<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM TO .
Commission file number: 1-10989
Ventas, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 61-1055020
(State or other jurisdiction) (I.R.S. Employer Identification Number)
</TABLE>
<TABLE>
<S> <C>
4360 Brownsboro Road, Suite 115 40207-1642
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
</TABLE>
(502) 357-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class of Common Stock: Outstanding at May 8, 2000:
Common Stock, $.25 par value 68,419,305 shares
</TABLE>
<PAGE>
VENTAS. INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION............................................ 1
Item 1. Financial Statements............................................. 1
Condensed Consolidated Balance Sheets as of March 31, 2000 and December
31, 1999................................................................ 1
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999................................................. 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999........................................... 3
Notes To Condensed Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 26
PART II--OTHER INFORMATION............................................... 27
Item 1. Legal Proceedings................................................ 27
Item 2. Changes in Securities and Use of Proceeds........................ 27
Item 3. Defaults Upon Senior Securities.................................. 28
Item 6. Exhibits and Reports on Form 8-K................................. 28
</TABLE>
i
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited) (Audited)
(In Thousands)
<S> <C> <C>
Assets
Real estate investments:
Land................................................ $ 120,891 $ 120,891
Building and improvements........................... 1,061,656 1,061,656
---------- ----------
1,182,547 1,182,547
Accumulated depreciation............................ (298,390) (287,756)
---------- ----------
Total real estate investments..................... 884,157 894,791
Cash and cash equivalents:
Cash and cash equivalents........................... 94,829 139,594
Cash and cash equivalents--disputed federal tax
refunds and accumulated interest................... 26,819 --
---------- ----------
Total cash and cash equivalents................... 121,648 139,594
Deferred financing costs, net......................... 12,708 5,702
Notes receivable from employees....................... 3,629 3,611
Recoverable federal income taxes...................... -- 26,610
Other................................................. 2,146 891
---------- ----------
Total assets...................................... $1,024,288 $1,071,199
========== ==========
Liabilities and stockholders' equity
Liabilities:
Notes payable and other debt........................ $ 923,368 $ 974,247
Deferred gain on partial termination of interest
rate swap agreement................................ 21,605 21,605
Accounts payable and other accrued liabilities...... 9,981 9,886
Other liabilities--disputed federal tax refunds and
accumulated interest............................... 26,819 26,610
Deferred income taxes............................... 30,506 30,506
---------- ----------
Total liabilities................................. 1,012,279 1,062,854
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, unissued........................... -- --
Common stock........................................ 18,402 18,402
Capital in excess of par value...................... 132,237 139,723
Unearned compensation on restricted stock........... (2,353) (2,080)
Retained earnings................................... 9,142 6,409
---------- ----------
157,428 162,454
Treasury stock...................................... (145,419) (154,109)
---------- ----------
Total stockholders' equity........................ 12,009 8,345
---------- ----------
Total liabilities and stockholders' equity........ $1,024,288 $1,071,199
========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months Three months
ended March 31, ended March 31,
2000 1999
---------------- ----------------
(Unaudited)
(In Thousands, Except Per Share)
<S> <C> <C>
Revenues:
Rental income.................... $ 57,483 $ 56,436
Interest and other income........ 1,617 197
---------------- ----------------
Total revenues................. 59,100 56,633
Expenses:
General and administrative....... 2,288 1,754
Professional fees................ 3,322 797
Non-recurring employee severance
costs........................... 355 1,272
Loss on uncollectible amounts due
from tenant..................... 11,307 --
Amortization of restricted stock
grants.......................... 405 652
Depreciation on real estate
investments..................... 10,634 10,944
Interest......................... 23,849 20,876
---------------- ----------------
Total expenses................. 52,160 36,295
---------------- ----------------
Income before extraordinary loss... 6,940 20,338
Extraordinary loss on
extinguishment of debt............ (4,207) --
---------------- ----------------
Net income......................... $ 2,733 $ 20,338
================ ================
Earnings per common share:
Basic:
Income before extraordinary
loss.......................... $ 0.10 $ 0.30
Extraordinary loss on
extinguishment of debt........ (0.06) --
---------------- ----------------
Net income..................... $ 0.04 $ 0.30
================ ================
Diluted:
Income before extraordinary
loss.......................... $ 0.10 $ 0.30
Extraordinary loss on
extinguishment of debt........ (0.06) --
---------------- ----------------
Net income..................... $ 0.04 $ 0.30
================ ================
Weighted average number of shares
outstanding, basic................ 67,898 67,712
Weighted average number of shares
outstanding, diluted.............. 67,912 67,976
</TABLE>
See accompanying notes.
2
<PAGE>
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
------------ ------------
(Unaudited)
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 2,733 $ 20,338
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 10,653 10,945
Amortization of deferred financing costs......... 1,403 1,218
Amortization of restricted stock grants.......... 405 652
Normalized rents................................. (40) --
Extraordinary loss on extinguishment of debt..... 4,207 --
Changes in operating assets and liabilities:
Decrease in amount due from Vencor, Inc.......... -- 6,967
Decrease (increase) in accounts receivable and
other assets.................................... 25,358 (641)
Increase (decrease) in accounts payable and
accrued and other liabilities................... 817 (471)
-------- ---------
Net cash provided by operating activities...... 45,536 39,008
Cash flows from investing activities:
Purchase of furniture and equipment................ -- (122)
-------- ---------
Net cash used in investing activities.......... -- (122)
Cash flows from financing activities:
Net change in borrowings under revolving line of
credit............................................ -- 173,143
Repayment of long-term debt........................ (50,879) (127,381)
Payment of deferred financing costs................ (12,616) --
Issuance of restricted stock....................... 13 --
Cash distribution to stockholders.................. -- (26,489)
-------- ---------
Net cash (used in) provided by financing
activities.................................... (63,482) 19,273
-------- ---------
(Decrease) increase in cash and cash equivalents..... (17,946) 58,159
Cash and cash equivalents--beginning of period....... 139,594 338
-------- ---------
Cash and cash equivalents--end of period............. $121,648 $ 58,497
======== =========
</TABLE>
See accompanying notes.
3
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--REPORTING ENTITY
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 March 31, 2000. The Company conducts
substantially all of its business through a wholly owned operating
partnership, Ventas Realty, Limited Partnership. Although the Company
currently expects to qualify as a real estate investment trust ("REIT") for
tax years beginning with the tax 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.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered for a fair presentation
have been included. Operating results for the three-month period ended March
31, 2000 are not necessarily an indication of the results that may be expected
for the year ending December 31, 2000. The Condensed Consolidated Balance
Sheet as of December 31, 1999 has been derived from the Company's audited
consolidated financial statements for the year ended December 31, 1999. These
financial statements and related notes should be read in conjunction with the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
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 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 $26.0
million at March 31, 2000, as well as the $21.6 million gain incurred but not
yet reflected in net income on the terminated derivative position (see "Note
4--Bank Credit Facility"), the Company estimates that upon adoption it would
report a positive adjustment of $47.6 million in other comprehensive income.
The Company was not required to report the $26.0 million unrealized gain for
the three month period ended March 31, 2000.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In March 2000, the SEC issued SAB No. 101A to defer for
one quarter the effective date of implementation of SAB No. 101 with earlier
application encouraged. The Company is required to adopt SAB 101 in the second
quarter of fiscal 2000. The Company does not expect the adoption of SAB 101 to
have a material effect on its financial position or results of operations.
4
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--CONCENTRATION OF CREDIT RISK AND RECENT DEVELOPMENTS
Concentration of Credit Risk
As of March 31, 2000, approximately 70.5% of the Company's real estate
investments (based on cost) 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%) of revenues. The Company leases all of its hospitals and 210 of
its nursing facilities to Vencor, Inc. ("Vencor") under four master lease
agreements relating to 254 facilities and a single nursing facility lease
(individually a "Master Lease" and collectively "the Master 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 United States Bankruptcy Code (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 "--Recent Developments Regarding Vencor."
Recent Developments Regarding Vencor
On September 13, 1999, Vencor filed for protection under chapter 11 of the
Bankruptcy Code. Under the automatic stay provisions of the Bankruptcy Code,
the Company is currently prevented from exercising certain rights and remedies
under the various agreements that the Company and Vencor entered into at the
time the Company spun off its health care operations to Vencor (the "1998 Spin
Off"), including the Master Leases (the "Spin Agreements"), 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.
At the time of Vencor's filing for protection under the Bankruptcy Code,
Vencor's major creditors, Vencor and Ventas agreed upon the terms of a
preliminary, non-binding agreement regarding Vencor's plan of reorganization
(the "September 1999 Agreement in Principle"). 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 have resulted in adjustments to its financial projections, and have
caused it to enter into additional negotiations with its various creditors and
Ventas regarding its ultimate plan of reorganization. Vencor and certain of
Vencor's creditors recently submitted to the Company proposed amendments to
the terms of the September 1999 Agreement in Principle that materially alter
the terms of the Vencor plan of reorganization. The Company rejected the
proposed changes and confirmed to Vencor and the Vencor creditors the
Company's willingness to support a Vencor plan of reorganization under the
terms of the September 1999 Agreement in Principle. Discussions are ongoing
among Vencor, Vencor's major
5
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
creditors and Ventas regarding Vencor's plan of reorganization and any
necessary amendments to the September 1999 Agreement in Principle. However, no
agreement regarding the Vencor plan of reorganization has been reached. The
Company does not intend to update the foregoing information until a definitive
agreement regarding Vencor's plan of reorganization has been reached. There
can be no assurance that Vencor will be successful in obtaining the approval
of its creditors for a plan of reorganization, 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 plan of
reorganization will not have a Material Adverse Effect on the Company. Under
the terms of the Amended and Restated Credit, Security, Guaranty and Pledge
Agreement (the "Amended Credit Agreement") that the Company and all of the
lenders under its prior credit agreement 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 "Note 4--Bank Credit Facility" to the
Condensed Consolidated Financial Statements.
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. See "Note 5--Litigation" to
the Condensed 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.
The Company is not required to file a proof of claim in the Vencor
bankruptcy cases until 30 days after receipt of written notice from Vencor
requesting that a proof of claim be filed. On April 18, 2000, the Company
received written notice from Vencor requesting that the Company file a proof
of claim in the Vencor bankruptcy cases within 30 days of the date of the
Company's receipt of the written notice, or May 17, 2000. The Company intends
to file its proof of claim in the Vencor bankruptcy cases on or before May 17,
2000.
During the Company's discussions with Vencor, Vencor asserted various
potential claims against the Company arising out of the 1998 Spin Off. See
"Note 5--Litigation" to the Condensed Consolidated Financial Statements. The
Company intends to defend these claims vigorously if they are asserted in a
legal or mediation proceeding.
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.
6
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $18.8 million, 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. The Company has written off
the difference between the monthly base rent payable pursuant to the Master
Leases and the Stipulation for the three month period ended March 31, 2000 as
a loss on uncollectible amounts due from tenant.
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 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 Income Taxes
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 a tax allocation agreement (the "Tax Allocation Agreement") the Company
entered into with Vencor in connection with the 1998 Spin Off and on other
legal grounds, the Internal Revenue Service may assert a right to all or some
portion of the Refund based upon the review of the federal income tax returns
for the tax years ending December 31, 1996 and 1995 of the Company (which then
operated under the name Vencor) it is currently conducting. In addition, the
United States Department of the Treasury--Internal Revenue Service has filed a
proof of claim in the Vencor bankruptcy proceeding asserting a claim against
Vencor to 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. There can be no assurance as to how such controversy will be
resolved or as to whether the Company will ultimately retain all or a portion
of the Refund. Accordingly, the Refund, and interest earned thereon, has been
classified with the other liabilities of the Company at March 31, 2000 in the
Condensed Consolidated Financial Statements.
7
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
have discussed the terms of a stipulation relating to such tax refunds, but no
agreement regarding such terms has been reached. There can be no assurance as
to how such dispute will be resolved. No adjustments have been made in the
Condensed Consolidated Financial Statements at March 31, 2000 relating to this
issue.
Recent Developments Regarding Dividends
The Company intends to qualify as a REIT for the tax year ending Deember
31, 1999 (the "1999 Tax Year") and the tax year ending December 31, 2000 (the
"2000 Tax Year"). Such qualification requires the Company to distribute 95% of
its taxable income by (a) September 15, 2000 for the 1999 Tax Year, and
(b) September 15, 2001 for the 2000 Tax Year. While such distributions are not
required to be made quarterly, if they are not made by January 31, 2000 for
the 1999 Tax Year and January 31, 2001 for the 2000 Tax Year, the Company is
required to pay a 4% non-deductible excise tax on the portion of the
distribution not paid by January 31 of the year following the year in respect
of which the dividend is paid.
It is important to note for purposes of the required REIT distributions
that the Company's taxable income may vary significantly from historical
results and from current income determined in accordance with generally
accepted accounting principles depending on the resolution of a variety of
factors. Under certain circumstances, the Company may be required to make
distributions in excess of FFO (as defined by the National Association of Real
Estate Investment Trusts) in order to meet such distribution requirements. In
the event that timing differences or 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 intends to qualify as a REIT for the 1999 and 2000 Tax
Years, 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 either or both tax years. If the Company were to fail or elect not to
qualify as a REIT in either or both tax years, the Company would be subject to
35% federal income tax and to applicable state and local income taxes for the
affected years. Such tax obligations would have a Material Adverse Effect on
the Company.
Recent Developments Regarding Liquidity
On January 31, 2000, the Company and all of the lenders under a prior
credit agreement entered into the Amended and Restated 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. See
"Note 4--Bank Credit Facility" to the Condensed Consolidated Financial
Statements.
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders (the "Waiver and Extension Agreement"),
regarding the restructuring of the Company's long-term debt, including the
$275.0 million bridge loan under the Bank Credit Agreement which was
originally scheduled to mature on October 30, 1999 (the "Bridge Loan"), 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.
8
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Recent Developments
Tenant Bankruptcies
Certain of the Company's tenants, other than Vencor, have filed for
protection under the Bankruptcy Code. These tenants include: Health
Enterprises of Michigan, Inc. ("HEM"), Sun Healthcare Group, Inc. ("Sun"), and
Integrated Health Services, Inc. and a number of its subsidiaries
(collectively, "IHS"). Under the Bankruptcy Code, a tenant may seek either to
reject or assume the Company's leases. If a tenant rejects the leases, then
the Company will have to locate a substitute tenant or operator for the
facilities whose leases were rejected. There can be no assurance that the
Company would be able to locate satisfactory substitute tenants or operators
for such facilities on terms that are acceptable to the Company. Should the
Company fail to locate substitute tenants or operators on terms acceptable to
the Company, then the Company would have to assume operations at the
facilities, sell the facilities or close the facilities.
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 entered into at the
time of the 1998 Spin Off, 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"). Two of the third party
subtenants under the Subleased Third Party Leases, HEM and Lenox Healthcare,
Inc. and its subsidiaries (collectively, "Lenox"), have filed for protection
under the Bankruptcy Code. 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 sublet to such third party subtenant, 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. 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 below, has to date performed its obligations. 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, March
7, 2000 and April 19, 2000 for obligations alleged to be due under certain
Third Party Leases. The aggregate amount alleged to be due to HCPI in such
demand letters is approximately $3.8 million. In addition, by letter dated
February 9, 2000, HCPI notified the Company and Vencor that HCPI intends to
exercise its right under certain Third Party Leases to have the Company or
Vencor purchase two facilities owned by HCPI (one in Evansville, Indiana and
one in Kansas City, Missouri). 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. Vencor has advised HCPI and the Company that the facility
in Kansas City, Missouri was reopened on April 21, 2000. Vencor has advised
the Company that Vencor will not reopen the Evansville, Indiana facility, but
that Vencor and HCPI have reached a tentative agreement for the resolution of
the matters relating to the Evansville, Indiana facility, which tentative
agreement would include the termination of the lease and the repurchase
requirement in exchange for an agreed upon payment by Vencor. 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.
No adjustments or provisions for liability, if any, resulting from the
matters discussed above has been recorded in the Condensed Consolidated
Financial Statements for the three month period ended March 31, 2000.
9
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--BANK CREDIT FACILITY
On January 31, 2000, the Company and 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 $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.
The following is a summary of long-term borrowings at March 31, 2000 (In
Thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Tranche A Loan, bearing interest at a base rate of LIBOR plus
2.75% (8.69% at March 31, 2000), due December 31, 2002......... $150,000
Tranche B Loan, bearing interest at a base rate of LIBOR plus
3.75%
(9.69% at March 31, 2000), due December 31, 2005............... 300,000
Tranche C Loan, bearing interest at a base rate of LIBOR plus
4.25% (10.19% at March 31, 2000), due December 31, 2007........ 473,368
--------
$923,368
========
The following is a summary of long-term borrowings at December 31, 1999 (In
Thousands):
<CAPTION>
Amount
--------
<S> <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
Bridge facility loan, bearing interest at a base rate of LIBOR
plus 2.75% (9.23% at December 31, 1999)........................ 275,000
Term A Loan, bearing interest at a base rate of LIBOR plus 2.25%
(8.74% at December 31, 1999)................................... 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus 2.75%
(9.24% at December 31, 1999) .................................. 314,682
Other........................................................... 4
--------
$974,247
========
</TABLE>
10
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first quarter of 2000, the Company incurred 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 regarding the restructuring of the Company's long-term
debt, including the $275.0 million Bridge Loan, 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 only pay dividends based
on a certain minimum percentage of its taxable income (currently equal to 95%
of its taxable income for the year ended December 31, 1999 and the year ending
December 31, 2000 and 90% 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%
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, affiliate transactions
and capital expenditures; (c) 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.
The Company has an interest rate swap agreement with a notional principal
amount of $875 million, under which the Company pays a fixed rate at 5.985%
and receives 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 March 31, 2000, no collateral was
required to be posted under the interest rate swap agreement.
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.
11
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED 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.
NOTE 5--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 any of
the assets or liabilities transferred to Vencor in connection with the 1998
Spin Off, 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 3--
Concentration of Credit Risk and Recent Developments"), 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 the Stipulation will remain
in effect, 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 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 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. On April
24, 2000, the Sixth Circuit upheld the District Court's judgment dismissing
the action in its entirety as to all defendants in the case.
12
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 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
13
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
14
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
15
<PAGE>
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The complaint also includes 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, 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 a
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 overcharged 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.
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VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 might not be subject to Indemnification and 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 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 5, 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 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
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VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Oral argument on the motion for summary
judgment was heard by the Jefferson Circuit Court on May 2, 2000, and the
Company is awaiting the Court's decision.
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 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 no claims have been formally asserted, legal counsel for Vencor
and certain of its creditors have raised questions relating to potential
fraudulent conveyance or obligation issues and other claims relating to the
1998 Spin Off. If a court in a lawsuit by Vencor or a representative of
Vencor's creditors were to determine that, as of the 1998 Spin Off, Vencor did
not receive fair consideration or reasonably equivalent value for the
liabilities it assumed (such as the Master Leases or the Indemnification
obligation), 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, then such court could among other
things void some or all of such liabilities. At the time of the 1998 Spin Off,
the Company obtained an opinion from an independent third party that addressed
issues of Vencor's 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.
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VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 March 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statements
Forward Looking Statements
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's 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-Q and elsewhere in
the Company's filings with 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 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, 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, (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-Q 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-Q is
encouraged to obtain Vencor's publicly available filings from the Commission.
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
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states as of March 31, 2000. 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 tax years beginning
with the tax 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.
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 the various agreements (the
"Spin Agreements") that the Company and Vencor entered into at the time the
Company spun off its health care operations to Vencor (the "1998 Spin Off"),
including four master lease agreements and one facility lease (individually, a
"Master Lease" and, collectively, the "Master Leases"), 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.
At the time of Vencor's filing for protection under the Bankruptcy Code,
Vencor's major creditors, Vencor and Ventas agreed upon the terms of a
preliminary, non-binding agreement regarding Vencor's plan of reorganization
(the "September 1999 Agreement in Principle"). See "Note 3--Concentration of
Credit Risk and Recent Developments" to the Condensed Consolidated Financial
Statements. 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 have resulted in adjustments to its financial projections, and have
caused it to enter into additional negotiations with its various creditors and
Ventas regarding its ultimate plan of reorganization. Vencor and certain of
Vencor's creditors recently submitted to the Company proposed amendments to
the terms of the September 1999 Agreement in Principle that materially alter
the terms of the Vencor plan of reorganization. The Company rejected the
proposed changes and confirmed to Vencor and the Vencor creditors the
Company's willingness to support a Vencor plan of reorganization under the
terms of the September 1999 Agreement in Principle. Discussions are ongoing
among Vencor, Vencor's major creditors and Ventas regarding Vencor's plan of
reorganization and any necessary amendments to the September 1999 Agreement in
Principle. However, no agreement regarding the Vencor plan of reorganization
has been reached. The Company does not intend to update the foregoing
information until a definitive agreement regarding Vencor's plan of
reorganization has been reached. There can be no assurance that Vencor will be
successful in obtaining the approval of its creditors for a plan of
reorganization, 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 plan of reorganization 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"). Under the terms of the Amended and Restated Credit, Security,
Guaranty and Pledge Agreement (the "Amended Credit Agreement") that the
Company and all of the lenders under its prior credit agreement 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 "Note 4--
Bank Credit Facility" to the Condensed Consolidated Financial Statements.
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. See "Note 5--Litigation" to
the Condensed 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
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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.
The Company is not required to file a proof of claim in the Vencor
bankruptcy cases until 30 days after receipt of written notice from Vencor
requesting that a proof of claim be filed. On April 18, 2000, the Company
received written notice from Vencor requesting that the Company file a proof
of claim in the Vencor bankruptcy cases within 30 days of the date of the
Company's receipt of the written notice, or May 17, 2000. The Company intends
to file its proof of claim in the Vencor bankruptcy cases on or before May 17,
2000.
Although no claims have been formally asserted, legal counsel for Vencor
and certain of its creditors have raised questions relating to potential
fraudulent conveyance or obligation issues and other claims relating to the
1998 Spin Off. See "Note 5--Litigation" to the Condensed Consolidated
Financial Statements. The Company intends to defend these claims vigorously if
they are asserted in a court, arbitration or mediation proceeding. If these
claims were to prevail, it could have a Material Adverse Effect on the
Company.
Recent Developments Regarding Regulatory Matters
In a proposed rule refining the prospective payment system for skilled
nursing facilities ("SNF PPS") published on April 10, 2000, the Health Care
Financing Administration ("HCFA"), which is responsible for implementing the
Medicare and Medicaid provisions of the Balance Budget Refinement Act of 1999
(the "Refinement Act"), announced proposed increases in payment rates for
fiscal year 2001. In addition, the agency detailed proposed refinements to be
made to the SNF PPS case-mix classification system that would more adequately
account for high cost cases. The refinements would not alter the general
structure of the SNF PPS classification system.
In its proposed rule, HCFA developed new categories of service
classifications for payment purposes, and proposed to increase reimbursement
rates for higher cost cases using a new index system based on patient clinical
variables. HCFA is accepting public comments on the proposed refinements, and
a final rule will be issued once the agency has considered all submitted
comments.
The precise economic impact of the proposed rule is under review by the
long term care industry and by Vencor and Ventas.
In the interim, under the mandates of the Refinement Act, two temporary
remedies are in place. First, there is a 20% increase in the per diem
reimbursement for 15 Resource Utilization Groups ("RUGs") falling under the
Extensive Services, Special Care, Clinically Complex, High Rehabilitation and
Medium Rehabilitation categories. This 20% increase will apply only to
services furnished on or after April 1, 2000 and before the later of October
1, 2000 or the implementation of final regulation. Second, there is a 4%
increase in the per diem reimbursement rate for all RUGS in both fiscal years
2001 and 2002.
Recent Developments Regarding Income Taxes
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 a tax allocation agreement (the "Tax Allocation Agreement") the Company
entered into with Vencor in connection with the 1998 Spin Off and on other
legal grounds, the Internal Revenue Service may assert a right to all or some
portion of the Refund based upon the review of the federal income tax returns
for the tax years ending December 31, 1996 and 1995 of the Company (which then
operated under the name Vencor) the Internal Revenue Service is currently
conducting. In addition,
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the United States Department of the Treasury-Internal Revenue Service has
filed a proof of claim in the Vencor bankruptcy proceeding asserting a claim
against Vencor to 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. There can be no assurance as to how such
controversy will be resolved or as to whether the Company will ultimately
retain all or a portion of the Refund. Accordingly, the Refund, and interest
earned thereon, has been classified with the other liabilities of the Company
at March 31, 2000 in the Condensed 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
have discussed the terms of a stipulation relating to such tax refunds but no
agreement regarding such terms has been reached. There can be no assurance as
to how such dispute will be resolved. No adjustments have been made in the
Condensed Consolidated Financial Statements at March 31, 2000 relating to this
issue.
Recent Developments Regarding Liquidity
On January 31, 2000, the Company and all of the lenders under its prior
credit agreement entered into the Amended Credit Agreement, which amended and
restated the $1.2 billion credit agreement the Company entered into at the
time of the 1998 Spin Off (the "Bank Credit Agreement"). See "Note 4--Bank
Credit Facility" to the Condensed Consolidated Financial Statements.
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders (the "Waiver and Extension Agreement"),
regarding the restructuring of the Company's long-term debt, including the
$275.0 million bridge loan under the Bank Credit Agreement which was
originally scheduled to mature on October 30, 1999 (the "Bridge Loan"), 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.
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 "Note 3--Concentration of Credit Risk
and Recent Developments--Other Recent Developments" to the Condensed
Consolidated Financial Statements.
Results of Operations
The Company intends to qualify as a REIT for federal income tax purposes
for the tax years beginning with the tax year ended December 31, 1999.
Accordingly, no provision for income taxes has been made for the three month
periods ended March 31, 2000 and 1999 in the accompanying Condensed
Consolidated Statement of Income. Although the Company intends to qualify as a
REIT for the tax years beginning with the tax 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.
Three months ended March 31, 2000 and March 31, 1999
Rental income for the three months ended March 31, 2000 was $57.5 million,
of which $56.7 million (98.6%) resulted from leases with Vencor, as compared
to rental income for the three months ended March 31, 1999 of $56.4 million,
of which $55.5 million (98.4%) resulted from leases with Vencor. Interest and
other income totaled approximately $1.6 million for the three months ended
March 31, 2000 as compared to approximately $0.2 million for the three months
ended March 31, 1999. The increase in interest and other income was primarily
the result of earnings from investment of larger cash reserves during the
quarter ended March 31, 2000.
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Expenses totaled $52.2 million for the quarter ended March 31, 2000, and
included $10.6 million of depreciation expense on real estate assets and $23.8
million of interest on the Amended Credit Agreement and other debt. For the
quarter ended March 31, 1999, expenses totaled $36.3 million and included
$10.9 million of depreciation expense on real estate assets and $20.9 million
of interest on the Bank Credit Agreement and other debt. The $15.9 million
increase in expenses was due primarily to (1) a charge to earnings of $11.3
million for unpaid rent from Vencor, which charge includes the $3.75 million
per month difference for January, February and March 2000 between the minimum
monthly base rent that would be due 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 30, 1999 Agreement in Principle, (2) increased
interest expense and (3) increased professional fees.
General and administrative expenses totaled $2.3 million for the quarter
ended March 31, 2000, as compared to $1.8 million for the quarter ended March
31, 1999.
Professional fees totaled approximately $3.3 million for the three months
ended March 31, 2000, as compared to $.8 million for the three months ended
March 31, 1999, and included approximately $2.7 million in unusual
professional fees (legal and financial advisory) incurred as a result of
ongoing negotiations with Vencor and in connection with the Company's business
strategy alternatives as discussed above in "Recent Developments Regarding
Vencor" and "Recent Developments Regarding Liquidity." Substantial legal and
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.
Interest expense of $23.8 million for the quarter ended March 31, 2000
increased by $2.9 million over interest expense of $20.9 million for the
quarter ended March 31, 1999. The increase in interest expense was due
primarily to the higher interest rates under the Amended Credit Agreement and
amortized deferred financing fees of approximately $1.4 million, which
included $.8 million of amortization for fees related to the agreement
contained in the Waiver and Extension Agreement to enter into the Amended
Credit Agreement by January 31, 2000. The increase in interest expense was
offset in part by the reduced principal amount. For the three months ended
March 31, 1999, amortization of deferred financing fees was $1.2 million. See
"Note 4--Amended Credit Agreement" to the Condensed Consolidated Financial
Statements.
The Company also incurred $0.4 million and $1.3 million in non-recurring
employee severance costs in the first quarter of 2000 and the first quarter of
1999, respectively.
During the first quarter of 2000, the Company incurred 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. See "Note 4--Amended Credit Agreement" to the Condensed
Consolidated Financial Statements.
After extraordinary expenses of $4.2 million, or $0.06 per diluted share,
as discussed above, net income for the three months ended March 31, 2000 was
$2.7 million, or $.04 per diluted share. Net income for the three months ended
March 31, 1999 was $20.3 million, or $0.30 per diluted share.
24
<PAGE>
Funds from Operations
Funds from operations ("FFO") for the three months ended March 31, 2000
totaled $17.6 million, or $0.26 per diluted share. FFO for the comparable
period in 1999 totaled $31.3 million, or $0.46 per diluted share. In
calculating net income and FFO for the three months ended March 31, 2000 and
1999, the Company included in its expenses (and thus reduced net income and
FFO) the aforementioned non-recurring employee severance costs and unusual
legal and financial advisory expenses. See "Recent Developments Regarding
Liquidity." FFO for the three months ended March 31, 2000 and 1999 is
summarized in the following table:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Net income...................................... $ 2,733 $20,338
Extraordinary loss on extinguishment of debt.... 4,207 --
------- -------
Income before extraordinary loss.............. 6,940 20,338
Add: depreciation on real estate investments.... 10,634 10,944
------- -------
Funds from operations......................... $17,574 $31,282
======= =======
FFO per diluted share........................... $ 0.26 $ 0.46
======= =======
</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 Trust's, or 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 Condensed
Consolidated Financial Statements and data included elsewhere in this Form 10-
Q.
Liquidity and Capital Resources
Cash provided by operations totaled $45.5 million for the three months
ended March 31, 2000. Net cash used in financing activities for the three
months ended March 31, 2000 totaled $63.5 million and included a $50.9 million
payment of principal on the Amended Credit Agreement and the Bank Credit
Agreement. Cash provided by operations totaled $39.0 million for the three
months ended March 31, 1999. Net cash provided by financing activities for the
three months ended March 31, 1999 totaled $19.3 million after payment of a
cash dividend on its common stock of $26.5 million, or $0.39 per common share
to stockholders of record as of January 29, 1999.
The Company had cash and cash equivalents of $121.6 million and outstanding
debt aggregated $923.4 million at March 31, 2000.
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 "Note 3--Concentration of Credit Risk and Recent
Developments" to the Condensed Consolidated Financial Statements.
25
<PAGE>
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, respectively, of the tax year ending December 31, 1999 (the
"1999 Tax Year"). The Company expects to pay, in 2000, a dividend in respect
of its 1999 Tax Year equal to 95% of its taxable income, less dividends paid
in February 1999 of approximately $26.5 million. The Company announced on
February 29, 2000 that it would not declare or pay a dividend in the first
quarter of the tax year ending December 31, 2000 (the "2000 Tax Year"), but
the Company expects to pay a dividend in respect of its 2000 Tax Year equal to
95% of its taxable income. The dividends in respect of the 1999 and 2000 Tax
Years may be satisfied by a combination of cash and a distribution of Vencor
equity, which the Company may receive as part of the Vencor reorganization, if
it occurs, or other property or securities.
The Company intends to qualify as a REIT for the 1999 and 2000 Tax Years.
Such qualification requires the Company to distribute 95% of its taxable
income by (a) September 15, 2000 for the 1999 Tax Year, and (b) September 15,
2001 for the 2000 Tax Year. While such distributions are not required to be
made quarterly, if they are not made by January 31, 2000 for the 1999 Tax Year
and January 31, 2001 for the 2000 Tax Year, the Company is required to pay a
4% non-deductible excise tax on the portion of the distribution not paid by
January 31 of the year following the year in respect of which the dividend is
paid.
It is important to note for purposes of the required REIT distributions
that the Company's taxable income may vary significantly from historical
results and from current income determined in accordance with generally
accepted accounting principles depending on the resolution of a variety of
factors. Under certain circumstances, the Company may be required to make
distributions in excess of FFO in order to meet such distribution
requirements. In the event that timing differences or 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 intends to qualify as a REIT for the 1999 Tax Year and
the 2000 Tax Year, 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 either or both tax years. If the Company were to fail or elect not to
qualify as a REIT in either or both tax years, the Company would be subject to
35% federal income tax and to applicable state and local income taxes for the
affected years. Such tax obligations would have a Material Adverse Effect on
the Company.
Capital expenditures to maintain and improve the leased properties
generally will be incurred by the tenants under the leases with the Company.
Accordingly, the Company does not believe that it will incur any major
expenditures in connection with the leased properties. After the terms of the
leases expire, or in the event that the tenants are unable to meet their
obligations under the leases, the Company anticipates that any expenditures
for which it may become responsible to maintain the leased properties will be
funded by cash flows from operations and, in the case of major expenditures,
through additional borrowings or issuances of equity. To the extent that
unanticipated expenditures or significant borrowings are required, the
Company's liquidity may be affected adversely.
The Company does not currently intend to acquire any additional properties.
In addition, the Company's access to debt and equity capital is limited under
the terms of the Amended Credit Agreement and current market conditions.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's exposure to various market risks
contains "forward looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Nevertheless, because of the inherent unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected in such forward looking information.
The Company earns revenue by leasing its assets under 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--Bank
Credit Facility" to the Condensed 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 March
31, 2000, the Company had an $875 million notional amount 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 notional amount
of the interest rate swap agreement is scheduled to decline as follows:
<TABLE>
<CAPTION>
Amount Date
------ ----
<S> <C>
$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 March 31, 2000, interest
rates had risen and the interest rate swap agreement was in an unrealized gain
position to the Company of approximately $26.0 million. 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 in interest rates, the following
summary shows the effects of a hypothetical instantaneous change of 100 basis
points (BPS) in interest rates as of March 31, 2000:
<TABLE>
<S> <C>
Notional Amount............................................. $875,000,000
Fair Value to the Company................................... $ 25,989,458
Fair Value to the Company Reflecting
Change in Interest Rates
-100 BPS.................................................. $ 4,673,586
+100 BPS.................................................. $ 46,525,935
</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--Bank Credit Agreement" to the Condensed 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 March 31, 2000, 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 $26.0 million; therefore, no collateral was
required to be posted. 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
27
<PAGE>
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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth in "Note 5--Litigation" to the Condensed Consolidated
Financial Statements of the Company as of March 31, 2000 (which is
incorporated by reference into this Item 1), there has been no material change
in the status of the litigation reported in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since January 1, 2000, the Company has issued the following equity
securities in transactions that were not registered under the Securities Act:
On February 24, 2000, the Company granted the members of the Board of
Directors (a) options to purchase an aggregate of 26,000 shares of Common
Stock, par value $.25 per share, of the Company (the "Common Stock") at an
exercise price of $3.3125 per share of Common Stock, the closing price of the
Common Stock on the date of grant of the options, and (b) 97,357 shares of
restricted Common Stock of the Company. Fifty percent of the options and
restricted shares vested on the grant date and the remaining 50% vest on the
first anniversary date of the grant date. The options may be exercised for
cash or by surrendering options or common stock with a value equal to the
exercise price at any time prior to the tenth anniversary of the grant. There
were no proceeds to the Company from the issuance of the options or the
restricted stock. Based upon the number of offerees and the nature of their
relationship with the Company, the options and the restricted stock were
issued without registration under the Securities Act, in reliance on an
exemption contained in Section 4 (2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company had a $275.0 million Bridge Loan as part of its Bank Credit
Agreement, which was originally scheduled to mature on October 30, 1999. On
October 29, 1999, the Company entered into a Waiver and Extension Agreement
with over 95 percent of its lenders providing for a four month extension of
the Bridge Loan. Two lenders that did not execute the Waiver and Extension
Agreement but that did execute the Amended Credit Agreement have asserted a
right to seek current repayment of their portion of the $1.2 billion under the
Bank Credit Agreement. 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 Bank Credit Agreement, including the Bridge Loan. See "Note 3--
Concentration of Credit Risk and Recent Developments," "Note 4--Bank Credit
Facility," and "Note 5--Litigation" to the Condensed Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
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.
28
<PAGE>
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.
Certain mortgages, assignments and other related documentation were placed in
escrow pending receipt of third party consents and/or resolution of certain
other matters. 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.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 9, 2000
Ventas, Inc.
/s/ Debra A. Cafaro
By: _________________________________
Debra A. Cafaro
Chief Executive Officer and
President and Acting Principal
Financial Officer
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENTAS, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 121,648
<SECURITIES> 0
<RECEIVABLES> 3,629
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,182,547
<DEPRECIATION> (298,390)
<TOTAL-ASSETS> 1,024,288
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 18,402
<OTHER-SE> (6,393)
<TOTAL-LIABILITY-AND-EQUITY> 1,024,288
<SALES> 0
<TOTAL-REVENUES> 59,100
<CGS> 0
<TOTAL-COSTS> 52,160
<OTHER-EXPENSES> 6,370
<LOSS-PROVISION> 11,304
<INTEREST-EXPENSE> 23,849
<INCOME-PRETAX> 6,940
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,940
<DISCONTINUED> 0
<EXTRAORDINARY> (4,207)
<CHANGES> 0
<NET-INCOME> 2,733
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
