA Arlington VA 3,025 3,105 -- 3,025 3,105 898 N/A 1998
Vencor
Hospital--Mt.
Carmel Mt. Carmel WI 322 3,296 -- 322 3,296 705 1989 1998
-------- ---------- ------ -------- ---------- --------
TOTAL FOR VENCOR HOSPITALS 42,853 301,920 7 42,853 301,927 72,043
PERSONAL CARE FACILITIES
ResCare--
Tangram--8 sites San Marcos TX 616 6,512 4 616 6,521 408 N/A
-------- ---------- ------ -------- ---------- --------
$120,897 $1,063,498 $1,245 $120,891 $1,061,656 $287,756
======== ========== ====== ======== ========== ========
<CAPTION>
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- ----------------- ------------
<S> <C>
VENCOR HOSPITALS
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>
<TABLE>
<S> <C>
Reconciliation of real estate:
Carrying cost:
Balance at beginning of period: $1,185,969
Additions during period:
Acquisitions --
Dispositions:
Asset impairment (3,422)
----------
Balance end of period $1,182,547
==========
</TABLE>
<TABLE>
<S> <C>
Accumulated depreciation:
Balance at beginning of period: $246,509
Additions during period:
Depreciation expense 42,742
Dispositions:
Asset impairment (1,495)
--------
Balance end of period $287,756
========
</TABLE>
- -----
*Pursuant to the terms of the Amended Credit Agreement, a mortgage was granted
on all properties, effective February 28, 2000
S-6
<PAGE>
EXHIBIT 10.12.5
AMENDMENT TO THE
1997 INCENTIVE COMPENSATION PLAN
--------------------------------
Effective March 5, 1999
1. The following is added as Section 6.11 Committee Determination of Option
Terms to the 1997 Incentive Compensation Plan:
"6.11 Committee Determination of Option Terms.
Notwithstanding anything to the contrary in Section 6.4 or Section 6.7,
the Committee determines the period of time the Option is exercisable
(provided that no Option shall be exercised later than the tenth
anniversary of its grant) and to the extent that the Option Agreement
provides for exercisability of the Option during a period when Section
6.4 or Section 6.7 would not otherwise permit exercise of the Option,
the Option Agreement shall control as to such exercisability."
2. The last sentence of Section 7.3 Non-Transferability of Retricted Stock of
the 1997 Incentive Plan is deleted in its entirety.
IN WITNESS WHEREOF, the Company has duly executed this Amendment effective as of
the day, month and year first written above.
Ventas, Inc.
By: /s/ W. Bruce Lunsford
---------------------
W. Bruce Lunsford
Chairman of the Board
<PAGE>
EXHIBIT 10.20
AMENDED AND RESTATED GUARANTEE REIMBURSEMENT AGREEMENT
AMENDED AND RESTATED GUARANTEE REIMBURSEMENT AGREEMENT dated as of
April 28, 1998 among VENCOR, INC., a Delaware corporation ("Vencor"), VENCOR
HEALTHCARE, INC., a Delaware corporation ("Healthcare"), and TENET HEALTHCARE
CORPORATION, INC., a Nevada corporation ("Tenet"). Vencor and Healthcare are
collectively referred to herein as "Guarantors," and each is sometimes referred
to herein as a Guarantor.
WHEREAS, on January 31, 1990, Tenet, then known as National Medical
Enterprises Inc., and The Hillhaven Corporation, a Nevada corporation that prior
thereto was a subsidiary of Tenet ("Hillhaven"), entered into a Guarantee
Reimbursement Agreement, dated as of the date thereof (which, together with all
amendments, is referred to herein as the "Guarantee and Reimbursement
Agreement"), in connection with the reorganization of certain of the businesses
theretofore conducted by Tenet's long-term care group and the pro rata
distribution to Tenet's shareholders of Hillhaven common stock;
WHEREAS, the Guarantee Reimbursement Agreement covered all debt,
lease, partnership, payment and other obligations described in Appendix A to the
Guarantee Reimbursement Agreement (said Appendix A is incorporated herein by
reference) (as such obligations, subsequent to January 31, 1990, have been
amended, modified, supplemented, expanded, terminated or reduced pursuant to the
various amendments to the Guarantee Reimbursement Agreement and/or satisfaction
of certain obligations by Vencor or its Subsidiaries, herein referred to as the
"Obligations");
WHEREAS, Hillhaven and Vencor entered into an Agreement and Plan of
Merger dated as of April 23, 1995 and as amended and restated as of July 31,
1995 (the "Merger Agreement"), providing for the merger of Hillhaven with and
into Vencor, in connection with which Vencor assumed Hillhaven's liabilities
under the Guarantee and Reimbursement Agreement;
WHEREAS, on April 27, 1998, Vencor received approval from its
stockholders of an Agreement and Plan of Reorganization (the "Agreement and Plan
of Reorganization"), pursuant to which among other things, Vencor will transfer
certain of its assets to Healthcare and will distribute to its stockholders all
of the common stock of Healthcare, and Vencor will change its name to Ventas,
Inc.; and
WHEREAS, to facilitate the transactions contemplated by the Agreement
and Plan of Reorganization and in order to reaffirm certain of Vencor's
obligations to Tenet under the Guarantee and Reimbursement Agreement, as assumed
by Vencor, and amend or delete certain other of Vencor's obligations thereunder,
including but not limited to the obligation to pay a guarantee fee, previously
contained in Section 2 of the Guarantee
<PAGE>
Reimbursement Agreement, each of the Guarantors agrees to be a primary obligor
with respect to the obligations and liabilities under the Guarantee
Reimbursement Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree that the Guarantee Reimbursement Agreement shall be amended and restated
as follows:
1. Agreement to Reimburse Tenet for Payments of the Obligations.
-------------------------------------------------------------
(a) Reimbursement. Guarantors agree, jointly and severally, that they shall
-------------
reimburse Tenet, promptly on demand, for all Obligations paid by Tenet or its
subsidiaries on or after January 31, 1990 not theretofore reimbursed by
Guarantors. Payments and notices shall be made or given, as the case may be, in
accordance with the provisions of Sections 1(c), 2 and 7(b).
(b) Interest on Unpaid Reimbursements. Guarantors, jointly and severally,
---------------------------------
shall pay to Tenet interest on all payments of the Obligations by Tenet to the
extent that payment of such Obligations is not reimbursed by Guarantors on the
same day Tenet or its subsidiaries make such payments, such interest to accrue
from the date of each payment until reimbursement thereof has occurred in full,
on demand, at the maximum interest rate permitted by law. Interest payable shall
be computed on the basis of a 365 (or 366, as the case may be) day year for the
actual days elapsed.
(c) Payments. All payments due to Tenet hereunder shall be made in lawful
--------
currency of the United States in immediately available funds, by transfer, with
sufficient information to identify the source and application of funds, to such
account as Tenet may identify from time to time, or in such other manner or at
such other address as may be designated by Tenet in writing. In the event the
date specified for any payment hereunder is not a Business Day, such payment
shall be made on the next following Business Day and Interest shall be paid at
the rate provided for herein on any such payment to the Business Day on which
such payment is made.
(d) Duty to Pay Absolute. The duty of Guarantors to make any and all
--------------------
payments in the manner specified hereunder shall be joint and several,
unconditional, irrevocable and absolute, and all such payments shall be made
strictly in accordance with the terms hereof under all circumstances, including,
without limitation, the following:
(i) Any lack of validity or enforceability of the agreements pursuant
to which the Obligations were incurred, this Agreement, or any other
document, instrument or agreement relating thereto or hereto (including,
without limitation, any Assumption Agreements or any guarantees with
-2-
<PAGE>
respect to the Obligations) (sometimes hereinafter being referred to
collectively and severally as the "Related Documents");
(ii) Any change in the time, manner or place of payment of, or any
other term of, any or all of the Obligations;
(iii) Any release, amendment or waiver of, or any consent to or
departure from, any or all provisions of the Related Documents;
(iv) The existence of any claim, set-off, defense or other right
(including, but not limited to, right of contribution or similar right, if
any) which Guarantors may have at any time against Tenet, each other or any
other Person, whether in connection with a Related Document, a transaction
contemplated by a Related Document or any other transaction; and
(v) Any other circumstance which might otherwise constitute a defense
available to, or a discharge of, Guarantors, any Subsidiary or Tenet.
Guarantors hereby waive, to the fullest extent permitted by law, any right to
proceed or make a claim against Tenet arising out of Tenet's payment of any
amount, whether or not any of the foregoing circumstances shall exist at any
time.
2. Notice of Certain Payment Defaults. Prepayments or Terminations of
------------------------------------------------------------------
Assumed Leases.
- ---------------
If either of Guarantors or any Subsidiary defaults in the payment of any
Obligation or prepays any Obligation, whether in whole or in part, or if any of
the Assumed Leases terminates, Guarantors shall give Tenet notice of such
payment default, prepayment or termination on the same day as the occurrence of
such payment default, prepayment or termination by telephonic notice confirmed
on the same day in writing or by telex or telecopy. Any confirmation in writing
provided pursuant to this Section 2 shall be provided in accordance with Section
7(b).
3. Affirmative Covenants.
----------------------
So long as Tenet or any subsidiary thereof remains obligated (either
directly or indirectly or as guarantor or otherwise) with respect to any
outstanding Obligations, or any amount is owing to Tenet hereunder, Guarantors
shall, unless otherwise consented in writing by Tenet:
(a) Financial Statements. Furnish to Tenet:
--------------------
(i) as soon as available, but in any event not later than 120 days
after the close of each fiscal year of
-3-
<PAGE>
each of Vencor and Healthcare, a copy of the audited consolidated balance
sheet of each of Vencor and Healthcare, and its respective Consolidated
Subsidiaries as at the end of such fiscal year, and related audited
consolidated statements of income, cash flows and changes in stockholders'
equity of each of Vencor and Healthcare and its respective Consolidated
Subsidiaries for such fiscal year, setting forth for each fiscal year
beginning with the fiscal year ending December 31, 1998, with respect to
each of such other financial statements in comparative form the
corresponding figures for the preceding fiscal year, all in reasonable
detail, prepared in accordance with GAAP applied on a basis consistently
maintained throughout the period involved and with the prior fiscal year,
except as disclosed therein, such consolidated financial statements
containing a report of Independent Certified Public Accountants (such
report not to be qualified or limited because of any restricted or limited
examination made by such accountants); and
(ii) a copy of each of the Guarantors' Quarterly Reports on Form 10-Q
at such time as it is furnished to such Guarantor's stockholders.
(b) Payment of Obligations and Liabilities. Pay and discharge, and cause
--------------------------------------
the Subsidiaries to pay and discharge, at or before maturity, all their
respective obligations and liabilities, except (i) (other than with respect to
tax liabilities and obligations and liabilities under the Assumption Agreements,
the Assumed Leases and this Agreement, each of which shall be paid and
discharged on or before the due date thereof) where the failure to pay or
discharge, or to cause to be paid or discharged, would not in the aggregate have
material adverse effect on the business, operations, properties or financial or
other condition of Guarantors and the Subsidiaries, taken as a whole or (ii)
(other than with respect to obligations and liabilities under the Assumption
Agreements, the Assumed Leases and this Agreement, each of which shall be paid
and discharged on or before the due date thereof) where the same may be
contested in good faith, in which case Guarantors shall maintain, and cause the
Subsidiaries to maintain, in accordance with GAAP, appropriate reserves for the
accrual of any of the same.
(c) Maintenance of Properties; Insurance. Keep, and cause the Subsidiaries
------------------------------------
to keep, all properties useful and necessary in the business of Guarantors and
the Subsidiaries in good working order and condition, maintain, and cause the
Subsidiaries to maintain, with financially sound and reputable insurance
companies (which insurance companies may be, subject to the proviso below, part
of Guarantors' self-insurance program) insurance on all their properties in at
least such amounts and against at least such risks as are usually insured
against in the same general area and by companies engaged in the same or a
similar business and maintain professional liability and
-4-
<PAGE>
malpractice insurance against claims usually insured against by skilled nursing
and other long term care facilities and the personnel connected with such
facilities, provided that for professional liability and malpractice insurance
Guarantors shall not increase the deductible (or self-insured retention) to more
than $100,000 per claim, unless it is financially advantageous for Guarantors to
do so and such increase is approved in writing by Tenet, which approval shall
not be unreasonably withheld; and furnish to Tenet, upon request, full
information as to the insurance carried.
(d) Notice. Promptly give notice to Tenet (i) of the occurrence of any
------
Default or Event of Default hereunder, (ii) of any default or event of default
under any material instrument or other agreement of either of the Guarantors or
any Subsidiary, (iii) of any litigation, proceeding, investigation or dispute
which may exist at any time between either of the Guarantors or any Subsidiary
and any governmental authority which might have a material adverse effect upon
the business, operations, assets or condition, financial or otherwise, of either
of the Guarantors and its Subsidiaries, taken as a whole, (iv) of all litigation
and proceedings affecting either of the Guarantors or any Subsidiary (A) in
which the amount involved is equal to at least 5% of Consolidated Net Worth of
such Guarantor at the time of the commencement, or at any time during the
continuance, of such litigation or proceeding and not fully covered by insurance
(other than self-insurance or insurance deductibles) or (B) in which injunctive
or similar relief is sought and which might have a material adverse effect on
such Guarantor and its Subsidiaries, taken as a whole, (v) as soon as possible
and in any event within 30 days after either Guarantor knows or has reason to
know that (A) any Reportable Event has occurred with respect to any Plan, (B) a
transaction prohibited under Section 4975 of the Code or Section 406 of ERISA
resulting in a material liability to such Guarantor, a Subsidiary or any Person
that Guarantors or a Subsidiary has an obligation to indemnify has occurred, (C)
a Plan has incurred an accumulated funding deficiency as described in Section
412 of the Code or Section 302 of ERISA, whether or not waived, (D) there has
been a failure to make contributions to a Plan which may give rise to a lien,
(E) there has been an amendment to a Plan which required the granting of a
security interest, (F) there has been a termination of a Plan or there are
proceedings which are likely to be or have been instituted to terminate a Plan
with unfunded benefit liabilities as described in Section 4001(a)(18) of ERISA
or unfunded retiree medical benefits, or (G) either of the Guarantors or a
Subsidiary (or any respective ERISA Affiliate has incurred liability under
Section 515 or Title IV of ERISA (including withdrawal liability) with respect
to a Plan, and deliver to Tenet a certificate of the Chief Financial Officer,
the President, an Executive Vice President or a Senior Vice President of either
of the Guarantors setting forth details as to such event and the action that
such Guarantor proposes to take with respect thereto, together with a copy of
any notices that may be required to be filed with the
-5-
<PAGE>
Internal Revenue Service, the PBGC or any other authority, or any notice
delivered by such authority, and (vi) immediately after the occurrence of a
material adverse change in the business, operations, assets or condition,
financial or otherwise, of either of the Guarantors and its Subsidiaries, taken
as a whole, and deliver to Tenet a certificate of the Chief Financial Officer,
the President, an Executive Vice President or a Senior Vice President of such
Guarantor setting forth the details of such change and what action such
Guarantor proposes to take with respect thereto. For all purposes of Section
3(a)(v), Guarantors shall be deemed to have all knowledge or knowledge of all
facts attributable to the administrator of any such Plan.
(e) Conduct of Business; Maintenance of Existence and Compliance With Law.
----------------------------------------------------------------------
Continue, and cause the Consolidated Subsidiaries of each Guarantor to continue,
to engage primarily in business of the same general type as now contemplated to
be conducted by such Guarantor and its Consolidated Subsidiaries, and preserve,
renew and keep in full force and effect their corporate existence and take all
reasonable action to maintain their rights, privileges and franchises necessary
or desirable in the normal conduct of business, provided that the foregoing
shall not be deemed to prohibit any actions expressly permitted under Section
3(e) hereof; comply, and cause each Subsidiary to comply, with all material
applicable laws, ordinances, rules, regulations and requirements of governmental
authorities (including without limitation ERISA and the rules and regulations
thereunder and Public Law 92-603), and hold and maintain, and at all times cause
each Subsidiary to hold and maintain, in full force and effect all
certifications, favorable governmental reviews, governmental approvals, licenses
and permits necessary or desirable to enable Guarantors and the Subsidiaries to
conduct their respective businesses as not contemplated to be conducted except
where the failure to comply therewith or hold and maintain such certifications,
favorable governmental reviews, governmental approvals, licenses or permits
would not, individually or in the aggregate, have a material adverse effect on
the business, operations, properties or financial or other condition of either
Guarantor and its Subsidiaries, taken as a whole, and except where compliance
with any such laws, ordinances, rules, regulations or requirements would cause
Guarantors or a Subsidiary to violate laws of the United States of America to
which such Guarantor or such Subsidiary is subject, notwithstanding the
foregoing, (i) a Subsidiary may reincorporate in another state or merge with or
into the Guarantor that is its parent or another Subsidiary wholly-owned by such
Guarantor or other Subsidiaries and (ii) Guarantors may reincorporate in another
state or merge with or into a Subsidiary wholly-owned by such Guarantor or other
Subsidiaries, provided that the successor corporation assumes in writing all the
obligations of such Guarantor hereunder and said successor corporation of such
obligations is effective and is fully binding upon and enforceable against such
successor corporation.
-6-
<PAGE>
(f) Books and Records. The Guarantors each agree to maintain complete and
-----------------
accurate books and records (specifically including, without limitation, the
originals or copies of documents supporting entries in the books of account) as
required by law. In addition, if (i) an Event of Default under this Agreement or
(ii) an event of default (as such term is defined therein) under any loan
agreement, credit facility or indenture having an outstanding balance of at
least $10,000,000, the effect of which is to cause the lender or creditor
thereunder to have a right of redemption or to accelerate the maturity of such
indebtedness, shall occur, and in the case of (i), continue for a period of 15
days, Tenet and its duly authorized representative shall have the right, during
normal business hours and upon reasonable notice, to examine and copy such books
and records and all other documents and materials in the possession of and under
the control of the Guarantors with respect to subject matter and terms of this
Agreement. Tenet shall (and shall cause its representative to) keep confidential
and shall not use or disclose, other than in connection with the enforcement of
its rights hereunder, any non-public information contained in any of such books
and records.
4. Negative Covenants.
-------------------
So long as Tenet or any subsidiary of Tenet remains obligated (either
directly or as guarantor or otherwise) with respect to any outstanding
Obligations, or any amount is owing to Tenet hereunder, Guarantors shall not,
unless otherwise consented to in writing by Tenet:
(a) Limitation of Fundamental Changes. Merge or consolidate with any other
---------------------------------
Person (except as expressly permitted by Section 3(e) hereof) unless, after
giving effect to such merger or consolidation, no Default or Event of Default
has occurred and is continuing, or liquidate or dissolve itself (or suffer any
liquidation or dissolution), or dispose of or lease or sell, or permit any
Subsidiary to dispose of or lease or sell, all or any substantial portion of its
properties, assets and business to any other Person, except that Guarantors or
any Subsidiary may lease, sell or otherwise dispose of all or any part of its
property, assets or business (including, without limitation, Stock) to any
Person, including, without limitation, a Guarantor or a Consolidated Subsidiary
for consideration at least equal to the fair market value of such properties,
assets or business (as determined by the Board of Directors of Guarantors in
good faith).
(b) Maintenance of Consolidated Net Worth. Permit at any time the Net Worth
-------------------------------------
of the Guarantors (or any successors thereto) on a combined basis to be less
than $500 million. "Net Worth" shall mean, at a particular date, all amounts
which, in conformity with generally accepted accounting principles, would be
included under stockholders' equity on a consolidated balance
-7-
<PAGE>
sheet of each of the Guarantors and their consolidated subsidiaries, taken
together, at such date.
5. No Amendments or Waiver, etc. Except in Writing; Remedies Cumulative.
---------------------------------------------------------------------
No amendment or waiver of any provision of this Agreement shall in any
event be effective unless the same shall be in writing and signed by Tenet and
the Guarantors.
6. Indemnification.
----------------
In addition to the amounts payable under Section 1, Guarantors hereby
agree, jointly and severally, to protect, indemnify, pay and save Tenet harmless
from and against any and all claims, demands, liabilities, damages, losses,
costs, charges and expenses (including reasonable attorneys' fees) which Tenet
incurs or becomes subject to as a consequence, direct or indirect, of (i) any
breach by either of the Guarantors of any covenant, term or condition in, or the
occurrence of any Default or Event of Default under, this Agreement, together
with all expenses resulting from the compromise or defense of any claims or
liabilities arising as a result of any such breach, Default or Event of Default
and (ii) defense against any legal action commenced to challenge this Agreement,
all to the extent not caused or incurred as a result of the gross negligence or
willful misconduct of Tenet.
The obligations of Guarantors under this Section 6 shall survive the
termination of this Agreement.
7. Miscellaneous.
--------------
(a) Binding Effect; Assignment. This Agreement is a continuing obligation
--------------------------
and shall be binding upon and inure to the benefit of and be enforceable by
Tenet and Guarantors and their respective successors, transferees and assigns,
provided that Guarantors may not transfer or assign all or any part of this
- --------
Agreement without the prior written consent of Tenet.
(b) Notices. All notices, consents, requests, instructions, approvals and
-------
other communications hereunder shall be in writing and shall be deemed to have
been duly given, if delivered in person or by courier, telegraphed, telexed or
sent by facsimile transmission or mailed, by certified or registered mail,
postage prepaid at the following address (or at such other address provided by
one party to the other in writing):
-8-
<PAGE>
If to Tenet:
Tenet Healthcare Corporation
c/o Tenet Health Systems
14001 Dallas Parkway
Dallas, TX 75240
Telecopy no.: (972) 702-6595
Attention: Controller
with a copy to:
Tenet Healthcare Corporation
3820 State Street
Santa Barbara, CA 93105
Santa Monica, California 90404
Telecopy no.: (805) 563-7085
Attention: General Counsel
If to Vencor:
Vencor Healthcare, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telecopy no.: (502) 596-7901
Attention: President
If to Healthcare:
Vencor Healthcare, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
Telecopy no.: (502) 596-4075
Attention: President
(c) Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed an original, but such counterparts shall together
constitute but one and the same instrument.
(d) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
-9-
<PAGE>
(e) Construction. In this Agreement:
------------
(i) Unless the context otherwise requires, the terms "herein,"
"hereof," and "hereunder" refer to this Agreement;
(ii) the headings of the sections and subsections hereof and the table
of contents hereof are inserted for convenience only and do not constitute
a part of this Agreement; and
(iii) all references to the Assumption Agreements and the Assumed
Leases shall refer to such agreements as the same have been, and hereafter
may be amended, supplemented or modified from time to time.
8. Definitions.
-----------
The terms defined in this Section (unless the context otherwise
requires) for all purposes of this Agreement shall have the respective meanings
specified in this Section.
"Affiliate": as to any Person, any Person directly or indirectly
---------
controlling, controlled by or under common control with such Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement": this Amended and Restated Guarantee Reimbursement
---------
Agreement, as the same may be amended, supplemented or modified from time to
time.
"Assumed Leases": mean those leases the obligations under which were
--------------
assumed by Vencor or its predecessor or a subsidiary thereof and which
theretofore had been the obligations of Tenet and/or certain subsidiaries of
Tenet, as either a tenant or a guarantor.
"Assumption Agreements": the various Assignment and Assumption of
---------------------
Lease Agreements dated on or prior to January 31, 1990, or subsequent thereto,
between Tenet and/or certain of Tenet subsidiaries, on the one hand, and certain
Subsidiaries, on the other hand, each together with the related Guaranty of
Lease.
"Business Day": a day other than a Saturday, Sunday or other day on
------------
which commercial banks in the City of Los Angeles, the State of California are
authorized or required by law to close.
"Consolidated Subsidiaries": all Subsidiaries of a Guarantor, the
-------------------------
accounts of which have been, or which in accordance with GAAP should be,
consolidated with the accounts of such Guarantor on a consolidated balance sheet
of such Guarantor.
-10-
<PAGE>
"Counsel for Guarantors": at any particular date, such counsel, who
----------------------
may be the General Counsel or Assistant General Counsel of Guarantors at such
date, as may be selected by Guarantors.
"Default": any of the events specified in Section 9, whether or not
-------
any requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
"$": dollars in lawful currency of the United States of America.
-
"ERISA": the Employee Retirement Income Security Act of 1974, as the
-----
same may be amended, supplemented or modified from time to time.
"ERISA Affiliate": each trade or business (whether or not
---------------
incorporated) which together with Guarantors or a Subsidiary would be deemed to
be a "single employer" within the meaning of Section 4001 of ERISA or under
subsection (b), (c), (m) or (o) of Section 414 of the Code.
"Event of Default": any of the events specified in Section 9 hereof,
----------------
provided that any requirement for the giving of notice, lapse of time, or both,
or any other condition, has been satisfied.
"GAAP": generally accepted accounting principles as in effect from
----
time to time in the United States of America.
"Independent Certified Public Accountants": a firm of independent
----------------------------------------
accountants which is known as one of the "big Six" accounting firms, selected by
Guarantors.
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
----
to Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, business trust,
------
joint stock company, truck, unincorporated association, joint venture or other
entity or a government or any agency or political subdivision thereof.
"Plan": any employee benefit plan described in Section 3(2) of ERISA
----
established or maintained by Guarantors or a Subsidiary in respect of which
Guarantors or a commonly controlled entity is an "employer" as defined in
Section 3(5) of ERISA or with respect to which Guarantors, a subsidiary or a
commonly controlled entity has an obligation to contribute.
"Reportable Event": any of the events set forth in Section 4043(b) of
----------------
ERISA or the regulations thereunder.
"Stock": the meaning assigned to the term 'margin stock' in
-----
subsection 221.2(h) of Regulation U of the Board of
-11-
<PAGE>
Governors of the Federal Reserve System, as the same may be amended,
supplemented or modified from time to time.
"Subsidiary": any corporation of which more than 50% of the
----------
outstanding shares of stock having ordinary voting power to elect a majority of
the board of directors (other than stock having such power only by reason of the
happening of a contingency) is at the time owned by either of the Guarantors or
by one or more of its subsidiaries or by such Guarantor and one or more of its
subsidiaries.
9. Event of Default. An Event of Default shall mean any of the
----------------
following: (a) any failure by either Guarantor to pay any amount payable under
this Agreement when due and payable, or any failure of Guarantor or any
Subsidiary to pay any other amount when due with respect to any of the
Obligations as and when due or within any applicable cure period; (b) the
failure by either Guarantor to observe or perform any of its obligations
hereunder, which failure shall continue unremedied for a period of 30 days after
its receipt of written notice of such failure from Tenet; (c) the failure of any
representation or warranty made or deemed to be made by either Guarantor
hereunder (including in any financial statements or documents provided pursuant
to this Agreement) to be true and correct as of the date made or deemed to be
made; (d) the entry by a court having jurisdiction over a Guarantor of a decree
of order for relief in respect of such Guarantor in an involuntary case of
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization, rehabilitation or other similar law; or (e) the commencement by
any Guarantor or third party of a voluntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by any Guarantor to the entry of a decree or order for
relief in an involuntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it. If
an Event of Default occurs (i) Tenet, by notice to the Guarantors, may declare
any or all amounts payable by the Guarantors under this Agreement to be due and
payable forthwith, whereupon the same shall immediately become due and payable,
without presentment, demand, protest, or other notice of any kind, or right of
offset, all of which are expressly waived, anything contained herein to the
contrary notwithstanding; provided that no payment by a Guarantor pursuant to
--------
this Section 9 shall relieve either Guarantor from making any and all
future payments pursuant to this Agreement when due and payable under this
Agreement, and (ii) the party that did not default will have such remedy as is
available under laws and regulations relating thereto. Notwithstanding the
foregoing, none of the foregoing events shall be deemed an Event of Default
hereunder to the extent (and during the time period) Tenet has provided a
written waiver thereof pursuant hereto.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
VENCOR, INC.
By: /s/ Jill L. Force
-------------------------------
Name: Jill L. Force
Title: Vice President
VENCOR HEALTHCARE, INC.
By: /s/ Jill L. Force
-------------------------------
Name: Jill L. Force
Title: Vice President
TENET HEALTHCARE CORPORATION
By: /s/ L.G. Hixon
-------------------------------
Name: Lawrence G. Hixon
Title: Vice President
-13-
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Summarized unaudited consolidated quarterly information for the year ended
December 31, 1999 and the period from May 1, 1998 to December 31, 1998 is
provided below (amounts in thousands, except per share amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues
Year end December 31, 1999......... $56,633 $57,909 $59,311 $ 59,392
Period from May 1, 1998 to December
31, 1998.......................... N/A 37,356 56,168 56,409
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999....... $20,338 $20,166 $13,027 $(10,996)(2)
Period from May 1, 1998 to December
31, 1998.......................... N/A $ 8,198 (1) $12,958 $ 13,653
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999....... -- -- -- --
Period from May 1, 1998 to December
31, 1998.......................... N/A $(7,970)(1) $ (81) --
Net Income (Loss)
Year ended December 31, 1999....... $20,338 $20,166 $13,027 $(10,996)(2)
Period from May 1, 1998 to December
31, 1998.......................... N/A $ 228 (1) $12,877 $ 13,653
Earnings per share
Basic
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ .12 (1) $ .19 $ .20
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999..... $ -- $ -- $ -- $ --
Period from May 1, 1998 to
December 31, 1998............... N/A $ (.12)(1) $ -- $ --
Net Income (Loss)
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ -- (1) $ .19 $ .20
Diluted
Income (Loss) before Extraordinary
Item
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ .12 (1) $ .19 $ .20
Extraordinary Item, net of Income
Taxes
Year ended December 31, 1999..... $ -- $ -- $ -- $ --
Period from May 1, 1998 to
December 31, 1998............... N/A $ .(12)(1) $ -- $ --
Net Income (Loss)
Year ended December 31, 1999..... $ .30 $ .30 $ .19 $ (.16)(2)
Period from May 1, 1998 to
December 31, 1998............... N/A $ -- (1) $ .19 $ .20
</TABLE>
- --------
(1) Reflects operations since May 1, 1998.
(2) Reflects the write-off of uncollectible amounts due from tenants and loss
from impairment of assets as described in Notes 2 and 8 to the Consolidated
Financial Statement.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-02717) pertaining to the Vencor, Inc. 1987 Incentive
Compensation Plan; the Registration Statement (Form S-8 No. 333-40737)
pertaining to the Vencor, Inc. 1997 Incentive Compensation Plan; the
Registration Statement (Form S-8 No. 33-34191) pertaining to the Vencor, Inc.
1987 Stock Option Plan for Non-Employee Directors; the Registration Statement
(Form S-8 No. 333-40735) pertaining to the Vencor, Inc. 1997 Stock Option Plan
for Non-Employee Directors; and the Registration Statement (Form S-8 No. 333-
25519) pertaining to the TheraTx, Inc. 1996 Stock Option/Stock Issuance Plan,
of our report dated March 23, 2000, with respect to the consolidated financial
statements and schedule of Ventas, Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENTAS, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 139,594
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,071,199
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 18,402
<OTHER-SE> (10,057)
<TOTAL-LIABILITY-AND-EQUITY> 1,071,199
<SALES> 0
<TOTAL-REVENUES> 233,245
<CGS> 0
<TOTAL-COSTS> 190,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34,418
<INTEREST-EXPENSE> 88,753
<INCOME-PRETAX> 42,535
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,535
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.63
</TABLE>
