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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4360 Brownsboro Road
Suite 115
Louisville, Kentucky 40207-1642
(Address of principal executive offices) (Zip Code)
(502) 357-9000
(Registrant's telephone number, including area code)
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
Common Stock, par value $.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [_]
As of March 15, 2002, there were 69,062,380 shares of the Registrant's
common stock, $.25 par value ("Common Stock"), outstanding. The aggregate market
value of the shares of Common Stock of the Registrant held by non-affiliates of
the Registrant, based on the closing price of such stock on the New York Stock
Exchange on March 15, 2002, was approximately $844 million. For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Certain portions of the Registrant's annual report to stockholders for the
fiscal year ended December 31, 2001 are incorporated by reference into Parts I
and II of this Annual Report on Form 10-K.
Certain portions of the Registrant's definitive proxy statement relating to
the annual meeting of stockholders to be held on May 14, 2002 are incorporated
by reference into Part III of this Annual Report on Form 10-K.
CAUTIONARY STATEMENTS
This Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding Ventas, Inc. (the "Company" or "Ventas") 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, continued qualification
as a real estate investment trust ("REIT"), plans and objectives of management
for future operations and statements that include words such as "anticipate,"
"if," "believe," "plan," "estimate," "expect," "intend," "may," "could,"
"should," "will," 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. The
Company does not undertake a duty to update such forward-looking statements.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in the Company's filings with the
Securities and Exchange Commission (the "Commission"). Factors that may affect
the plans or results of the Company include, without limitation, (a) the ability
and willingness of Kindred Healthcare, Inc. ("Kindred") and certain of its
affiliates to continue to meet and/or honor its obligations under its
contractual arrangements with the Company and the Company's subsidiaries,
including without limitation the lease agreements and various agreements (the
"Spin Agreements") entered into by the Company and Kindred at the time of the
Company's spin-off of Kindred on May 1, 1998 (the "1998 Spin Off"), as such
agreements may have been amended and restated in connection with Kindred's
emergence from bankruptcy on April 20, 2001 (the "Kindred Effective Date"), (b)
the ability and willingness of Kindred to continue to meet and/or honor its
obligation to indemnify and defend the Company for all litigation and other
claims relating to the healthcare operations and other assets and liabilities
transferred to Kindred in the 1998 Spin Off, (c) the ability of Kindred 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 healthcare 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)
changes in general economic conditions and/or economic conditions in the markets
in which the Company may, from time to time, compete, (k) the ability of the
Company to pay down, refinance, restructure, and/or extend its indebtedness as
it becomes due, (l) the movement of interest rates and the resulting impact on
the value of the Company's interest rate swap agreements and the ability of the
Company to satisfy its obligation under one of these agreements to post cash
collateral if required to do so, (m) the ability and willingness of Atria, Inc.
("Atria") to continue to meet and honor its contractual arrangements with the
Company and Ventas Realty, Limited Partnership ("Ventas Realty") entered into in
connection with the Company's spin off of its assisted living operations and
related assets and liabilities to Atria in August 1996, (n) the ability and
willingness of the Company to maintain its qualification as a REIT due to
economic, market, legal, tax or other considerations, including without
limitation, the risk that the Company may fail to qualify as a REIT due to its
ownership of Kindred common stock, (o) the outcome of the audit being conducted
by the Internal Revenue Service for the Company's tax years ended December 31,
1997 and 1998, (p) final determination of the Company's taxable net income for
the year ended December 31, 2001, (q) the ability and willingness of the
Company's tenants to renew their leases with the Company upon expiration of the
leases and the Company's ability to relet its properties on the same or better
terms in the event such leases expire and are not renewed by the existing
tenants and (r) the limitations on the ability of the Company to sell, transfer
or otherwise dispose of its common stock in Kindred arising out of the
securities laws and the registration rights agreement the Company entered into
with Kindred and certain of the holders of the Kindred common stock. Many of
such factors are beyond the control of the Company and its management.
Kindred Information
Kindred 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 Kindred provided in this Form 10-K is derived from
filings made with the Commission or other publicly available information, or has
been provided by Kindred. The Company has not verified this information either
through an independent investigation or by reviewing Kindred's public filings.
The Company has no reason to believe that such information is inaccurate in any
material respect, but there can be no assurance that all such information is
accurate. The Company is providing this data for informational purposes only,
and the reader of this Form 10-K is encouraged to obtain Kindred's publicly
available filings from the Commission.
2
TABLE OF CONTENTS
PART I
Item 1. Business .................................................................................... 4
Item 2. Properties .................................................................................. 36
Item 3. Legal Proceedings ........................................................................... 41
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 41
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 42
Item 6. Selected Financial Data ..................................................................... 42
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................. 42
Item 8. Financial Statements and Supplementary Data ................................................. 42
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........ 42
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................... 43
Item 11. Executive Compensation ...................................................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 43
Item 13. Certain Relationships and Related Transactions .............................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................. 43
3
PART I
Item 1. Business
General
Ventas, Inc. ("Ventas" or the "Company") is a Delaware corporation that
elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), for the year ended
December 31, 1999. The Company believes that it has satisfied the requirements
to qualify as a REIT for the years ended December 31, 2000 and 2001. The Company
intends to continue to qualify as a REIT for federal income tax purposes for the
year ending December 31, 2002 and subsequent years. It is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail, or elect not, to continue to qualify as a REIT. The Company owns a
geographically diverse portfolio of healthcare related facilities which
consisted of 44 hospitals, 216 nursing facilities and eight personal care
facilities in 36 states as of December 31, 2001. The Company and its
subsidiaries lease these facilities to healthcare operating companies under
"triple-net" or "absolute-net" leases. Kindred Healthcare, Inc. and its
subsidiaries (collectively, "Kindred") lease 210 of the Company's nursing
facilities and all of the Company's hospitals as of December 31, 2001. The
Company conducts substantially all of its business through a wholly owned
operating partnership, Ventas Realty, Limited Partnership ("Ventas Realty") and
an indirect, wholly owned limited liability company, Ventas Finance I, LLC
("Ventas Finance"). The Company operates in one segment which consists of owning
and leasing healthcare facilities and leasing or subleasing such facilities to
third parties. See "Note 2--Summary of Significant Accounting Policies" to the
Consolidated Financial Statements included in the Company's annual report to
stockholders for the fiscal year ended December 31, 2001, which is incorporated
herein by reference (the "Annual Report").
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and acquiring
healthcare facilities and companies engaged in providing healthcare services.
On May 1, 1998, the Company effected the 1998 Spin Off pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently named Vencor, Inc. (which has since been renamed
Kindred Healthcare, Inc.), was formed to operate the hospital, nursing facility
and ancillary services businesses. Pursuant to the terms of the 1998 Spin Off,
the Company distributed the common stock of Kindred to stockholders of record of
the Company as of April 27, 1998. The Company, through its subsidiaries,
continued to hold title to substantially all of the real property and to lease
such real property to Kindred. At such time, the Company also changed its name
to Ventas, Inc. and refinanced substantially all of its long-term debt. For
financial reporting periods after and including the 1998 Spin Off, the
historical financial statements of the Company for financial reporting periods
prior to the 1998 Spin Off were assumed by Kindred, and the Company is deemed to
have commenced operations on May 1, 1998. In addition, for certain reporting
purposes under this Form 10-K and other filings, the Commission treats the
Company as having commenced operations on May 1, 1998. On September 13, 1999
(the "Petition Date"), Kindred filed for protection under chapter 11 of title 11
of the United States Code (the "Bankruptcy Code"). Kindred emerged from
proceedings under the Bankruptcy Code on April 20, 2001 (the "Kindred Effective
Date") pursuant to the terms of Kindred's plan of reorganization (the "Kindred
Reorganization Plan"). As a result of the Kindred bankruptcy proceedings, the
Company suspended the implementation of its original business strategy in 1999
and continued such suspension through 2001.
The Company's current business strategy is preserving and maximizing
stockholders' capital by means that include (a) the reduction of the amount of
the Company's indebtedness and a reduction of the average all-in cost of the
Company's indebtedness and (b) the implementation of a measured and disciplined
diversification and growth program to reduce the Company's dependence on
Kindred. The ability of the Company to pursue certain of these objectives may be
restricted by the terms of the Company's Amended and Restated Credit, Security,
Guaranty and Pledge Agreement dated January 31, 2000 (the "Credit Agreement").
Dependence on Kindred
The Company leases all of its hospitals and 210 of its nursing facilities
to Kindred under five master lease agreements (the "Master Leases"). For the
years ended December 31, 2001, 2000 and 1999, Kindred accounted for
approximately 98.8%, 98.6% (98.4%, net of write-offs) and 98.5% of the Company's
rental revenues, respectively. In addition, the Company owns 1,080,314 shares of
the outstanding common stock of Kindred. See "--Risk Factors--Any significant
decrease in the value of the 1,080,314 shares of Kindred common stock that the
Company owns, as well as the limitations on the Company's ability to sell,
transfer or otherwise dispose of such shares of
4
Kindred common stock, could have a material adverse effect on the Company's
ability to reduce its indebtedness and implement its business strategy."
Recent Developments Regarding Kindred
In order to govern certain of the relationships between the Company and
Kindred after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Kindred entered into the Spin Agreements at the time
of the 1998 Spin Off. Except as noted below, each written agreement by and among
Kindred and the Company and/or Ventas Realty was assumed by Kindred and certain
of these agreements were simultaneously amended in accordance with the terms of
the Kindred Reorganization Plan.
The Company and Kindred also entered into certain agreements and
stipulations and orders both prior to and during the pendency of Kindred's
bankruptcy proceedings governing certain aspects of the business relationships
between the Company and Kindred prior to the Kindred Effective Date. These
agreements and stipulations and orders were terminated on the Kindred Effective
Date in accordance with the terms of the Kindred Reorganization Plan.
Set forth below is a description of the material terms of (a) the Kindred
Reorganization Plan, (b) certain of the Spin Agreements as assumed by Kindred
pursuant to the Kindred Reorganization Plan, including the terms of amendments
or restatements of such Spin Agreements, where applicable, (c) those Spin
Agreements and other agreements terminated under the Kindred Reorganization
Plan, and (d) new agreements entered into between the Company and Kindred in
accordance with the Kindred Reorganization Plan.
Summary of the Kindred Reorganization Plan
Under the terms of the Kindred Reorganization Plan, the Company, among
other things, (a) retained all rent paid by Kindred through the Kindred
Effective Date, (b) amended and restated its leases with Kindred, (c) received
1,498,500 shares of the common stock of Kindred together with certain
registration rights, (d) entered into new agreements relating to the allocation
of certain tax refunds and liabilities, and (e) settled certain claims of the
United States pertaining to the Company's former healthcare operations.
Master Leases
Under the Kindred Reorganization Plan, Kindred assumed its five
pre-existing leases with the Company and Ventas Realty (the "Prior Master
Leases"). The Prior Master Leases were then amended and restated into four
agreements styled as amended and restated master leases (collectively, the
"Amended Master Leases").
In connection with the consummation on December 12, 2001 of a $225 million
LIBOR based floating rate commercial mortgage backed securitization transaction
(the "CMBS Transaction"), Ventas Realty removed 40 skilled nursing facilities
(the "CMBS Properties") from Amended Master Lease No. 1 and placed the CMBS
Properties in a new fifth master lease with Kindred dated December 12, 2001 (the
"CMBS Master Lease"). Simultaneously with the closing of the CMBS Transaction,
Ventas Realty transferred the CMBS Properties and the CMBS Master Lease to
Ventas Finance, the borrower under the CMBS Transaction. The Amended Master
Leases and the CMBS Master Lease are collectively referred to as the "Master
Leases."
Each Master Lease is a "triple-net lease" or an "absolute-net lease"
pursuant to which Kindred is required to pay all insurance, taxes, utilities,
maintenance and repairs related to the properties. There are several renewal
bundles of properties under each Master Lease, with each bundle containing a
varying number of properties. All properties within a bundle have primary terms
ranging from 10 to 15 years commencing May 1, 1998, plus renewal options
totaling fifteen years.
Under each Master Lease, the aggregate annual rent is referred to as Base
Rent (as defined in each Master Lease). Base Rent equals the sum of Current Rent
(as defined in each Master Lease) and Accrued Rent (as defined in each Master
Lease). Kindred is obligated to pay the portion of Base Rent that is Current
Rent, and unpaid Accrued Rents, as set forth below. From May 1, 2001 through
April 30, 2004, Base Rent will equal Current Rent. Under the Master Leases, the
initial annual aggregate Base Rent is $180.7 million from May 1, 2001 to April
30, 2002. For the period from May 1, 2002 through April 30, 2004, annual
aggregate Base Rent, payable all in cash, escalates on May 1 of each year at an
annual rate of 3.5% over the Prior Period Base Rent (as defined in the Master
Leases) if certain Kindred revenue parameters are met. Assuming such Kindred
revenue parameters are met, Annual Base Rent under the Master Leases would be
$187.0 million from May 1, 2002 to April 30, 2003 and $193.6 million from May 1,
2003 to April 30, 2004. See "Note 3--Revenues from Leased Properties" and "Note
9--Transactions with Kindred" to the Consolidated Financial Statements included
in the Annual Report, which is incorporated herein
5
by reference.
Each Master Lease provides that beginning May 1, 2004, if Kindred
refinances its senior secured indebtedness entered into in connection with the
Kindred Reorganization Plan or takes other similar action (a "Kindred
Refinancing"), the 3.5% annual escalator will be paid in cash and the Base Rent
shall continue to equal Current Rent. If a Kindred Refinancing has not occurred,
then on May 1, 2004, the annual aggregate Base Rent will be comprised of (a)
Current Rent payable in cash which will escalate annually by an amount equal to
2% of Prior Period Base Rent, and (b) an additional annual non-cash accrued
escalator amount of 1.5% of the Prior Period Base
Rent which will accrete from year to year including an interest accrual at
LIBOR (as defined in the Master Leases) plus 450 basis points (compounded
annually) to be added to the annual accreted amount (but such interest will not
be added to the aggregate Base Rent in subsequent years). The Unpaid Accrued
Rent will become payable, and all future Base Rent escalators will be payable in
cash, upon the occurrence of a Kindred Refinancing. Under certain circumstances,
the Company's right to receive payment of the Unpaid Accrued Rent is subordinate
to the receipt of payment by the lenders of Kindred's senior secured
indebtedness. Upon the occurrence of a Kindred Refinancing, the annual aggregate
Base Rent payable in cash will thereafter escalate at the annual rate of 3.5%
and there will be no further accrual feature for rents arising after the
occurrence of such events.
Under the terms of the Master Leases, the Company has a one time right to
reset the rents under the Master Leases (the "Reset Right"), exercisable 5 years
after the Kindred Effective Date on a Master Lease by Master Lease basis, to a
then fair market rental rate, for a total fee of $5.0 million payable on a
pro-rata basis at the time of exercise under the applicable Master Lease. The
Reset Right under the CMBS Master Lease can only be exercised in conjunction
with the exercise of the Reset Right under Master Lease No. 1. The Company
cannot exercise the Reset Right under the CMBS Master Lease without the prior
written consent of the CMBS Lender if, as a result of such reset, the aggregate
rent for the CMBS Properties would decrease. See "--Risk Factors--Because
Kindred is the primary source of the Company's rental revenues, Kindred's
inability or unwillingness to satisfy its obligations under the Master Leases
would have a Material Adverse Effect on the Company" and "--Due to the Company's
dependence on Kindred's rental payments as the primary source of its rental
revenues, the Company may be negatively affected by enforcing its rights under
the Master Leases or by terminating a Master Lease."
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
The Tax Allocation Agreement, entered into at the time of the 1998 Spin Off
and described in more detail below, was assumed by Kindred under the Kindred
Reorganization Plan and then amended and supplemented by the Tax Refund Escrow
Agreement, also described below. The Tax Stipulation, entered into by Kindred
and the Company during the pendency of the Kindred bankruptcy proceedings, was
superseded by the Tax Refund Escrow Agreement.
The Tax Allocation Agreement provides that Kindred will be liable for, and
will hold the Company harmless from and against, (i) any taxes of Kindred and
its then subsidiaries (the "Kindred Group") for periods after the 1998 Spin Off,
(ii) any taxes of the Company and its then subsidiaries (the "Company Group") or
the Kindred Group for periods prior to the 1998 Spin Off (other than taxes
associated with the Spin Off) with respect to the portion of such taxes
attributable to assets owned by the Kindred Group immediately after completion
of the 1998 Spin Off and (iii) any taxes attributable to the 1998 Spin Off to
the extent that Kindred derives certain tax benefits as a result of the payment
of such taxes. Under the Tax Allocation Agreement, Kindred would be entitled to
any refund or credit in respect of taxes owed or paid by Kindred under (i), (ii)
or (iii) above. Kindred's liability for taxes for purposes of the Tax Allocation
Agreement would be measured by the Company's actual liability for taxes after
applying certain tax benefits otherwise available to the Company other than tax
benefits that the Company in good faith determines would actually offset tax
liabilities of the Company in other taxable years or periods. Any right to a
refund for purposes of the Tax Allocation Agreement would be measured by the
actual refund or credit attributable to the adjustment without regard to
offsetting tax attributes of the Company.
Under the Tax Allocation Agreement, the Company would be liable for, and
would hold Kindred harmless against, any taxes imposed on the Company Group or
the Kindred Group other than taxes for which the Kindred Group is liable as
described in the above paragraph. The Company would be entitled to any refund or
credit for taxes owed or paid by the Company as described in this paragraph. The
Company's liability for taxes for purposes of the Tax Allocation Agreement would
be measured by the Kindred Group's actual liability for taxes after applying
certain tax benefits otherwise available to the Kindred Group other than tax
benefits that the Kindred Group in good faith determines would actually offset
tax liabilities of the Kindred Group in other taxable years or periods. Any
right to a refund would be measured by the actual refund or credit attributable
to the adjustment without regard to offsetting tax attributes of the Kindred
Group. See "Note 8--Income Taxes" to the Consolidated Financial Statements
included in the Annual Report, which is incorporated by reference herein.
6
Prior to and during the Kindred bankruptcy proceedings, the Company and
Kindred were engaged in disputes regarding the entitlement to federal, state and
local tax refunds for the tax periods prior to and including May 1, 1998 (the
"Subject Periods") which had been received or which would be received by either
company. Under the terms of the Tax Stipulation, the companies agreed that the
proceeds of certain federal, state and local tax refunds for these Subject
Periods, received by either company on or after September 13, 1999, with
interest thereon from the date of deposit at the lesser of the actual interest
earned and 3% per annum, were to be held by the recipient of such refunds in
segregated interest bearing accounts.
On the Kindred Effective Date, Kindred and the Company entered into the Tax
Refund Escrow Agreement governing their relative entitlement to certain tax
refunds for the Subject Periods that each received or may receive in the future.
The Tax Refund Escrow Agreement amends and supplements the Tax Allocation
Agreement and supersedes the Tax Stipulation. Under the terms of the Tax Refund
Escrow Agreement, refunds ("Subject Refunds") received on or after September 13,
1999 by either Kindred or the Company with respect to federal, state or local
income, gross receipts, windfall profits, transfer, duty, value-added, property,
franchise, license, excise, sales and use, capital, employment, withholding,
payroll, occupational or similar business taxes (including interest, penalties
and additions to tax, but excluding certain refunds), for taxable periods ending
on or prior to May 1, 1998, or including May 1, 1998 and received on or after
September 13, 1999 ("Subject Taxes") must be deposited into an escrow account
with a third-party escrow agent.
The Tax Refund Escrow Agreement provides, inter alia, that each party must
notify the other of any asserted Subject Tax liability of which it becomes
aware, that either party may request that asserted liabilities for Subject Taxes
be contested, that neither party may settle such a contest without the consent
of the other, that each party has the right to participate in any such contest,
and that the parties generally must cooperate with regard to Subject Taxes and
Subject Refunds and will mutually and jointly control any audit or review
process related thereto.
The funds in the escrow account (the "Escrow Funds") may be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The Tax Refund Escrow Agreement provides generally that Kindred and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow Funds,
notwithstanding the indemnification provisions of the Tax Allocation Agreement.
To the extent that the Escrow Funds are insufficient to satisfy all liabilities
for Subject Taxes that are finally determined to be due (such excess amount,
"Excess Taxes"), the relative liability of Kindred and the Company to pay such
Excess Taxes shall be determined as provided in the Tax Refund Escrow Agreement.
Disputes under the Tax Refund Escrow Agreement, and the determination of the
relative liability of Kindred and the Company to pay Excess Taxes, if any, are
governed by the arbitration provision of the Tax Allocation Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities will be distributed equally to each of Kindred and
the Company on an annual basis and are accrued as interest income on the
Consolidated Statement of Operations. Any Escrow Funds remaining in the escrow
account after no further claims may be made by governmental authorities with
respect to Subject Taxes or Subject Refunds (because of the expiration of
statutes of limitation or otherwise) will be distributed equally to Kindred and
the Company.
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to Kindred
(the "Third Party Leases"). Under the Kindred Reorganization Plan, Kindred
assumed and has agreed to fulfill its obligations under the Agreement of
Indemnity--Third Party Leases. There can be no assurance that Kindred will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Agreement of Indemnity--Third Party Leases or that Kindred
will continue to honor its obligations under the Agreement of Indemnity--Third
Party Leases. If Kindred does not satisfy or otherwise honor the obligations
under the Agreement of Indemnity--Third Party Leases, then the Company may be
liable for the payment and performance of such obligations. Under the Kindred
Reorganization Plan, Kindred has agreed not to renew or extend any Third Party
Lease unless it first obtains a release of the Company from liability under such
Third Party Lease. See "--Risk Factors--Kindred may not perform the obligations
it assumed in the 1998 Spin Off relating to indemnification of the Company and
the assumption of the defense of certain claims" and "Note 9--Transactions with
Kindred--Agreement of Indemnity--Third Party Leases" to the Consolidated
Financial Statements included in the Annual Report, which is incorporated by
reference herein.
Agreement of Indemnity--Third Party Contracts
7
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Kindred (the "Third Party Guarantees"). Under the
Kindred Reorganization Plan, Kindred assumed and has agreed to fulfill its
obligations under the Agreement of Indemnity--Third Party Contracts. There can
be no assurance that Kindred will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the Agreement of Indemnity--Third Party Contracts or that Kindred will continue
to honor its obligations under the Agreement of Indemnity--Third Party
Contracts. If Kindred does not satisfy or otherwise honor the obligations under
the Agreement of Indemnity--Third Party Contracts, then the Company may be
liable for the payment and performance of such obligations. See "--Risk
Factors---Kindred may not perform the obligations it assumed in the 1998 Spin
Off relating to indemnification of the Company and the assumption of the defense
of certain claims." and "Note 9--Transactions with Kindred--Agreement of
Indemnity--Third Party Contracts" to the Consolidated Financial Statements
included in the Annual Report, which is incorporated by reference herein.
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Kindred agreed in various Spin
Agreements to assume and to indemnify the Company for any and all liabilities
that may arise out of the ownership or operation of the healthcare operations
either before or after the date of the 1998 Spin Off. Under the Kindred
Reorganization Plan, Kindred assumed and agreed to perform its obligations under
these indemnifications. There can be no assurance that Kindred will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations incurred in connection with the 1998 Spin Off or that Kindred will
continue to honor its obligations incurred in connection with the 1998 Spin Off.
If Kindred does not satisfy or otherwise honor the obligations under these
arrangements, then the Company may be liable for the payment and performance of
such obligations and may have to assume the defense of such claims. See "--Risk
Factors---Kindred may not perform the obligations it assumed in the 1998 Spin
Off relating to indemnification of the Company and the assumption of the defense
of certain claims." and "Note 9--Transactions with Kindred--Assumption of
Certain Operating Liabilities and Litigation" to the Consolidated Financial
Statements included in the Annual Report, which is incorporated by reference
herein.
Kindred Common Stock and Registration Rights Agreement
On the Kindred Effective Date, Ventas Realty received 1,498,500 shares of
the common stock in Kindred, representing not more than 9.99% of the issued and
outstanding common stock in Kindred as of the Kindred Effective Date. Based on
applicable laws, regulations, advice from experts, an appraisal, the trading
performance of the Kindred common stock at the applicable time and other
appropriate facts and circumstances, including the illiquidity and lack of
registration of the Kindred common stock when received and the Company's lack of
significant influence over Kindred, the Company determined that the value of the
Kindred common stock was $18.2 million on the date received by Ventas Realty.
The Kindred common stock received by Ventas Realty is subject to dilution from
stock issuances occurring after the Kindred Effective Date. The Kindred common
stock was issued to Ventas Realty as additional future rent in consideration of
the agreement to charge the base rent as provided in the Master Leases.
On the Kindred Effective Date, Kindred executed and delivered to Ventas
Realty and other signatories, a Registration Rights Agreement, which, among
other things, provides that Kindred must file a shelf registration statement
with respect to the Kindred common stock and to keep such registration statement
continuously effective for a period of two years with respect to such securities
(subject to customary exceptions). The shelf registration statement was declared
effective on November 7, 2001.
The Company disposed of 418,186 shares of Kindred common stock in the
fourth quarter of 2001 and recognized a gain of $15.4 million on the
dispositions. In connection with a registered offering of common stock by
Kindred, Ventas Realty exercised its piggyback registration rights, and sold
83,300 shares of Kindred common stock, recognizing a gain of $2.6 million. The
Company applied the net proceeds of $3.6 million from the sale of the 83,300
shares of Kindred common stock as a prepayment on the Company's indebtedness
under the Credit Agreement. The Company declared a distribution of 334,886
shares of Kindred common stock as part of the 2001 dividend, resulting in a gain
of $12.8 million. For every share of common stock of the Company that a
stockholder owned at the close of business on December 14, 2001, the stockholder
received 0.005 of a share of Kindred common stock and $0.0049 in cash (equating
to one share of Kindred common stock and $0.98 in cash for every two hundred
shares of common stock in the Company). For purposes of the 2001 dividend, the
Kindred common stock was valued in accordance with the Code and applicable
rulings and regulations on December 31, 2001 at $51.02 per share. See "--Risk
Factors--Any significant decrease in the value of the 1,080,314 shares of
Kindred common stock that the Company owns, as well as the limitations on the
Company's ability to sell, transfer or otherwise dispose of such shares of
Kindred common stock, could have a material adverse effect on the Company's
ability to reduce its indebtedness and implement its business strategy."
8
Terminated Agreements
The Participation Agreement and the Development Agreement, both executed in
connection with the 1998 Spin Off, were terminated on the Kindred Effective
Date. The Second Standstill Agreement and the Tolling Agreement, both entered
into by the Company and Kindred in April 1999, and the Tax Stipulation and the
Rent Stipulation were all terminated on the Kindred Effective Date and are of no
further force or effect.
Settlement of United States Claims
Kindred and the Company were the subject of investigations by the United
States Department of Justice regarding the Company's prior healthcare
operations, including matters arising from lawsuits filed under the qui tam, or
whistleblower, provision of the Federal Civil False Claims Act, which allows
private citizens to bring a suit in the name of the United States. See "Note
12--Litigation" to the Consolidated Financial Statements included in the Annual
Report, which is incorporated by reference herein. The Kindred Reorganization
Plan contains a comprehensive settlement of all of these claims by the United
States (the "United States Settlement").
Under the United States Settlement, the Company will pay $103.6 million to
the United States, of which $34.0 million was paid on the Kindred Effective
Date. The balance of $69.6 million bears interest at 6% per annum and is payable
in equal quarterly installments over a five-year term commencing on June 30,
2001 and ending in 2006. The Company made the first three quarterly installments
under the United States Settlement through December 31, 2001.
The Company also paid approximately $0.4 million to legal counsel for the
relators in the qui tam actions. In the fourth quarter of 2000, the Company
recorded the full amount of the obligation under the United States Settlement
for $96.5 million based on an imputed interest rate of 10.75%.
Recent Developments Regarding Liquidity
See the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments Regarding Liquidity" in
the Annual Report incorporated herein by reference for a discussion of the
Company's Credit Agreement and the CMBS Transaction.
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 2001.
Percentage Number Number Number of
---------- ------ ------ ---------
Type of Facility of Portfolio(1) of Facilities of Beds/Units States (2)
- ----------------------------------------- --------------- ------------- ------------- ----------
Hospitals ................... 35.0% 44 4,033 21
Skilled Nursing Facilities .. 65.0% 216 27,952 31
Personal Care Facilities .... 00% 8 136 1
-------- ------ --------
Total. ............ 100.0% 268 32,121 36
======== ====== ========
(1) Based on percentage of rent earned by the Company for the year ended
December 31, 2001.
(2) The Company has properties located in 36 states operated by four different
operators.
Hospital Facilities
The Company's hospitals generally are long-term acute care hospitals that
serve medically complex, chronically ill patients. The operator of these
hospitals has the capability to treat patients who suffer from multiple systemic
failures or conditions such as neurological disorders, head injuries, brain stem
and spinal cord trauma, cerebral vascular accidents, chemical brain injuries,
central nervous system disorders, developmental anomalies and cardiopulmonary
disorders. Chronic patients are often dependent on technology for continued life
support, such as mechanical ventilators, total parenteral nutrition, respiration
or cardiac monitors and dialysis machines. While these patients suffer from
conditions which require a high level of monitoring and specialized care, they
may not necessitate the continued services of an intensive care unit. Due to
their severe medical conditions, these patients generally are not clinically
appropriate for admission to a nursing facility or rehabilitation hospital.
9
Nursing Facilities
The Company's nursing facilities generally are skilled nursing facilities.
In addition to the customary services provided by skilled nursing facilities,
the operators of the Company's nursing facilities typically provide
rehabilitation services, including physical, occupational and speech therapies.
Personal Care Facilities
The Company's personal care facilities serve persons with acquired or
traumatic brain injury. The operator of the personal care facilities provides
services including supported living services, neurorehabilitation,
neurobehavioral management and vocational programs.
Competition
The Company competes for real property investments with healthcare
providers, other healthcare related REITs, real estate partnerships, banks,
insurance companies and other investors. Many of the Company's competitors are
significantly larger and have greater financial resources and lower cost of
capital than the Company. The Company's ability to compete successfully for real
property investments will be determined by numerous factors, including the
ability of the Company to identify suitable acquisition targets, the ability of
the Company to negotiate acceptable terms for any such acquisition, the
availability and cost of capital to the Company, and the restrictions contained
in the Credit Agreement. "--Risk Factors--The Company may encounter certain
risks and financing constraints when implementing the Company's business
strategy" and "Note 5--Borrowing Arrangements" to the Consolidated Financial
Statements included in the Annual Report, which is incorporated by reference
herein.
The operators of the Company's properties compete on a local and regional
basis with other healthcare operators. The ability of the Company's operators to
compete successfully for patients at the Company's facilities depends upon
several factors, including the quality of care at the facility, the operational
reputation of the operator, physician referral patterns, physical appearance of
the facilities, other competitive systems of healthcare delivery within the
community, population and demographics, and the financial condition of the
operator. Private, federal and state reimbursement programs and the effect of
other laws and regulations also may have a significant effect on the Company's
operators to compete successfully for patients for the properties.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property from which
there is a release or threatened release of hazardous or toxic substances or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances that
could be located on, in or under such property or other affected property. Such
laws and regulations often impose liability whether or not the owner, operator
or otherwise responsible party knew of, or caused the presence of the hazardous
or toxic substances. The costs of any required remediation or removal of these
substances could be substantial, and the liability of a responsible party as to
any property is generally not limited under such laws and regulations and could
exceed the property's value and the aggregate assets of the liable party. The
presence of these substances or failure to remediate such substances properly
also may adversely affect the owner's ability to sell or rent the property, or
to borrow using the property as collateral. In connection with the ownership and
leasing of the Company's properties, the Company could be liable for these costs
as well as certain other costs, including governmental fines and injuries to
person or properties or natural resources. In addition, owners and operators of
real property are liable for the costs of complying with environmental, health,
and safety laws, ordinances and regulations and can be subjected to penalties
for failure to comply. Such ongoing compliance costs and penalties for
non-compliance can be substantial. Changes to existing or the adoption of new
environmental, health, and safety laws, ordinances, and regulations could
substantially increase an owner's or operator's environmental, health, and
safety compliance costs and/or associated liabilities. Environmental, health,
and safety laws, ordinances, and regulations potentially affecting the Company
address a wide variety of topics, including, but not limited to, asbestos,
polychlorinated biphenyls ("PCBs"), fuel oil management, wastewater discharges,
air emissions, radioactive materials, medical wastes, and hazardous wastes.
Under the Master Leases, Kindred has agreed to indemnify the Company against any
environmental claims (including penalties and clean-up costs) resulting from any
condition arising in, on or under, or relating to, the leased properties at any
time on or after the commencement date of the lease term for the applicable
leased property. Kindred also has agreed to indemnify the Company against any
environmental claim (including penalties and clean up costs) resulting from any
condition permitted to deteriorate, on or after the commencement date of the
lease term for the applicable leased property (including as a result of
migration from adjacent properties not owned or operated by the Company or any
of its affiliates other than
10
Kindred and its direct affiliates). There can be no assurance that Kindred will
have the financial capability or the willingness to satisfy any such
environmental claims. See "--Risk Factors--Kindred may not perform the
obligations it assumed in the 1998 Spin Off relating to indemnification of the
Company and the assumption of the defense of certain claims." If Kindred is
unable or unwilling to satisfy such claims, the Company may be required to
satisfy the claims. The Company has agreed to indemnify Kindred against any
environmental claims (including penalties and clean-up costs) resulting from any
condition arising on or under, or relating to, the leased properties at any time
before the commencement date of the lease term for the applicable leased
property.
The Company did not make any material capital expenditures in connection
with such environmental, health, and safety laws, ordinances, and regulations in
2001 and does not expect that it will have to make any such material capital
expenditures during 2002.
Governmental Regulation
General
The operators of the Company's properties derive a substantial portion of
their revenues from third party payors, including the Medicare and Medicaid
programs. Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons age 65 and over, certain disabled persons
and persons with end-stage renal disease. Medicaid is a medical assistance
program jointly funded by federal and state governments and administered by each
state pursuant to which benefits are available to certain indigent patients. The
Medicare and Medicaid statutory framework is subject to administrative rulings,
interpretations and discretion that may affect the amount and timing of
reimbursements made under Medicare and Medicaid. The amounts of program payments
received by the Company's operators and tenants can be changed by legislative or
regulatory actions and by determinations by agents for the programs.
The Balanced Budget Act of 1997 (the "Budget Act") was intended to reduce
the increase in Medicare payments by $115 billion and reduce the increase in
Medicaid payments by $13 billion between 1998 through 2002 and made extensive
changes to the Medicare and Medicaid programs. The impact of these changes and
reductions has been only partially ameliorated by subsequent legislation. See
"--Healthcare Reform" below. In addition, private payors, including managed care
payors, increasingly are demanding discounted fee structures and the assumption
by healthcare providers of all or a portion of the financial risk. Efforts to
impose greater discounts and more stringent cost controls upon operators by
private payors are expected to continue. Further, on March 25, 1999, legislation
was passed that prevents nursing facility operators that decide to withdraw from
the Medicaid program from evicting or transferring patients who are residents as
of the effective date of withdrawal, and who rely on Medicaid to cover their
long-term care expenses. There can be no assurance that adequate reimbursement
levels will continue to be available for services to be provided by the
operators of the Company's properties, which currently are being reimbursed by
Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on these operators' liquidity, financial condition and results of
operations, which could affect adversely their ability to make rental payments
to the Company.
The operators of the Company's properties are subject to extensive federal,
state and local laws and regulations including, but not limited to, laws and
regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities, services, prices for services and billing
for services. These laws authorize periodic inspections and investigations, and
identification of deficiencies that, if not corrected, can result in sanctions
that include loss of licensure to operate and loss of rights to participate in
the Medicare and Medicaid programs. Regulatory agencies have substantial powers
to affect the actions of operators of the Company's properties if the agencies
believe that there is an imminent threat to patient welfare, and in some states
these powers can include assumption of interim control over facilities through
receiverships. Extensive legislation and regulations also pertain to healthcare
fraud and abuse, including kickbacks, physician self-referrals and false claims.
Federal anti-kickback laws codified under Section 1128B(b) of the Social
Security Act (the "Anti-kickback Laws") prohibit certain business practices and
relationships that might affect the provision and cost of healthcare services
reimbursable under Medicare, Medicaid and other federal healthcare programs,
including the payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other governmental programs. Sanctions
for violating the Anti-kickback Laws include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs such
as the Medicare and Medicaid programs. In the ordinary course of its business,
the operators of the Company's properties have been and are subject regularly to
inquiries, investigations and audits by federal and state agencies that oversee
these laws and regulations.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the Department of Health
11
and Human Services ("HHS") periodically has issued regulations that describe
some of the conduct and business relationships permissible under the
Anti-kickback Laws ("Safe Harbors"). The fact that a given business arrangement
does not fall within a Safe Harbor does not render the arrangement per se
illegal. Business arrangements of healthcare service providers that fail to
satisfy the applicable Safe Harbor's criteria, however, risk increased scrutiny
and possible sanctions by enforcement authorities.
The operators of the Company's properties also are subject to the Ethics in
Patient Referral Act of 1989, commonly referred to as the Stark Law. In the
absence of an applicable exception, the Stark Law prohibits referrals by
physicians of Medicare and other government-program patients to providers of a
broad range of designated health services with which the physicians (or their
immediate family members) have ownership interests or certain other financial
arrangements. Initially, the Stark Law applied only to clinical laboratory
services and regulations applicable to clinical laboratory services were issued
in 1995. Earlier that same year, the Stark Law's self-referral prohibition
expanded to additional goods and services, including inpatient and outpatient
hospital services. In January 2001 the Centers for Medicare and Medicaid
Services ("CMS," formerly the Health Care Financing Administration) published a
final rule that it characterized as the first phase of what will be a two-phase
final rule, and most of the provisions of part one of this final rule became
effective on January 4, 2002. Although CMS has stated that it intends to publish
phase two shortly, it is unclear when this will occur.
Many states have adopted or are considering legislative proposals similar
to the federal referral prohibition, some of which extend beyond the Medicare
and Medicaid programs to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of whether the
service was reimbursed by Medicare or Medicaid. These laws and regulations are
extremely complex, and little judicial or regulatory interpretation exists. A
violation of such laws and regulations could have a material adverse effect on
these operators' liquidity, financial condition and results of operations, which
could affect adversely their ability to make rental payments to the Company.
Government investigations and enforcement of healthcare laws has increased
dramatically over the past several years and is expected to continue. The Health
Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191)
("HIPAA"), which became effective January 1, 1997, greatly expanded the
definition of healthcare fraud and related offenses and broadened the scope to
include private healthcare plans in addition to government payors. HIPAA also
greatly increased funding for the Department of Justice, Federal Bureau of
Investigation and the Office of the Inspector General to audit, investigate and
prosecute suspected healthcare fraud. Private enforcement of healthcare fraud
also has increased due in large part to amendments to the civil False Claims Act
in 1986 that were designed to encourage private individuals to sue on behalf of
the government. These whistleblower suits by private individuals, known as qui
tam relators, may be filed by almost anyone, including present and former
patients and nurses and other employees. HIPAA also mandates the adoption by HHS
of regulations aimed at standardizing transaction formats and billing codes for
documenting medical services, dealing with claims submissions and protecting the
privacy and security of individually identifiable health information. HIPAA
regulations that standardize transactions and code sets became final in the
fourth quarter of 2000. Final privacy regulations became effective in April
2001, with compliance required by April 2003. HIPAA's security regulations have
not yet been finalized. These actions could have a material adverse effect on
these operators' liquidity, financial condition and results of operations, which
could affect adversely their ability to make rental payments to the Company.
The Budget Act also provides a number of additional anti-fraud and abuse
provisions. The Budget Act contains new civil monetary penalties for an
operator's violation of the Anti-kickback Laws and imposes an affirmative duty
on operators to ensure that they do not employ or contract with persons excluded
from the Medicare and other government programs. The Budget Act also provides a
minimum ten-year period for exclusion from participation in federal healthcare
programs for operators convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional or
expanded healthcare facilities or services. A certificate of need ("CON"), which
is issued by governmental agencies with jurisdiction over healthcare facilities,
is at times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The CON rules and regulations may restrict an
operator's ability to expand the Company's properties in certain circumstances.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable healthcare
regulations, and, in either case, such operators or their lenders fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by various state licensing,
receivership, CON or other laws, as well as by Medicare and Medicaid
change-of-ownership rules. Such delays and limitations could have a material
adverse effect on the Company's ability to collect rent, to obtain possession of
leased
12
properties, or otherwise to exercise remedies for tenant default. In addition,
the Company may also incur substantial additional expenses in connection with
any such licensing, receivership or change-of-ownership proceedings.
Long-Term Acute Care Hospitals
Substantially all of the Company's hospitals are operated as long-term
acute care hospitals ("LTACs"). In order to receive Medicare and Medicaid
reimbursement, each hospital must meet the applicable conditions of
participation set forth by HHS relating to the type of hospital, its equipment,
personnel and standard of medical care, as well as comply with state and local
laws and regulations. Hospitals undergo periodic on-site certification surveys,
which generally are limited if the hospital is accredited by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") or other
recognized accreditation organizations. A loss of certification could adversely
affect a hospital's ability to receive payments from Medicare and Medicaid
programs, which could in turn adversely impact the operator's ability to make
rental payments under its leases with the Company.
An LTAC has an average length of stay greater than 25 days. Hospitals that
are certified by Medicare as LTACs are currently excluded from the prospective
payment system ("PPS") that applies to acute care hospitals. However, a PPS
system for LTACs is scheduled to be in place by October 1, 2002 and applicable
to cost report periods commencing on or after October 1, 2002. See "--Healthcare
Reform" below. Inpatient operating costs for LTACs are reimbursed under a
cost-based reimbursement system, subject to a computed target rate per discharge
for inpatient operating costs established by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"), as amended by the Budget Act and the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
("BIPA"). Medicare and Medicaid reimbursements generally are determined from
annual cost reports filed by hospital operators that are subject to audit by the
respective agency (or their fiscal agents) administering the program. Under such
programs of cost-based reimbursement, costs which will be accepted for
reimbursement are defined and limited by statutes, regulations and program
policies relating to numerous factors, including necessity, reasonableness,
related-party principles and relatedness to patient care.
Nursing Facilities
The operators of the Company's nursing facilities generally are licensed on
an annual or bi-annual basis and certified annually for participation in the
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided, qualifications
of the administrative personnel and nursing staff, the adequacy of the physical
plant and equipment and continuing compliance with the laws and regulations
governing the operation of nursing facilities.
The Budget Act established a prospective payment system for Medicare
skilled nursing facilities ("SNFs") for cost reporting periods beginning on or
after July 1, 1998. The payments received under the SNF prospective payment
system cover all services for Medicare patients, including ancillary services.
The rates for such services were first published in the Federal Register on May
12, 1998, after the consummation of the 1998 Spin Off. Although there has been
some payment relief under the Balanced Budget Refinement Act of 1999
("Refinement Act") and BIPA, there can be no assurance that the reimbursement
levels under the SNF prospective payment system will be sufficient to permit the
Company's operators to satisfy their obligations, including payment of rent
under their leases with the Company. See "--Healthcare Reform."
Healthcare Reform
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. In an
effort to reduce federal spending on healthcare, in 1997 the Federal government
enacted the Budget Act, which contained extensive changes to the Medicare and
Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
were to be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from 1993 to 1997.
Virtually all spending reductions have and will come from healthcare operators
and changes in program components. For certain healthcare providers, including
hospitals, home health agencies, SNFs and hospices, implementation of the Budget
Act resulted in more drastic reimbursement reductions than had been anticipated.
In addition to its impact on Medicare, the Budget Act also afforded states more
flexibility in administering their Medicaid plans, including the ability to
shift most Medicaid enrollees into managed care plans without first obtaining a
federal waiver. Accordingly, the Medicare and Medicaid programs, including
payment levels and methods, are in a state of change and are less predictable
than before enactment of the Budget Act. Further Medicare reform legislation is
currently under consideration by Congress. See "Recent Developments Regarding
Government Regulations."
13
The Budget Act established a prospective payment system for skilled nursing
facilities ("SNF PPS") to be transitioned over a three-year period for cost
reporting periods beginning on or after July 1, 1998. Under the SNF PPS payment
methodology, payment amounts are based upon classifications determined through
assessments of individual Medicare patients in the skilled nursing facility,
rather than on the facility's reasonable costs. The SNF PPS features a case-mix
adjustment that utilizes data derived from a standardized clinical assessment
tool that assesses a patient's needs known as the Minimum Data Set, or MDS. For
SNF PPS purposes, the MDS data are used to classify SNF patients into one of 44
Resource Utilization Groups, Version III ("RUG-III") based on the medical
services and functional support the patient is expected to need. Each RUG-III
group is assigned an index score that factors the amount of staff time,
supplies, and services used, on average, for patients classified in that group.
The payments received under the SNF PPS are intended generally to cover all
inpatient services for Medicare patients, including routine nursing care, most
capital-related costs associated with the inpatient stay, and ancillary
services, such as respiratory therapy, occupational therapy, speech therapy and
certain covered drugs.
Under the SNF PPS, per diem payments are made to nursing home facilities
for each resident. Upon the expiration of the three-year transition period,
these per diem payments would be fully transitioned into the federal SNF PPS
rates. During the transition period, payments are based on a blended rate that
uses both a facility-specific rate and the federal rate. As a result of SNF PPS,
Medicare payments to SNFs dropped by 12.5% in 1999. Additionally, the SNF PPS
forced SNFs to make expensive administrative adjustments to implement the
payment system. Although there has been some payment relief (as described
below), there can be no assurance that the reimbursement levels under the SNF
PPS will be sufficient to permit the Company's operators to satisfy their
obligations, including payment of rent under their leases with the Company.
With respect to Medicaid, the Budget Act repealed the "Boren Amendment"
federal payment standard for Medicaid payments to hospitals and nursing
facilities effective October 1, 1997, giving states greater latitude in setting
payment rates for these providers.
The Budget Act also affected the payments made to LTACs by reducing the
amount of reimbursement for incentive payments established pursuant to the
TEFRA, for capital expenditures and bad debts, and for services to certain
patients transferred from an acute care hospital. In addition, the Budget Act
for the first time imposed a national ceiling limitation or "national cap" on
payments that may be made in each category of hospitals exempt from a
prospective payment system. LTACs constitute one such category. The Budget Act
also mandated the creation of a prospective payment system ("LTAC PPS") for
LTACs.
In response to widespread healthcare industry concern about the effects of
the Budget Act, the Federal government enacted the Refinement Act on November
29, 1999. The Refinement Act did not enact any fundamental changes in the
Medicare system, but rather reversed or delayed some of the reductions in
Medicare payment increases mandated by the Budget Act. It was estimated that in
the four to five fiscal years after its enactment, the Refinement Act would
return to healthcare providers approximately $16 billion of the $115 billion the
Budget Act was expected to cut from increases to the Medicare program. Specific
providers who received relief under the Refinement Act included SNFs, which
received temporary (effective April 1, 2000 to October 1, 2000) per diem payment
increases for certain high cost patients, and outpatient rehabilitation therapy
providers, which received a 2-year moratorium on a $1,500 annual cap on the
amount of physical, occupational and speech therapy provided to a patient.
Pursuant to BIPA, CMS extended the moratorium on the $1,500 annual cap to
December 31, 2002.
In its July 31, 2000 final rule ("Final Refinement Act Rule") refining the
SNF PPS, CMS announced increases in payment rates for fiscal year 2001. In its
earlier proposed rule, issued on April 10, 2000, CMS had detailed proposed
refinements to be made to the SNF PPS case-mix classification system that would
more adequately account for high cost cases. Specifically, the agency 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. The Final Refinement Act Rule postponed any
such refinements to the SNF PPS case-mix classification system, while retaining
two temporary remedies set forth in the Refinement Act: (a) a 4% increase in the
per diem reimbursement rates for all RUG-III groups in both fiscal years 2001
and 2002; and (2) an additional 20% increase in the per diem reimbursement for
fifteen RUG-III groups falling under the Extensive Services, Special Care,
Clinically Complex, High Rehabilitation and Medium Rehabilitation categories,
applicable to services furnished on or after April 1, 2000, until such time as
case-mix refinements are implemented.
Passed in December 2000, BIPA provided a certain degree of relief from the
projected impact of the Budget Act. Specifically, BIPA modified the impact of
the Refinement Act on SNF PPS payment rates, as implemented by the Final
Refinement Act Rule, in several important ways. First, BIPA revised the annual
market basket update factor upward from "market basket--1%" to (a) "market
basket" in fiscal year 2001, and (b) "market basket--
14
0.5%" in fiscal years 2002 and 2003. Second, BIPA temporarily increased the
nursing component of the federal SNF PPS rate by 16.6%, from April 1, 2001
through September 30, 2002. Finally, BIPA increased the per diem reimbursement
rates for fourteen rehabilitation-related RUG-III groups by 6.7%, from April 1,
2001 until such time as case-mix refinements are implemented pursuant to the
Refinement Act. To date, CMS has not promulgated the SNF PPS case-mix
refinements required by the Refinement Act. As a result, the temporary per diem
payment increases for specified RUG-III groups have been retained for an
unspecified period of time, with certain budget-neutral changes to the size and
allocation of such increases among different RUG-III groups. However, CMS has
indicated that the RUG-III refinements may be incorporated into a final rule
scheduled for release by July 31, 2002 and implementation in fiscal year 2003.
With respect to LTACs, BIPA mandated that HHS implement the LTAC PPS by
October 1, 2002. Unless the Secretary of HHS develops a system of
diagnosis-related groups ("DRGs") specifically refined for LTACs before that
date, the LTAC PPS will be implemented using the DRGs currently used for
inpatient stays in acute care hospitals (modified, if feasible, to account for
the resource usage of long-term care patients, as well as the most recently
available hospital discharge data). In the interim, LTACs continue to be
reimbursed on a reasonable cost basis, subject to a facility-specific target
amount, and subject also to a national cap. For cost reporting periods during
fiscal year 2001, BIPA raised the applicable national cap for LTACs by 2%. BIPA
also raised the target amount for LTACs by 25%, though this revised target
amount cannot exceed the wage-adjusted national cap.
On March 22, 2002, CMS published a proposed rule for LTAC PPS. The Company
is currently analyzing the proposed rule. The public will have 60 days from
March 22, 2002 to review the proposed rule and submit comments. In response to
comments submitted by the public and its own ongoing review of the proposed
rule, CMS may modify the proposed rule before it is adopted in final form. There
can be no assurance as to the content of the final rule for LTAC PPS, nor can we
predict its impact on the Company's tenants and operators.
There can be no assurance that the Budget Act, the Refinement Act, BIPA and
future healthcare legislation, or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the liquidity, financial condition or results of operations of
the Company's operators which could have a material adverse effect on their
ability to make rental payments to the Company.
Recent Developments Regarding Government Regulation
Recent legislation and implementing regulations set forth revised payment
mechanisms for skilled nursing facility and long-term care hospital services.
The precise overall economic impact of new laws and other recent developments is
under review by the long-term care industry and by the Company and its
operators.
In its annual update for 2002 ("2002 Final Rule"), CMS announced SNF
payment increases effective October 1, 2001. The 2002 Final Rule reflects an
update using a 2.8% market basket and is intended to implement both Refinement
Act and BIPA adjustments. The rule reflects the Refinement Act's and BIPA's
temporary increase to the per diem adjusted payment rates to certain RUG-III
groups, as well as BIPA's 16.6% adjustment to the nursing component of the
Federal rate. These increases are to continue until the implementation of
case-mix refinements. Also provided in the 2002 Final Rule is the Refinement
Act's 4% increase in the adjusted Federal rate for fiscal year 2002. There can
be no assurance that the give back provisions under the Refinement Act and BIPA
will continue after September 30, 2002.
The 16.6% temporary increase to the nursing home RUG-III groups and the 4%
add-on for all RUG-III groups provided under the Refinement Act and BIPA expire
on September 30, 2002. Expiring provisions are estimated to, on average, reduce
per beneficiary per diems by $57. Moreover, CMS has informally indicated that it
intends to complete refinements to the SNF PPS as part of the upcoming fiscal
year 2003 rulemaking. Under applicable law, when these revisions are
implemented, the 6.7% increase for rehabilitation patients and the 20% add-on
for medically complex patients authorized under the Refinement Act and BIPA will
expire.
LTACs, which are currently excluded from a prospective payment system, are
scheduled to transition to LTAC PPS by October 1, 2002. The new prospective
payment system for LTACs would apply to cost report periods beginning on or
after October 1, 2002. The Company believes that the new prospective payment
system would impact Kindred no sooner than September 1, 2003. As noted
previously, if HHS cannot implement a prospective payment system specific to
LTACs by October 1, 2002, it is required to instead implement a prospective
payment system based upon existing acute care hospital diagnosis-related groups
that have been modified where possible to account for resource usage of LTAC
patients. On March 22, 2002, CMS published a proposed rule for LTAC PPS. The
Company is currently analyzing the proposed rule. The public will have 60 days
from March 22, 2002 to review the proposed rule and submit comments. In response
to comments submitted by the public and its own ongoing review of the proposed
rule, CMS may modify the proposed rule before it is adopted in final form.
There can be no assurance as to the content of the final rule for LTAC PPS, nor
can we predict its impact on the Company's tenants and operators. The Company
believes that the new prospective payment system would impact Kindred no sooner
than September 1, 2003.
On November 20, 2001, CMS announced a proposed regulation ("Proposed
Regulation") to restrict the "upper-payment limit loophole" in Medicaid. The
Proposed Regulation revises a provision of an earlier regulation published on
January 12, 2001 that allowed states to make overall payments to public
non-state government owned or operated hospitals of up to 150 percent of the
estimated amount that would be paid under Medicare for the same
15
services. Under the Proposed Regulation, these payments would be limited to 100
percent of estimated Medicare payments, which is the limit for all other
hospitals. The resulting effect of the Proposed Rule is that states may
implement rate or service cuts to providers (including SNFs) to compensate for
reduced federal funding. To date, CMS has not issued the final regulations.
Approximately two-thirds of all nursing home residents are dependent on
Medicaid. Medicaid reimbursement rates, however, typically are less than the
amounts charged by the operators of the Company's properties. Moreover, rising
Medicaid costs and decreasing state revenues caused by the current recession
have prompted an increasing number of states to cut Medicaid funding as a means
of balancing their respective state budgets. Existing and future initiatives
affecting Medicaid reimbursement may reduce utilization of (and reimbursement
for) services offered by the operators of the Company's properties.
There can be no assurance that future healthcare legislation or changes in
the administration or implementation of governmental healthcare reimbursement
programs will not have a material adverse effect on the liquidity, financial
condition or results of operations of the Company's operators and tenants which
could have a material adverse effect on their ability to make rental payments to
the Company which, in turn, could have a material adverse effect on the
business, financial condition, results of operation and liquidity of the Company
and on the Company's ability to service its indebtedness and its obligations
under the United States Settlement and on the Company's ability to make
distributions to its stockholders as required to continue to qualify as a REIT
(a "Material Adverse Effect").
Federal Income Tax Considerations
The Company elected to qualify as a REIT for federal income tax purposes
for the year ended December 31, 1999. The Company believes that it has satisfied
the requirements to qualify as a REIT for the years ended December 31, 2000 and
2001. The Company intends to continue to qualify as a REIT for federal income
tax purposes for the year ended December 31, 2002 and subsequent years subject
to its ability to meet the minimum distribution requirements as discussed below.
The Company's continued qualification and taxation as a REIT will depend upon
its ability to meet on a continuing basis, through actual annual operating
results, distribution levels, and stock ownership, the various qualification
tests imposed under the Code. These tests are discussed below. No assurance can
be given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. Although the Company believes it
has satisfied the requirements to continue to qualify as a REIT for years ended
December 31, 2000 and 2001 and although the Company currently intends to
continue to qualify as a REIT for the year ended December 31, 2002 and
subsequent years, it is possible that economic, market, legal, tax or other
considerations may cause the Company to fail, or elect not, to continue to
qualify as a REIT. For a discussion of the tax consequences of failing to
continue to qualify as a REIT, see "--Failure to Continue to Qualify," below.
The discussion of "Federal Income Tax Considerations" set forth herein is
not exhaustive of all possible tax considerations and is not tax advice.
Moreover, this summary does not deal with all tax aspects that might be relevant
to a particular stockholder in light of such stockholder's circumstances, nor
does it deal with particular types of stockholders that are subject to special
treatment under the Code, such as insurance companies, financial institutions
and broker-dealers. The Code provisions governing the federal income tax
treatment of REITs are highly technical and complex, and this summary is
qualified in its entirety by the applicable Code provisions, rules and Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof. The following discussion is based on current law, which
could be changed at any time, possibly retroactively.
Federal Income Taxation of the Company
If the Company continues to qualify for taxation as a REIT, it generally
will not be subject to federal corporate income tax on net income that it
currently distributes to stockholders. This treatment substantially eliminates
the "double taxation" (i.e., taxation at both the corporate and stockholder
levels) that generally results from investment in a corporation. Notwithstanding
its qualification as a REIT, the Company will be subject to federal income tax
in the following circumstances. First, the Company will be taxed at regular
corporate rates on any undistributed taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its undistributed items of tax preference.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by foreclosure
or otherwise on default of a loan secured by the property or property
repossessed by the Company upon dispossessing a tenant after a lease default)
that is held primarily for sale to customers in the ordinary course of business
or (ii) other non-qualifying income from foreclosure property, it will be
subject to tax at the highest corporate rate on such income. Fourth, if the
Company has net income from "prohibited transactions" (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to
16
customers in the ordinary course of business), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the product of (a) the gross
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test, and (b) a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year (other
than retained long-term capital gain the Company elects to treat as having been
distributed to stockholders), and (iii) any undistributed taxable income from
prior years, the Company would be subject to a non-deductible 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
Seventh, if the Company should receive rents from a tenant deemed not to be fair
market value rents, or if the Company values its assets incorrectly, the Company
may be liable for valuation penalties. Finally, if the Company acquires any
asset from a C corporation (i.e., a corporation generally subject to full
corporate level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation, and the Company recognizes gain
on the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the Company,
then, to the extent of such asset's "Built-in Gain" (i.e., the excess of the
fair market value of such property at the time of acquisition by the Company
over the adjusted basis of such asset at such time), such gain will be subject
to tax at the highest regular corporate rate (the "Built-in Gain Rules")).
The Company owns appreciated assets that it held on January 1, 1999, the
effective date of its REIT election. These assets are subject to the Built-in
Gain Rules discussed above because the Company was a taxable C corporation prior
to January 1, 1999. If the Company recognizes taxable gain upon the disposition
of any of these assets within the ten-year Recognition Period, the Company
generally will be subject to regular corporate income tax on the gain equal to
the lower of (a) the recognized gain at the time of the disposition and (b) the
Built-in Gain in that asset as of January 1, 1999. The total amount of gain on
which the Company can be taxed under the Built-in Gain Rules is limited to its
net built-in gain at the time it became a REIT, i.e., the excess of the
aggregate fair market value of its assets at the time it became a REIT over the
adjusted tax bases of those assets at that time. Some but not all of such
capital gains realized would be offset by the amount of any available capital
loss carryforwards. In connection with the sale of any assets, all or a portion
of such gain could be treated as ordinary income instead of capital gain and be
subject to taxation and/or the minimum REIT distribution requirements. See
"--Annual Distribution Requirements" below.
Requirements for Qualification
To continue to qualify as a REIT, the Company must continue to meet the
requirements discussed below, relating to the Company's organization, sources of
income, nature of assets and distributions of income to stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a shorter taxable year (the "100 Shareholder Rule"); (vi) not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an
election to be a REIT (or has made such election for a previous taxable year)
and satisfies all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met in order to elect
and to maintain REIT status; (viii) that uses a calendar year for federal income
tax purposes; and (ix) that meets certain other tests, described below,
regarding the nature of its income and assets.
For purposes of the 5/50 Rule, an unemployment compensation benefits plan,
a private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. Certain entities,
including entities that file Schedules 13 D, F or G with the Commission, are not
treated as a single owner under the 5/50 Rule. For purposes of the 5/50 Rule,
the beneficial owners of such entities are deemed to be the owners of the
Company's Common Stock. A REIT will be treated as having satisfied the 5/50 Rule
if it complies with certain regulations for ascertaining the ownership of its
stock and if
17
it did not know (or after the exercise of reasonable diligence would not have
known) that its stock was sufficiently closely held to cause it to violate the
5/50 Rule. See "--Annual Record Keeping Requirements" below.
In order to prevent a concentration of ownership of the Company's stock
that would cause the Company to fail the 5/50 Rule or the 100 Shareholder Rule,
the Company amended its Certificate of Incorporation on April 30, 1998 to
provide that, except with the consent of the Company's Board of Directors, no
holder (with certain exceptions) is permitted to own, either actually or
constructively under the applicable attribution rules of the Code, more than
9.0% of the Common Stock or 9.9% of any class of preferred stock issued by the
Company. Certain persons (an "Existing Holder") who owned stock in the Company
in excess of the foregoing limits on April 30, 1998 (the date that the
Certificate of Incorporation was amended) are not subject to the general
ownership limits applicable to other stockholders; rather, Existing Holders
generally are permitted to own up to the same percentage of the Company's
outstanding stock that they owned on April 30, 1998. No holder, however, is
permitted to own, either actually or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's stock if
such ownership would cause more than 50% in value of the Company's outstanding
stock to be owned by five or fewer individuals or would result in the Company's
stock being beneficially owned by fewer than 100 persons (determined without
reference to any rule of attribution).
Since the date of the 1998 Spin Off, Tenet Healthcare Corporation ("Tenet")
has owned approximately 12% of the Company's issued and outstanding Common Stock
and, therefore, is treated as an Existing Holder under the Company's Certificate
of Incorporation. Except as explained below, as an Existing Holder, Tenet is
generally permitted to own in excess of the ownership limits in the Company's
Certificate of Incorporation.
As permitted by its certificate of incorporation, the Company previously
granted waivers of the ownership limitations to certain stockholders of the
Company. These waivers initially permitted such stockholders to own over 10% of
the Common Stock of the Company but in no event more than 15% of the Common
Stock. These waivers have either been terminated in their entirety or have been
subsequently revised to restrict the ownership of Common Stock by any such
stockholder to less than 10% of the Company's issued and outstanding Common
Stock. The Company believes that no stockholder, other than Tenet, owns 10% or
more of the Company's issued and outstanding Common Stock, as measured by the
Code.
To qualify as a REIT, a corporation may not have (as of the end of the
taxable year) any earnings and profits that were accumulated in periods before
it elected REIT status. The Company believes that at December 31, 1999 it did
not have any accumulated earnings and profits that are attributable to periods
during which the Company was not a REIT, although the IRS would be entitled to
challenge that determination. For taxable years beginning after 2000 (and the
Company believes for the taxable year 2000), a distribution made to meet the
requirement that a REIT may not have non-REIT earnings and profits will be
treated, on a first-in, first-out basis, as made from earnings and profits.
Thus, such earnings and profits are deemed distributed first from earnings and
profits that would cause such a failure, starting with the earliest Company year
for which such failure would occur.
Section 856(i) of the Code provides that a corporation that is a "Qualified
REIT Subsidiary" will not be treated as a separate corporation for federal
income tax purposes, and all assets, liabilities, and items of income, deduction
and credit of a qualified REIT subsidiary will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. A
"qualified subsidiary" is defined as any wholly owned corporate subsidiary of a
REIT. The Company currently has two qualified REIT subsidiaries, Ventas
Specialty I, Inc. and Ventas Finance I, Inc.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. The Company directly owns a 99% general partnership interest in Ventas
Realty and indirectly owns the remaining 1% limited partnership interest in
Ventas Realty through a wholly owned limited liability company. Under the
Check-the-Box Regulations, the limited liability Company, and therefore Ventas
Realty, is disregarded as an entity separate from the Company for federal income
tax purposes. Similarly, Ventas Specialty I, LLC and Ventas Finance I, LLC,
formed in connection with the CMBS Transaction, are also wholly owned, single
member limited liability companies that are disregarded for federal income tax
purposes.
In the case of a REIT that is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of the income and asset tests described below. If
and when Ventas Realty were to admit a partner other than the Company, a
subsidiary of the Company, or an entity that is disregarded under the
Check-the-Box Regulations as an entity separate from the Company, the Company's
proportionate share of the assets and gross income of Ventas Realty would be
treated as
18
the assets and gross income of the Company for purposes of applying the
requirements described herein.
Income Tests
To continue to qualify as a REIT, the Company must satisfy certain annual
gross income requirements. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" (defined below)) and, in certain circumstances,
interest on certain types of temporary investment income. Second, at least 95%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property or
temporary investments, dividends, interest and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing.
Substantially all of the Company's gross income is derived from leasing its
properties to Kindred under the Master Leases. Rents received or deemed received
by the Company under its leases (including the Master Leases) will qualify as
"rents from real property" in satisfying the gross income requirements described
above only if the Company's leases are respected as "true" leases for federal
income tax purposes and are not treated as service contracts, joint ventures, or
some other type of arrangement. The determination of whether the Company's
leases are true leases depends on an analysis of all the surrounding facts and
circumstances. In making such a determination, courts have considered a variety
of factors, including the following: (i) the intent of the parties, (ii) the
form of the agreement, (iii) the degree of control over the property that is
retained by the property owner (e.g., whether the lessee has substantial control
over the operation of the property or whether the lessee was required to use its
best efforts to perform its obligations under the agreement), and (iv) the
extent to which the property owner retains the risk of loss with respect to the
property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property) or the potential for economic
gains (e.g., appreciation) with respect to the property. Based upon advice of
counsel at the time the Master Leases were negotiated, the Company believes that
its leases should be treated as "true" leases for federal income tax purposes.
Investors should be aware, however, that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Company's leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the leases are
recharacterized as service contracts or partnership agreements, rather than true
leases, part or all of the payments that the Company receives from its tenants
would not be considered rent or would not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, the
Company likely would not be able to satisfy either the 75% or the 95% gross
income tests, and, as a result, would lose its REIT status.
Assuming that the Company's leases are "true" leases for tax purposes,
rents received by the Company will qualify as "rents from real property" for
purposes of the REIT gross income tests only if several additional conditions
are satisfied. First, the amount of rent generally must not be based in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Second, amounts received from a tenant will not qualify as "rents from real
property" if the Company, or an owner of 10% or more of the Company, directly or
constructively is deemed to own 10% or more of the ownership interests in the
tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with
a lease of real property, is greater than 15% of the total rent received under
the lease (based on the fair market values after 2000), then the portion of rent
attributable to such personal property will not qualify as "rents from real
property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
income. The "independent contractor" requirement, however, does not apply to the
extent that the services provided by the Company are "usually or customarily
rendered in connection with the rental of space for occupancy only," which are
services of a type that a tax-exempt organization can provide to its tenants
without causing its rental income to be unrelated business taxable income
("UBTI"). In addition, the "independent contractor" requirement does not apply
to noncustomary services provided by the Company, the annual value of which does
not exceed 1% of the gross income derived from the property with respect to
which the services are provided (the "1% de minimis exception"). For this
purpose, such services may not be valued at less than 150% of the Company's
direct cost of providing the services. An "independent contractor" is defined as
an entity that does not own (directly or indirectly) more than 35% of the
Company's stock or an entity not more than 35% owned (directly or indirectly) by
persons who own more than 35% of the Company's stock. If any class of stock of
the Company or the person being tested as
19
an independent contractor is regularly traded on an established securities
market, only persons who directly or indirectly own 5% or more of such class of
stock shall be counted in determining whether the 35% ownership limitations have
been exceeded. Certain of the foregoing rules are modified if the Company forms
a taxable REIT Subsidiary. See "--Taxable REIT Subsidiary."
The Company does not believe that it has, and does not anticipate that it
will in the future, (i) charged/charge rent that is based in whole or in part on
the income or profits of any person (except by reason of being based on a fixed
percentage or percentages of receipts or sales consistent with the rule
described above), (ii) derived/derive rent attributable to personal property
leased in connection with real property that exceeds 15% of the total rents,
(iii) derived/derive rent attributable to a Related Party Tenant, or (iv)
provided/provide any noncustomary services to tenants other than through
qualifying independent contractors, except as permitted by the 1% de minimis
exception or to the extent that the amount of resulting nonqualifying income
would not cause the Company to fail to satisfy the 95% and 75% gross income
tests.
Related Party Tenant
The Company leases substantially all of its properties to Kindred and
Kindred is the primary source of the Company's rental revenues. Under the
Kindred Reorganization Plan, Ventas Realty received 1,498,500 shares of Kindred
common stock on the Kindred Effective Date. Under the Code, if the Company owns
10% or more of any class of Kindred's issued and outstanding voting securities
or 10% or more of the value of any class of Kindred's issued and outstanding
securities (the "10% securities test"), Kindred would be a Related Party Tenant.
As a Related Party Tenant, the Company's rental revenue from Kindred would not
qualify as "rents from real property" and the Company would lose its REIT status
because it likely would not be able to satisfy either the 75% or the 95% gross
income test. The Company's loss of REIT status would have a Material Adverse
Effect on the Company.
Since the Kindred Effective Date, Kindred has issued additional common
stock and Ventas Realty has disposed of 418,186 shares of its Kindred common
stock. As of January 22, 2002, the Company owned 1,080,314 shares of Kindred
common stock or not more than 6.2% of the issued and outstanding shares of
Kindred. Based upon applicable tax authorities and decisions and advice from the
Internal Revenue Service, the Company believes that for purposes of the 10%
securities test, its ownership percentage in Kindred has been and will continue
to be less than 9.99%.
A number of safeguards are in place to reduce the risk of the Company's
violation of the 10% securities test as a result of its ownership of Kindred
common stock including: (a) a provision in Kindred's corporate charter requiring
Kindred, at the Company's sole option, to purchase a portion of the Company's
Kindred common stock in the event Kindred proposes to enter into a transaction
which would cause the Company to violate the 10% securities test, and (b) the
Company's ability to sell the Kindred common stock to a third party or
distribute the Kindred common stock to its stockholders, subject to compliance
with the registration requirements of the Securities Act. See "-- Recent
Developments Regarding Kindred--Registration Rights Agreement."
The Company believes that the only greater than 10% stockholder of the
Company's Common Stock, as measured by the Code, is Tenet. Since the date of the
1998 Spin Off, Tenet has owned approximately 12% of the Company's issued and
outstanding Common Stock. Certain provisions under the Code provide that any
ownership interest in Kindred that Tenet may purchase may be attributed to the
Company. Any such attribution could cause to Company to violate the 10%
securities test and lose its REIT status unless under applicable laws, rules and
regulations or interpretations, the Company is otherwise deemed not to have
violated the 10% securities test. To reduce the likelihood of such an
occurrence, the Company has implemented certain protective measures. As part of
the Kindred Reorganization Plan, the Company negotiated for the inclusion of
Article Tenth of the Kindred Corporate Charter. Article Tenth of the Kindred
Corporate Charter, which became effective on the Kindred Effective Date, is
designed to prohibit Tenet from gaining beneficial ownership of any Kindred
common stock if such ownership when combined with the Company's ownership would
exceed 9.9% of any class of stock or all stock in the aggregate. If Tenet should
nevertheless violate this provision, either directly or as a result of the
attribution rules under the Code, any shares of the Kindred common stock so
purchased by or attributed to Tenet will automatically, without any action by
any party, become "Excess Stock" in Kindred and will be deemed to be owned by a
trust for the benefit of a third party and Tenet will have no legal title to
such "Excess Stock" in Kindred. Tenet would have the limited right to receive
certain distributions on and a certain portion of the proceeds of a sale of such
"Excess Stock" in Kindred.
In addition, under the Company's Certificate of Incorporation, under a
formal interpretation by the Board of Directors, if Tenet should purchase any
Kindred common stock while Tenet owns in excess of 10% of the Company's Common
Stock, then all of Tenet's holdings of the Company's Common Stock in excess of
9.9% will automatically become "Excess Shares" in the Company and will be deemed
to be owned by a trust for the benefit
20
of a third party and Tenet would have no legal title to such "Excess Shares" in
the Company. Tenet would have the limited right to receive certain distributions
on and a certain portion of the proceeds of a sale of such Excess Shares in the
Company.
While the Company believes that these and other safeguards which have been
instituted by the Company are adequate, there can be no assurances that such
safeguards will be adequate to prevent the Company from violating the 10%
securities test. If the Company should ever violate the 10% securities test, the
Company would lose its status as a REIT which would have a Material Adverse
Effect on the Company.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless continues to qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure to
meet such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return and any
incorrect information on the schedules was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. Even if
these relief provisions were to apply, a tax would be imposed with respect to
the excess net income.
Foreclosure Property
General
The foreclosure property rules permit the Company (by the Company's
election) to foreclose or repossess properties without being disqualified as a
result of receiving income that does not qualify under the gross income tests;
however, a corporate tax is imposed upon net income from "foreclosure property"
that is not otherwise "good REIT" income. Detailed rules specify the calculation
of the tax. The after tax amount increases the amount the REIT must distribute
each year.
"Foreclosure property" includes any real property and any personal property
incident to such real property acquired by bid at foreclosure or by agreement or
process of law after there was a default or a default was imminent on the leased
property. During a 90-day grace period, the Company may operate the foreclosed
property without an "independent contractor" or qualifying lessee. The 90-day
grace period will begin on the date the Company acquires possession of the
property.
To maintain foreclosure property treatment after the 90 day grace period,
the Company must cause the property to be managed by an "independent contractor"
(from whom the Company derives or receives no income) or lease the property
pursuant to a lease qualifying as a true lease for income tax purposes to an
unrelated third party. Ownership of the tenant must not be attributed to the
Company in violation of the related tenant rule of Section 856(d)(2)(B)
(relating to 10% or more owned tenants). If the property is leased to a third
party under a true lease, the foreclosure property rules are not then relevant.
Foreclosure property treatment will end on the first day on which the REIT
enters into a lease of the property that will give rise to income that is not
good rental income under Section 856(c)(3). In addition, foreclosure property
treatment will end if any construction takes place on the property (other than
completion of a building, or other improvement more than 10 percent complete
before default became imminent). Foreclosure property treatment is available for
an initial period of three years, provided that such treatment may be extended
up to six years.
Healthcare Properties
The Company is permitted to terminate leases of "qualified healthcare
properties" other than by reason of default or imminent default. In addition,
the Company may treat "qualified healthcare properties" as foreclosure property
at the time a lease comes to an end. Except as noted below, healthcare
foreclosure properties are subject to the foreclosure property tax and other
rules under the general foreclosure property rules.
The differences between this special healthcare rule and the general
foreclosure rule are that (i) the initial foreclosure property period is for two
rather than three years, although it may be extended for the same aggregate six
years, (ii) the lease may be terminated without requirement of default, and
(iii) income from the independent contractor is disregarded to the extent such
income is attributable to any lease of property in effect on the date of
acquisition or any lease of property entered into after such date if on such
date a lease of the new property from the REIT was in effect, and under the
terms of the new lease, the REIT receives no more than substantially the same
benefit in comparison to the lease previously in effect.
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A "qualified healthcare property" includes any real property and any
personal property incident to such real property which is a "healthcare
facility" or is necessary or incidental to the use of a healthcare facility. The
qualified healthcare facility may be operated by an independent contractor from
whom the REIT does not derive or receive any income other than certain
qualifying lease income from an independent contractor.
Asset Tests
At the close of each quarter of its taxable year, the Company must satisfy
two tests relating to the nature of its assets. First, at least 75% of the value
of the Company's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets" or,
in cases where the Company raises new capital through stock or long-term
(maturity of at least five years) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital (the "75% asset test"). The term "real estate asset" includes
interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the 75%
asset class, the value of any one issuer's debt and equity securities owned by
the Company (other than the Company's interest in any entity classified as a
partnership for federal income tax purposes, or the stock of a qualified REIT
subsidiary) may not exceed 5% of the value of the Company's total assets (the
"5% asset test"), and the Company may not own more than 10% of any one issuer's
outstanding voting securities or 10% of the value of any one issuer's
outstanding securities, subject to limited "safe harbor" exceptions for certain
straight debt obligations (except for the Company's ownership interest in an
entity that is disregarded for federal income tax purposes, that is classified
as a partnership for federal income tax purposes or that is the stock of a
qualified REIT subsidiary) (previously defined as the "10% securities test"). In
addition, no more than 20% of the value of the Company's assets can be
represented by securities of Taxable REIT Subsidiaries (as defined below).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter except for its first calendar quarter, such a failure would not
cause it to fail to qualify as a REIT or to lose its REIT status if (i) it
satisfied all of the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by an acquisition of nonqualifying assets. If the
condition described in clause (ii) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose. The
Company intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such other actions as may be
required to comply with those tests.
The Company believes it has been and will continue to be in compliance with
the 10% securities test and the 5% asset test. However, there can be differing
opinions as to the methods of calculating compliance with these tests and as to
the value of the Company's assets (including the valuation of the Kindred common
stock) for purposes of these tests. Therefore, there can be no assurance the
Company is or will continue to be in compliance with either of these tests. If
the Company failed to satisfy either of these tests, the Company would lose its
REIT status. If the Company lost its status as a REIT, it would have a Material
Adverse Effect on the Company.
Taxable REIT Subsidiaries
The Company is permitted to own up to 100% of a "Taxable REIT Subsidiary."
To qualify as a taxable REIT subsidiary, both the Company and the subsidiary
corporation must join in an election to treat the subsidiary corporation as a
taxable REIT subsidiary. In addition, any corporation (other than a REIT or a
qualified REIT subsidiary) of which a taxable REIT subsidiary owns, directly or
indirectly, more than 35 percent of the vote or value is automatically treated
as a taxable REIT subsidiary.
A taxable REIT subsidiary can provide services to tenants of the Company's
properties (even if such services were not considered services customarily
furnished in connection with the rental of real property), and can manage or
operate properties, generally for third parties, without causing amounts
received or accrued directly or indirectly by the Company for such activities to
fail to be treated as rents from real property. However, rents paid to the
Company generally are not qualified rents if the Company owns more than 10% (by
vote or value) of the corporation paying the rents. Nevertheless, qualified
rents do include rents that are paid by taxable REIT subsidiaries and that also
meet a limited rental exception (where 90% of space is leased to third parties
at comparable rents) and an exception for rents from certain lodging facilities
(operated by an independent contractor).
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Moreover, the taxable REIT subsidiary cannot directly or indirectly operate
or manage a lodging or healthcare facility, subject to special rules for certain
lodging facilities.
Also, the taxable REIT subsidiary generally cannot provide to any person
rights to any brand name under which hotels or healthcare facilities are
operated, unless the rights are provided to an independent contractor to operate
or manage a lodging facility, if the rights are held by the taxable REIT
subsidiary as licensee or franchisee and the lodging facility is owned by the
taxable REIT subsidiary or leased to it by the Company.
The taxable REIT subsidiary cannot deduct interest in any years that would
exceed 50% of the taxable REIT subsidiary's adjusted gross income. If any amount
of interest, rent, or other deductions of the taxable REIT subsidiary for
amounts paid to the Company is determined to be other than at arm's length
("redetermined" items pursuant to Section 482), an excise tax of 100% is imposed
on the portion that was excessive, with limited "safe harbor" exceptions.
A 100% excise tax would be imposed on the Company for: (i) redetermined
rents, (ii) redetermined deductions, and (iii) excess interest. Redetermined
rents include "rents from real property" that would have been adjusted under
Section 482 (but for the imposition of the 100% tax) in an IRS audit to clearly
reflect income as a result of services furnished by a taxable REIT subsidiary to
the tenants of a REIT. Redetermined rents, however, would only include rents
attributable to "impermissible" services that exceed 1% of the total rents from
the property. In addition, redetermined rents would not include rents which
qualify for the following safe harbors: (i) the taxable REIT subsidiary charges
the same amounts for its services to the REIT and its tenants similar to other
third parties; (ii) the rents paid to the REIT by tenants (leasing at least 25%
of the net leasable space in the property) who are not receiving a service from
the taxable REIT subsidiary are substantially comparable to the rents paid by
tenants leasing comparable space and receiving such service from the taxable
REIT subsidiary, and the charge for such service is separately stated; and (iii)
the Taxable REIT Subsidiary recognizes income for its services at least equal to
150% of its direct costs in furnishing or rendering the service.
Redetermined deductions include deductions (other than redetermined rents)
of a Taxable REIT Subsidiary that would have been adjusted under Section 482
(but for the imposition of the 100% tax) in an IRS audit to clearly reflect
income between the taxable REIT subsidiary and REIT.
Excess interest would include any deduction for interest payments by a
taxable REIT subsidiary to the REIT to the extent such interest payments are in
excess of a rate that is "commercially reasonable." Loans from the REIT to a
taxable REIT subsidiary would be made subject to the Section 163(j) "earnings
stripping" rules in full (i.e., the rules would apply to the taxable REIT
subsidiary regardless of the underlying ownership of the REIT).
Annual Distribution Requirements
In order to be taxed as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 90% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 90% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 90%, but less than 100%, of its
"REIT taxable income," as adjusted, it will be subject to tax on the
undistributed amount at regular capital gains and ordinary corporate tax rates
except to the extent of net operating loss or capital loss carryforwards. If any
taxes are paid in connection with the Built-In Gain Rules, these taxes will be
deductible in computing REIT taxable income. Furthermore, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year (other than long-term capital gain the Company elects to retain
and treat as having been distributed to stockholders), and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions in
computing REIT taxable income. The Company anticipates that it generally will
have sufficient cash or liquid assets to enable it to satisfy the 90%
distribution requirement. It is possible, however, that the Company, from time
to time, may not have sufficient cash or other liquid assets to meet the 90%
distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation, as a result of timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at the Company's taxable income, or as a result of nondeductible
expenses such as principal amortization or repayments,
23
or capital expenditures in excess of noncash deductions. In the event that such
timing differences or other cash needs occur, the Company may find it necessary
to borrow funds or to issue equity securities (there being no assurance that it
will be able to do so) or, if possible, to pay taxable stock dividends,
distribute other property or securities (including the Kindred common stock) 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 Credit Agreement. Any such transaction would
likely require the consent of the "Required Lenders" under the Credit Agreement,
and there can be no assurance that such consent would be obtained. The Company's
ability to engage in certain of these transactions is also restricted by the
registration requirements under the Securities Act, the rules and regulations of
the New York Stock Exchange and the Commission and by other applicable laws,
rules and regulations. In addition, the failure of Kindred to make rental
payments under the Master Leases would impair materially the ability of the
Company to make required distributions. Consequently, there can be no assurance
that the Company will be able to make distributions at the required distribution
rate or any other rate.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay a 4% excise tax and interest to the IRS based upon the
amount of any deduction taken for deficiency dividends.
The Company elected to qualify as a REIT for federal income tax purposes
for the year ended December 31, 1999. The Company believes that it has satisfied
the requirements to qualify as a REIT for the years ended December 31, 2000 and
2001. Although the Company intends to continue to qualify as a REIT for federal
income tax purposes for the year ended December 31, 2002 and subsequent years,
it is possible that economic, market, legal, tax or other considerations may
cause the Company to fail, or elect not, to continue to qualify as a REIT.
Annual Record Keeping Requirements
In its first taxable year in which it qualifies as a REIT and thereafter,
the Company is required to maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the actual
ownership of its outstanding shares. The Company believes that it has complied
with these requirements for the 1999, 2000 and 2001 tax years. The Company will
be subject to a penalty of $25,000 ($50,000 for intentional violations) for any
year in which it does not comply with the rules.
Failure to Continue to Qualify
If the Company's election to be taxed as a REIT is revoked or terminated
(e.g., due to a failure to meet the REIT qualification tests), the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates except to the extent of net operating
loss and capital loss carryforwards. Distributions to stockholders will not be
deductible by the Company, nor will they be required to be made. To the extent
of current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and, subject to certain
limitations in the Code, corporate stockholders may be eligible for the
dividends received deduction. In addition, the Company would be prohibited from
re-electing REIT status for the four taxable years following the year during
which the Company ceased to qualify as a REIT, unless certain relief provisions
of the Code applied. It is impossible to predict whether the Company would be
entitled to such statutory relief.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of the Company's
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations.
Distributions that are designated as capital gain dividends will be taxed as a
capital gain (to the extent such distributions do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its shares. The tax rates applicable to such
capital gains are discussed below. Distributions in excess of current and
accumulated earnings and profits will not be
24
taxable to a stockholder to the extent that they do not exceed the adjusted
basis of the stockholder's shares, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a stockholder's
shares, such distributions will be included in income as capital gains assuming
the shares are capital assets in the hands of the stockholder. The tax rate
applicable to such capital gain will depend on the stockholder's holding period
for the shares. In addition, any distribution declared by the Company in
October, November or December of any year and payable to a stockholder of record
on a specified date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the distribution is actually paid by the Company during January of the
following calendar year.
If the Company should become a closely held REIT, any person owning at
least 10% (by vote or value) of the Company is required to accelerate the
recognition of year-end dividends attributable to the Company, for purposes of
such person's estimated tax payments. A closely held REIT is defined as one in
which at least 50% (by vote or value) is owned by five or fewer persons.
Attribution rules apply to determine ownership.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to its stockholders (including for
purposes of the 4% excise tax discussed above under "Requirements for
Qualification--Annual Distribution Requirements"). If the Company should make
such an election, the Company's stockholders would be required to include in
their income as long-term capital gain their proportionate share of the
Company's undistributed net capital gain, as designated by the Company. Each
such stockholder would be deemed to have paid its proportionate share of the
income tax imposed on the Company with respect to such undistributed net capital
gain, and this amount would be credited or refunded to the stockholder. In
addition, the tax basis of the stockholder's shares would be increased by its
proportionate share of undistributed net capital gains included in its income,
less its proportionate share of the income tax imposed on the Company with
respect to such gains.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the stockholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of the shares (or distributions treated as such) will
be treated as investment income only if the stockholder so elects, in which case
such capital gains will be taxed at ordinary income rates. The Company will
notify stockholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital and capital gain.
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as capital gain or loss. Lower marginal tax rates for individuals may apply in
the case of capital gains, depending on the holding period of the shares that
are sold. However, any loss upon a sale or exchange of shares by a stockholder
who has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of shares may be disallowed if other shares are purchased within 30
days before or after the disposition.
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal individual income
tax rate applicable to ordinary income is 39.1% for 2001. Any capital gain
generally will be taxed to a non-corporate taxpayer at a maximum rate of 20%
with respect to capital assets held for more than one year. The tax rates
applicable to ordinary income apply to gain attributable to the sale or exchange
of capital assets held for one year or less. In the case of capital gain
attributable to the sale or exchange of certain real property held for more than
one year, an amount of such gain equal to the amount of all prior depreciation
deductions not otherwise required to be taxed as ordinary depreciation recapture
income will be taxed at a maximum rate of 25%. With respect to distributions
designated by a REIT as capital gain dividends (including deemed distributions
of retained capital gains), the REIT also may designate (subject to certain
limits) whether the dividend is taxable to non-corporate stockholders as a 20%
rate gain distribution or an unrecaptured depreciation distribution taxed at a
25% rate.
The characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a non-corporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Non-corporate taxpayers may carry forward their
unused capital losses. All net capital gain of a corporate taxpayer is subject
to tax at ordinary corporate rates. A corporate taxpayer can deduct
25
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Treatment of Tax-Exempt Stockholders
Tax-exempt organizations, including qualified employee pension and profit
sharing trusts and individual retirement accounts (collectively, "Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their UBTI. While many investments in real
estate generate UBTI, the IRS has issued a published ruling that dividend
distributions by a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling, and subject to the exceptions discussed below, amounts distributed by
the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of the Common Stock
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17) and (20), respectively, of Section 501(c) of the
Code are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, in certain
circumstances, a pension trust that owns more than 10% of the Company's stock is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage"). The UBTI Percentage is the gross income, less related direct
expenses, derived by the Company from an unrelated trade or business (determined
as if the Company were a pension trust) divided by the gross income, less
related direct expenses, of the Company for the year in which the dividends are
paid. The UBTI rule applies to a pension trust holding more than 10% of the
Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more than
10% of the value of the Company's stock collectively own more than 50% of the
value of the Company's stock.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Non-U.S.
stockholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws with regard to their ownership of
the Common Stock, including any reporting requirements.
For purposes of this discussion, the term "Non-U.S. Stockholder" does not
include any foreign stockholder whose investment in the Company's stock is
"effectively connected" with the conduct of a trade or business in the United
States. Such a foreign stockholder, in general, will be subject to United States
federal income tax with respect to its investment in the Company's stock in the
same manner as a U.S. Stockholder is taxed (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). In addition, a foreign corporation receiving income that is
treated as effectively connected with a U.S. trade or business also may be
subject to an additional 30% "branch profits tax," unless an applicable tax
treaty provides a lower rate or an exemption. Certain certification requirements
must be satisfied in order for effectively connected income to be exempt from
withholding.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gain dividends (or deemed distributions
of retained capital gains) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. Distributions in excess of current
and accumulated earnings and profits of the Company will not be taxable to a
stockholder to the extent that such distributions do not exceed the adjusted
basis of the stockholder's shares, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's shares, such distributions will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of its shares, as described below.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions
26
attributable to gain from sales of U.S. real property interests are taxed to a
Non-U.S. Stockholder as if such gain were effectively connected with a U.S.
business. Non-U.S. Stockholders thus would be taxed at the normal capital gain
rates applicable to U.S. Stockholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA also may be subject to 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to
treaty relief or exemption.
Unless a reduced rate of withholding applies under an applicable tax
treaty, the Company generally will withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, 30% of all distributions out of current or
accumulated earnings and profits, subject to the application of FIRPTA
withholding rules discussed below. In addition, the Company is required to
withhold 10% of any distribution in excess of its current and accumulated
earnings and profits. Because the Company generally cannot determine at the time
a distribution is made whether or not it will be in excess of earnings and
profits, the Company intends to withhold 30% of the entire amount of any
distribution (other than distributions subject to the 35% withholding discussed
below). Generally, however, a Non-U.S. Stockholder will be entitled to a refund
from the IRS to the extent an amount is withheld from a distribution that
exceeds the amount of U.S. tax owed by such Non-U.S. Stockholder.
Under FIRPTA, the Company is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as a
capital gain dividend. Thus, if the Company designates previously made
distributions as capital gain dividends, subsequent distributions (up to the
amount of such prior distributions) will be treated as capital gain dividends
for purposes of FIRPTA withholding.
Under Regulations that are currently in effect, dividends paid to an
address in a country outside the United States generally are presumed to be paid
to a resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Regulations issued in October 1997, however, provide that a Non-U.S. Stockholder
who wishes to claim the benefit of an applicable treaty rate must satisfy
certain certification and other requirements. Such Regulations generally will be
effective for distributions made after December 31, 2000.
For so long as the Common Stock continues to be regularly traded on an
established securities market, the sale of such stock by any Non-U.S.
Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below)
generally will not be subject to United States federal income tax (unless the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for more than 182 days during the taxable year of the sale and
certain other conditions apply, in which case such gain will be subject to a 30%
tax on a gross basis). A "Five Percent Non-U.S. Stockholder" is a Non-U.S.
Stockholder who, at some time during the five-year period preceding such sale or
disposition, beneficially owned (including under certain attribution rules) more
than 5% of the total fair market value of the Common Stock (as outstanding from
time to time) or owned shares of another class of stock of the Company that
represented value greater than 5% of the Common Stock (measured at the time such
shares were acquired).
In general, the sale or other taxable disposition of the Common Stock by a
Five Percent Non-U.S. Stockholder (as defined below) also will not be subject to
United States federal income tax if the Company is a "domestically controlled
REIT." A REIT is a "domestically controlled REIT" if, at all times during the
five-year period preceding the relevant testing date, less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Stockholders (taking into
account those persons required to include the Company's dividends in income for
United States federal income tax purposes). Although the Company believes that
it currently qualifies as a "domestically controlled REIT," because the Common
Stock is publicly traded, no assurance can be given that the Company will
qualify as a domestically controlled REIT at any time in the future. If the
Company does not constitute a domestically controlled REIT, a Five Percent
Non-U.S. Stockholder will be taxable in the same manner as a U.S. Stockholder
with respect to gain on the sale of the Common Stock (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals).
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. Stockholders and to the IRS the amount
of distributions paid during each calendar year and distributions required to be
treated as so paid during a calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the applicable rate (30% beginning January 1, 2002) with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with the applicable
requirements of the backup withholding rules. A stockholder who does not provide
the Company with its correct taxpayer identification number also may be subject
to penalties imposed by the IRS. In addition, the Company may be required to
withhold a portion of capital gain distributions to any
27
stockholders who fail to certify their non-foreign status to the Company.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for an exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Backup withholding tax and information reporting generally will not apply
to distributions paid to Non-U.S. Stockholders outside the United States that
are treated as (i) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, (ii) capital gain dividends or (iii)
distributions attributable to gain from the sale or exchange by the Company of
U.S. real property interests. As a general matter, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
the Common Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of the Common Stock by a foreign office of a broker that (i)
is a United States person, (ii) derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States, or
(iii) is a "controlled foreign corporation" for United States tax purposes,
unless the broker has documentary evidence in its records that the holder is a
Non-U.S. Stockholder and certain other conditions are satisfied, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of the Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a
Non-U.S. Stockholder or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund with the IRS.
The final Regulations issued by the Treasury Department in 1997, as
corrected in 2000 and 2001 became effective January 1, 2001. In addition, the
Treasury Department issued Temporary Regulations in January 2002, which together
with the final Regulations govern the withholding of tax and information
reporting for certain amounts paid to non-resident alien individuals and foreign
corporations. Stockholders should consult their tax advisors concerning the
impact, if any, of these new Regulations on their ownership of shares of the
Common Stock.
Other Tax Considerations
The Company and its stockholders may be subject to state and local tax in
states and localities in which they do business or own property. The tax
treatment of the Company and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on their ownership of shares of the Common Stock.
Employees
As of December 31, 2001, the Company had nine (9) full-time employees and
five (5) part-time employees. The Company considers its relationship with its
employees to be good.
Insurance
The Company maintains and/or requires in its leases that its tenants
maintain appropriate liability and casualty insurance on its assets and
operations. Under the Master Leases, Kindred is required to maintain, at its
expense, certain insurance coverage related to the properties under the Master
Leases and Kindred's operations at the related facilities. See "--Recent
Developments Regarding Kindred--Master Leases." There can be no assurance that
Kindred and the Company's other tenants will maintain such insurance and any
failure by Kindred or the Company's other tenants to do so could have a Material
Adverse Effect on the Company. The Company believes that Kindred and its other
tenants are in substantial compliance with the insurance requirements contained
in their respective leases with the Company.
The Company believes that the amount and coverage of its insurance
protection is customary for similarly situated companies in its industry. There
can be no assurance that in the future such insurance will be available at a
reasonable price or that the Company will be able to maintain adequate levels of
insurance coverage.
28
RISK FACTORS
BECAUSE KINDRED IS THE PRIMARY SOURCE OF THE COMPANY'S RENTAL REVENUES,
KINDRED'S INABILITY OR UNWILLINGNESS TO SATISFY ITS OBLIGATIONS UNDER THE MASTER
LEASES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
The Company leases substantially all its properties to Kindred and,
therefore, Kindred is the primary source of the Company's rental revenues,
accounting for approximately 98.8% of its rental revenues in 2001. Accordingly,
Kindred's financial condition and ability to meet its rent obligations will
determine the Company's rental revenues and its ability to make distributions to
its stockholders. In addition, any failure by Kindred to effectively conduct its
operations could have a material adverse effect on its business reputation or on
its ability to enlist and maintain patients in its facilities. Kindred, as well
as certain other tenants of the Company, have experienced financial difficulty
and/or filed for bankruptcy. Kindred emerged from bankruptcy on April 20, 2001.
Despite Kindred's emergence from bankruptcy, there can be no assurance that
Kindred will have sufficient assets, income and access to financing to enable it
to satisfy its obligations under the Master Leases. Since the Company derives in
excess of 98% of its rental revenues from Kindred and since the Master Leases
are triple-net leases under which Kindred is responsible for all insurance,
taxes, utilities, maintenance and repair expenses required in connection with
the leased properties, the inability or unwillingness of Kindred to satisfy its
obligations under the Master Leases could have a Material Adverse Effect on the
Company.
DUE TO THE COMPANY'S DEPENDENCE ON KINDRED'S RENTAL PAYMENTS AS THE PRIMARY
SOURCE OF ITS RENTAL REVENUES, THE COMPANY MAY BE NEGATIVELY AFFECTED BY
ENFORCING ITS RIGHTS UNDER THE MASTER LEASES OR BY TERMINATING A MASTER LEASE.
If Kindred fails to comply with the terms of the Master Leases or to comply
with applicable healthcare regulations and, in either case, Kindred or its
lenders fail to cure such default within the specified cure period, the Company
may have to find another lessee/operator for the properties covered by one or
all of the Master Leases. During any period that the Company is attempting to
locate one or more lessee/operators there could be a decrease or cessation of
rental payments by Kindred. There can be no assurance that the Company will be
able to locate another suitable lessee/operator or that if the Company is
successful in locating such an operator, that the rental payments from the new
operator would not be significantly less than the existing rental payments. The
Company's ability to locate another suitable lessee/operator may be
significantly delayed or limited by various state licensing, receivership,
certificate-of-need or other laws, as well as by Medicare and Medicaid change of
ownership rules. See "Business--Governmental Regulation."
KINDRED MAY NOT PERFORM THE OBLIGATIONS IT ASSUMED IN THE 1998 SPIN OFF
RELATING TO INDEMNIFICATION OF THE COMPANY AND THE ASSUMPTION OF THE DEFENSE OF
CERTAIN CLAIMS.
In connection with the 1998 Spin Off, Kindred assumed and agreed to
indemnify the Company for all obligations under third party leases and contracts
and for all losses, including costs and expenses, resulting from future claims
and all liabilities that may arise out of the ownership or operation of the
healthcare operations either before or after the date of the 1998 Spin Off. At
that time, Kindred also agreed to assume the defense, on the Company's behalf,
of any claims that were pending at the time of the 1998 Spin Off and that arose
out of the ownership or operation of the healthcare operations or were asserted
after the 1998 Spin Off and that arise out of the ownership and operation of the
healthcare operations or any of the assets or liabilities transferred to Kindred
in connection with the 1998 Spin Off. Kindred also agreed to indemnify the
Company for any fees, costs, expenses and liabilities arising out of these
obligations and operations. There can be no assurance that Kindred will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations incurred in connection with the 1998 Spin Off or that Kindred will
continue to honor its obligations incurred in connection with the 1998 Spin Off.
If Kindred does not satisfy or otherwise honor the obligations under these
arrangements, then the Company may be liable for the payment or performance of
certain of such obligations and may have to assume the defense of such claims.
The failure of Kindred to perform these obligations could have a Material
Adverse Effect on the Company.
ANY SIGNIFICANT DECREASE IN THE VALUE OF THE 1,080,314 SHARES OF KINDRED
COMMON STOCK THAT THE COMPANY OWNS, AS WELL AS THE LIMITATIONS ON THE COMPANY'S
ABILITY TO SELL, TRANSFER OR OTHERWISE DISPOSE OF SUCH SHARES OF KINDRED COMMON
STOCK, COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S ABILITY TO REDUCE
ITS INDEBTEDNESS AND IMPLEMENT ITS BUSINESS STRATEGY.
The Company intends to apply its Kindred common stock to the satisfaction
of certain financial obligations of the Company. If the value of the Kindred
common stock decreases, the Company would have to use other
29
consideration, including cash on hand, to satisfy such financial obligations
thereby impairing the Company's ability to reduce its indebtedness and implement
it business strategy. In addition, the Company's ability to sell, transfer or
otherwise dispose of the Kindred common stock is subject to compliance with
certain laws, rules and regulations of the Commission and the New York Stock
Exchange and certain restrictions contained in the Registration Rights
Agreement. To the extent such legal and contractual restrictions limit the
Company's ability to sell, transfer or otherwise dispose of the Kindred common
stock, the Company would have to find other consideration to satisfy any
obligation the Company may intend to satisfy with the Kindred common stock. In
either case, were the Company required to use cash on hand, this may impact the
Company's ability to reduce its indebtedness, implement its business strategy
and meet its debt service and other obligations. For additional information on
the risks relating to the Kindred common stock, please see our risk factors
relating to (a) jeopardizing our REIT status due to the value of the Kindred
common stock and (b) not having sufficient cash to meet the REIT distribution
requirements.
THE COMPANY IS SIGNIFICANTLY LEVERAGED, AND IN SOME CIRCUMSTANCES THE
COMPANY COULD BE REQUIRED TO OBTAIN ADDITIONAL CREDIT OR RAISE EQUITY IN ORDER
TO MEET THE COMPANY'S DEBT PAYMENTS AND OBLIGATIONS UNDER THE UNITED STATES
SETTLEMENT. HOWEVER, THERE CAN BE NO ASSURANCE THAT THE COMPANY WOULD BE ABLE TO
OBTAIN ADDITIONAL CREDIT OR RAISE EQUITY IN THE FIRST INSTANCE OR THAT THE
COMPANY WOULD BE ABLE TO DO SO ON TERMS THAT THE COMPANY FINDS ACCEPTABLE.
The Company is significantly leveraged and a substantial portion of its
cash flow from operations is dedicated to the payment of principal and interest
on indebtedness and the obligations under the United States Settlement. The
Company depends on lease payments from Kindred to meet its interest expense and
principal repayment obligations under the Company's debt facilities and the
Company's obligations under the United States Settlement. If the Company's cash
flow from operations is not sufficient to meet these payments and obligations,
the Company would be required to obtain additional borrowings or raise equity to
meet them. The Company's ability to incur additional indebtedness is restricted
by the terms of the Credit Agreement. In addition, adverse economic conditions
could cause the terms on which the Company can obtain additional borrowings to
become unfavorable. In such circumstances, the Company may be required to raise
equity in the capital markets or liquidate one or more investments in properties
at times that may not permit realization of the maximum return on the
investments and that could result in adverse tax consequences to the Company. In
addition, certain healthcare regulations may constrain the Company's ability to
sell assets. There can be no assurance that the Company will be able to meet its
debt service obligations or its obligations under the United States Settlement
and the failure to do so could have a Material Adverse Effect on the Company.
THE COMPANY IS DEPENDENT ON THE ABILITY OF KINDRED, AS A TRIPLE-NET TENANT
UNDER THE MASTER LEASES, AND ITS OTHER TENANTS TO MANAGE AND MAINTAIN THE
COMPANY'S LEASED PROPERTIES.
The Company may be unable to take action if it believes Kindred or one of
its other tenants are operating one of the Company's leased properties
inefficiently or in a manner adverse to its interests. The failure of Kindred to
make three consecutive rent payments will trigger an event of default under the
Company's Credit Agreement. If there is an event of default under a Master Lease
and the Company repossesses the property or property under a Master Lease is
otherwise returned to the Company, it would have to locate a suitable
tenant/operator for the property. There can be no assurance that the Company
will be able to locate another suitable tenant/operator or that if the Company
is successful in locating such an operator, that the rental payments from the
new operator would not be significantly less than the existing rental payments.
In addition, the Company's ability to locate another suitable tenant/operator
may be significantly delayed or limited by various state licensing,
receivership, certificate-of-need or other laws, as well as Medicare and
Medicaid change of ownership rules.
THE COMPANY IS SUBJECT TO THE RISKS ASSOCIATED WITH INVESTMENT IN A SINGLE
INDUSTRY.
The Company's strategy is to invest solely in healthcare-related
properties. As a result, the Company has not diversified its investments beyond
the healthcare industry and is subject to the risks of investing in a single
industry. Moreover, the Company's ability to invest in nonhealthcare-related
properties is restricted by the terms of the Credit Agreement.
The ability of Kindred and the Company's other tenants and operators to
generate profits and pay rent under their leases may be adversely affected by
the risks associated with the heavily regulated healthcare industry.
Because all of its properties are used as healthcare facilities, the
Company is directly affected by the risks associated with the healthcare
industry. The ability of Kindred and the Company's other tenants and operators
to generate profits and pay rent under their leases may be adversely impacted by
such risks. See "Business--Governmental Regulation."
30
In the ordinary course of their businesses, Kindred and the Company's other
tenants and operators are subject regularly to inquiries, investigations and
audits by federal and state agencies that oversee compliance with statutory and
regulatory healthcare requirements. The extensive federal, state and local
requirements affecting the healthcare industry include, but are not limited to,
statutory and regulatory provisions relating to licensure, conduct of
operations, ownership of facilities, addition of facilities, allowable costs,
patient care and other services and charges for services. See
"Business--Governmental Regulation." In particular, various laws including,
antikickback, antifraud and abuse laws, prohibit certain business practices and
relationships that might affect the provision and cost of healthcare services
reimbursable under Medicare and Medicaid, including the payment or receipt of
remuneration for the referral of patients whose care will be paid for by
Medicare or other governmental programs. The sanctions and penalties for
violating these laws include criminal penalties and civil sanctions, including
fines and possible exclusion from federal and state government programs,
including Medicare and Medicaid.
The Company believes that the regulatory environment surrounding the
long-term care industry has intensified, particularly for large for-profit,
multi-facility providers like Kindred. The federal government has imposed
intensive enforcement policies resulting in a significant increase in the number
of inspections, citations of regulatory deficiencies and imposed regulatory
sanctions, including terminations from the Medicare and Medicaid programs and
civil monetary penalties. The operators of our facilities receive notices of
potential sanctions and remedies from time to time, and such sanctions have been
imposed on some of our facilities from time to time. If Kindred and the
Company's other tenants and operators fail to comply with the extensive laws and
regulations applicable to their businesses, they could become ineligible to
receive government program reimbursement, suffer civil or criminal penalties or
be required to make significant changes to their operations. In addition, they
could be forced to expend considerable resources responding to an investigation
or other enforcement action under these laws and regulations. Any of these
results could make it difficult or impossible for them to meet their financial
and other obligations to the Company.
As part of the United States Settlement, Kindred entered into and agreed to
comply with the terms of a Corporate Integrity Agreement. The Corporate
Integrity Agreement became effective on the Kindred Effective Date. Kindred's
failure to comply with the Corporate Integrity Agreement could have a material
adverse effect on Kindred's results of operations, financial condition and its
ability to make rental payments to the Company, which, in turn, could have a
Material Adverse Effect on the Company.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including the Medicare and Medicaid statutes
and regulations. Changes in the regulatory framework could have a material
adverse effect on Kindred and the Company's other operators' results of
operations, financial condition, and their ability to make rental payments to
the Company, which, in turn, could have a Material Adverse Effect on the
Company. See "Business--Government Regulation."
THE ABILITY OF KINDRED AND THE COMPANY'S OTHER TENANTS AND OPERATORS TO
GENERATE PROFITS AND PAY RENT UNDER THEIR LEASES MAY BE ADVERSELY AFFECTED BY
CHANGES IN THE REIMBURSEMENT RATES OR METHODS OF PAYMENT FROM THIRD-PARTY
PAYORS, INCLUDING MEDICARE AND MEDICAID PROGRAMS.
Kindred and the Company's other tenants and operators rely on reimbursement
from third-party payors, including the Medicare and Medicaid programs, for
substantially all of their revenues. Healthcare in the United States continues
to attract much legislative interest and public attention. In an effort to
reduce federal spending on healthcare, in 1997 the Federal government enacted
the Budget Act, which contained extensive changes to the Medicare and Medicaid
programs intended to reduce the projected amount of increase in payments under
such programs between 1998 and 2002. Virtually all spending reductions pursuant
to the Budget Act have and will reduce payments to healthcare providers, such as
our operators. For certain healthcare providers, including hospitals, home
health agencies, SNFs and hospices, implementation of the Budget Act has
resulted in more drastic reimbursement reductions than had been anticipated. In
addition to its impact on Medicare, the Budget Act also afforded states more
flexibility in administering their Medicaid plans, including the ability to
transfer most Medicaid enrollees into managed care plans without first obtaining
a federal waiver. Moreover, by repealing the Boren Amendment, the Budget Act
eased impediments on the states' ability to reduce their Medicaid reimbursement
levels. Accordingly, the Medicare and Medicaid programs, including payment
levels and methods, are in a state of change and are less predictable than
before enactment of the Budget Act. See "Business--Governmental
Regulation--Healthcare Reform."
Certain temporary Medicare reimbursement increases to SNFs provided under
the Refinement Act and BIPA expire on September 30, 2002. Expiring provisions
are estimated to, on average, reduce per beneficiary Medicare per diem rates by
$57. Moreover, CMS has informally indicated that it intends to complete
refinements to the SNF PPS as part of the upcoming fiscal year 2003 rulemaking.
Under applicable law, when these revisions are
31
implemented, the givebacks under the Refinement Act and BIPA will expire. There
can be no assurance that the giveback provisions under the Refinement Act and
BIPA will continue after September 30, 2002.
With respect to LTACs, BIPA mandated that HHS implement a Medicare LTAC PPS
by October 1, 2002. Unless the Secretary of HHS develops a methodology
specifically refined for LTACs before that date, the LTAC PPS will be
implemented using the DRGs currently used for inpatient stays in acute care
hospitals (modified, if feasible, to account for the resource usage of long-term
care patients, as well as the most recently available hospital discharge data).
On March 22, 2002, CMS published a proposed rule for LTAC PPS. The Company is
currently analyzing the proposed rule. The public will have 60 days from March
22, 2002 to review the proposed rule and submit comments. In response to
comments submitted by the public and its own ongoing review of the proposed
rule, CMS may modify the proposed rule before it is adopted in final form. There
can be no assurance as to the content of the final rule for LTAC PPS, nor can we
predict its impact on the Company's tenants and operators. The Company believes
that the new prospective payment system would impact Kindred no sooner than
September 1, 2003.
There also continue to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as Kindred. Due in part to anticipated budget short-falls, many
states have enacted or are considering enacting measures that are designed to
reduce their Medicaid expenditures and to make certain changes to private
healthcare insurance. Some states also are considering regulatory changes that
include a moratorium on the designation of additional LTACs. There are a number
of legislative proposals currently under consideration, including payment limits
or caps and the establishment of Medicaid prospective payment systems for
nursing facilities.
There continues to be various legislative and regulatory proposals to
implement cost-containment measures that limit payments to healthcare providers.
In addition, private third-party payors have continued their efforts to control
healthcare costs. There can be no assurance that adequate reimbursement levels
will continue to be available for services to be provided by Kindred and other
tenants which are currently being reimbursed by Medicare, Medicaid or private
payors. Significant limits by the governmental and third-party payors on the
scope of services reimbursed and on reimbursement rates and fees could have a
material adverse effect on the liquidity, financial condition and results of
operations of Kindred and the Company's operators and other tenants, which, in
turn, could have a Material Adverse Effect on the Company.
For more information, See "Business--Government Regulation."
SIGNIFICANT LEGAL ACTIONS, PARTICULARLY IN THE STATE OF FLORIDA, COULD
SUBJECT KINDRED TO INCREASED OPERATING COSTS AND SUBSTANTIAL UNINSURED
LIABILITIES, WHICH COULD MATERIALLY AND ADVERSELY AFFECT KINDRED'S LIQUIDITY,
FINANCIAL CONDITION AND RESULTS OF OPERATION.
Kindred has experienced substantial increases in both the number and size
of patient care liability claims in recent years. In addition to large
compensatory claims, plaintiffs' attorneys increasingly are seeking significant
punitive damages and attorneys fees. In the State of Florida, where Kindred
operates 15 of the Company's nursing centers and six of the Company's hospitals,
general liability and professional liability costs for nursing centers have
increased substantially and become increasingly difficult to estimate.
Kindred insures its professional liability risks in part through a
wholly-owned, limited purpose insurance company. The limited purpose insurance
company insures initial losses up to specified coverage levels per occurrence
and in the aggregate. Coverage for losses in excess of those levels are
maintained through unaffiliated commercial insurance carriers. Effective
November 30, 2000, the limited purpose insurance company insures all claims
arising in Florida up to a per occurrence limit without the benefit of any
aggregate coverage limit through unaffiliated commercial insurance carriers.
Kindred maintains general liability insurance and professional malpractice
liability insurance in amounts and with deductibles which Kindred management has
indicated that it believes are sufficient for its operations. However, its
insurance coverage might not cover all claims against Kindred or continue to be
available to Kindred at a reasonable cost. If Kindred is unable to maintain
adequate insurance coverage or is required to pay punitive damages, Kindred may
be exposed to substantial liabilities.
Kindred may also be sued under a federal whistleblower statute designed to
combat fraud and abuse in the healthcare industry. These lawsuits can involve
significant monetary and award bounties to private plaintiffs who successfully
bring these suits. These lawsuits brought against Kindred combined with
increased operating costs and substantial uninsured liabilities could have a
material adverse effect on the liquidity, financial condition and results of
operation of Kindred and its ability to make rental payments to the Company,
which, in turn, could have a Material Adverse Effect on the Company.
THE COMPANY MAY ENCOUNTER CERTAIN RISKS AND FINANCING CONSTRAINTS WHEN
IMPLEMENTING THE COMPANY'S BUSINESS STRATEGY.
At the time of the 1998 Spin Off, the Company's business strategy was to
diversify the Company from the Kindred tenant concentration. As a result of the
Kindred bankruptcy proceedings, the Company suspended the
32
implementation of its original business strategy in 1999 and continued such
suspension through 2001. The Company's current business strategy is preserving
and maximizing stockholders' capital by means that include (a) the reduction of
the amount of the Company's indebtedness and a reduction of the average all-in
cost of the Company's indebtedness and (b) the implementation of a measured and
disciplined diversification and growth program to reduce the Company's
dependence on Kindred. The ability of the Company to pursue certain of these
objectives may be restricted by the terms of the Credit Agreement.
If the Company pursues acquisitions or development of additional healthcare
or other properties, the Company may encounter certain risks and financing
constraints. Acquisitions entail general investment risk associated with any
real estate investments, including risks that investments will fail to perform
in accordance with expectations, the estimates of the cost of improvements
necessary for acquired properties will prove inaccurate, and the inability of
the tenant/operator to meet performance expectations. The Company does not
presently contemplate any development projects, although if the Company were to
pursue new development projects, such projects would be subject to numerous
risks, including risks of construction delays or cost overruns that may increase
project costs, new project commencement risks such as receipt of zoning,
occupancy and other required governmental approvals and permits and the
incurrence of development costs in connection with projects that are not pursued
to completion. The fact that the Company must distribute 90% of its net taxable
income in order to maintain qualification as a REIT may limit the Company's
ability to rely upon rental payments from its properties or subsequently
acquired properties to finance acquisitions or new developments. As a result, if
debt or equity financing is not available on acceptable terms, further
acquisitions or development activities might be curtailed or cash available for
distribution would be adversely impaired.
The Company will compete for investment opportunities with certain entities
that may have substantially greater financial resources. The Company's ability
to compete successfully for such opportunities is affected by many factors,
including the cost to the Company of obtaining debt and equity capital at rates
comparable to or better than its competitors. Competition generally may reduce
the number of suitable investment opportunities available to the Company and
increase the bargaining power of property owners seeking to sell, thereby
impeding the implementation of the Company's business strategy.
THE COMPANY MAY JEOPARDIZE ITS REIT STATUS IF IT VIOLATES THE 10%
SECURITIES TEST OR THE 5% ASSET TEST BECAUSE OF THE VALUE OF THE KINDRED COMMON
STOCK.
The Company leases substantially all of its properties to Kindred and
Kindred is the primary source of the Company's rental revenues. Under the
Kindred Reorganization Plan, the Company received 1,498,500 shares of Kindred
common stock on April 20, 2001 as future rent. The Company sold 83,300 of those
shares of Kindred common stock on November 14, 2001 through an underwritten
offering, and distributed 334,886 shares of Kindred common stock as part of the
2001 dividend. Consequently, the Company currently owns 1,080,314 shares of
Kindred common stock. If the Company violated or violates the 10% securities
test, Kindred would be a related party tenant and consequently, the rents from
Kindred would not qualify as "rents from real property" under the Code. As a
result, the Company would lose its REIT status because the Company likely would
not be able to satisfy either the 75% or the 95% gross income test. See
"Business-- Federal Income Tax Considerations."
In addition, if the value of the Company's shares of Kindred common stock
exceeds 5% of the value of the Company's total assets at the end of the quarter
in which the Company received the Kindred common stock or at the end of any
subsequent quarter (except where such excess in subsequent quarters is caused by
value fluctuations of the Company's various investments and not by the
acquisition or disposition of assets) the Company would violate the 5% asset
test. Consequently, the Company would lose its REIT status unless it timely
cured the violation under the applicable provisions of the Code. There can be no
assurance that relief for such a violation would be available. See "Business--
Federal Income Tax Considerations."
THE COMPANY MAY NOT HAVE SUFFICIENT CASH OR OTHER LIQUID ASSETS TO MEET THE
90% DISTRIBUTION REQUIREMENT BECAUSE OF TIMING ISSUES AND OTHER CASH NEEDS AND
MAY THEREFORE NEED TO ENGAGE IN SPECIFIC TRANSACTIONS IN ORDER TO MAINTAIN ITS
REIT QUALIFICATION.
To comply with the 90% distribution requirement applicable to REITs and to
avoid the nondeductible excise tax, the Company must make distributions to its
stockholders. Although the Company anticipates that it generally will have
sufficient cash or liquid assets to enable it to satisfy the distribution
requirement, it is possible that from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 90% distribution requirement
or to distribute such greater amount as may be necessary to avoid income and
excise taxation. This may be due to the timing differences between the actual
receipt of income and actual payment of deductible expenses on the one hand and
the inclusion of that income and deduction of those expenses in arriving at the
Company's taxable income. In addition, nondeductible expenses such as principal
amortization or repayments or
33
capital expenditures in excess of noncash deductions may also cause the Company
to fail to have sufficient cash or liquid assets to enable it to satisfy the 90%
distribution requirement.
In the event that timing differences or other cash needs occur, the Company
may find it necessary to borrow funds, issue equity securities (although there
can be no assurance that the Company will be able to do so), pay taxable stock
dividends if possible, distribute other property or securities (including
Kindred common stock) or engage in a transaction intended to enable the Company
to meet the REIT distribution requirements. The terms of the Credit Agreement
restrict the Company's ability to engage in some of these transactions. In
addition, any of these transactions would likely require the consent of the
required lenders under the Credit Agreement. There can be no assurance that the
Company can obtain the consent of the required lenders. In addition, the failure
of Kindred to make rental payments under the Master Leases would impair
significantly the Company's ability to make distributions. The registration
requirements under the Securities Act, the rules and regulations of the New York
Stock Exchange and the Commission and other applicable laws, rules and
regulations also restrict the ability of the Company to engage in some of these
transactions. 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 continue to qualify as a REIT for the year
ending December 31, 2002 and subsequent years, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail, or
elect not, to continue to qualify as a REIT.
EVEN THOUGH ATRIA, INC. ("ATRIA") HAS ASSUMED AND AGREED TO REPAY
INDEBTEDNESS EVIDENCED BY BONDS THAT THE COMPANY ISSUED UNDER THE SPIN OFF OF
THE COMPANY'S ASSISTED LIVING OPERATIONS, THE COMPANY MAY STILL BE LIABLE FOR
THE INDEBTEDNESS IF ATRIA CANNOT OR DOES NOT HONOR ITS OBLIGATIONS.
The Company has issued bonds to residents of an assisted living facility
that is owned by the Company, and leased to and operated by Atria. Proceeds from
the bonds are paid to and utilized by Atria. The obligation to repay the bonds
is secured by a mortgage and trust indenture that encumbers (among other
property) the assisted living facility. Currently, based solely upon information
obtained from Atria, the bonds evidence an aggregate principal amount of
indebtedness of approximately $29.4 million. In connection with the Company's
spin off of its assisted living operations and related assets and liabilities to
Atria in 1996, Atria assumed and agreed to repay the indebtedness and to
indemnify and hold the Company harmless from and against all amounts the Company
may be obligated to pay under the mortgage and trust indenture, including the
obligation to repay the bonds. The Company may remain the primary obligor under
the bonds and the mortgage and trust indenture. If Atria is unable to or does
not satisfy these obligations, the Company may be liable for these obligations.
There can be no assurance that Atria will have sufficient means to enable it to
satisfy its obligations or will continue to honor those obligations under the
mortgage and trust indenture and the bonds. However, the Company believes that
Atria's failure to satisfy its obligations would, subject to any applicable
defenses available to Atria, allow the Company to terminate the lease between
Atria and the Company, repossesses the property, and exercise all other
available remedies under the lease between Atria and the Company. The Company's
payment or performance of these obligations could have a Material Adverse Effect
on the Company. The Company is currently engaged in efforts to have itself
released from liability under the bonds and the mortgage and trust indenture.
There can be no assurance that the Company will be successful in its attempts to
be released from this potential liability. A lawsuit is pending against the
Company wherein Atria is seeking, among other things, a declaration that Atria's
indemnity obligation in favor of the Company relative to the bonds is void and
unenforceable. See "Note 12--Litigation--Other Legal Proceedings" to the
Consolidated Financial Statements included in the Annual Report, which is
incorporated by reference herein.
AN UNPAID CREDITOR OR REPRESENTATIVE OF CREDITORS COULD BRING A LAWSUIT
AGAINST THE COMPANY ALLEGING FRAUDULENT CONVEYANCE OR AN UNLAWFUL DIVIDEND
REGARDING THE 1998 SPIN OFF AND A COURT COULD RULE THAT THE COMPANY HAD VIOLATED
FRAUDULENT CONVEYANCE LAWS.
The 1998 Spin Off, including the simultaneous distribution of the Kindred
common stock to its stockholders, could be subject to review under various
federal and state laws and could lead to claims being asserted against the
Company, directly or indirectly, alleging that the 1998 Spin Off involved a
fraudulent conveyance, an unlawful dividend, misrepresentation or other conduct
giving rise to liability on the part of the Company. If a court were to conclude
that the 1998 Spin Off was improper or otherwise violated applicable law, it
could, among other things, order that the holders of the stock return the value
of the stock and any dividends paid thereon and invalidate, in whole or in part,
the 1998 Spin Off. The Company believes that the Company and each of its
subsidiaries were generally solvent at the time of the 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. The Company also
believes that the 1998 Spin Off was consummated entirely in compliance with
Delaware law. There can be no assurance that a court would reach the same
conclusions.
34
THE COMPANY MAY STILL BE SUBJECT TO CORPORATE LEVEL TAXES.
Following the Company's REIT election, the Company is considered to be a
former C corporation for income tax purposes. Therefore, potentially, the
Company remains subject to corporate level taxes for any asset dispositions
occurring between January 1, 1999 and December 31, 2008. The Internal Revenue
Service is currently reviewing the Company's federal tax returns for tax years
ended December 31, 1997 and 1998 and may also review the Company's federal tax
returns for subsequent years. There can be no assurance as to the ultimate
outcome of these matters or whether that outcome will have a Material Adverse
Effect on the Company.
However, if there are any resulting tax liabilities for the tax years ended
December 31, 1997 and 1998, the Company intends to use the net operating loss
carryforwards, if any (including the NOL carryforwards that were utilized to
offset its federal income tax liability for 1999 and 2000) to satisfy those tax
liabilities. If the tax liabilities exceed the amount of NOL carryforwards, then
the Company will use the escrowed amounts under the Tax Refund Escrow Agreement
to satisfy the remaining tax liabilities. To the extent that NOL carryforwards
and escrowed amounts are not sufficient to satisfy the tax liabilities, Kindred
has indemnified the Company for specific tax liabilities and Kindred has assumed
these obligations under the Tax Refund Escrow Agreement. There can be no
assurance that the NOL carryforwards and the escrowed amounts will be sufficient
to satisfy these liabilities, that Kindred has any obligation to indemnify the
Company for particular tax liabilities, that Kindred will have sufficient
financial means to enable it to satisfy its indemnity obligations under the Tax
Refund Escrow Agreement or that Kindred will continue to honor its
indemnification obligations.
THE COMPANY'S RENTAL REVENUES MAY DECREASE IF THE TERMS OF THE LEASES ON
ITS FACILITIES EXPIRE AND THE COMPANY IS UNABLE EITHER TO LOCATE A SATISFACTORY
TENANT OR TO RELET THE FACILITIES ON THE SAME OR BETTER TERMS.
When the term of the leases on the Company's facilities expire, if the then
current tenants do not renew the lease or a renewal term does not exist, then
the Company will have to relet the facility to the tenant or locate a substitute
tenant. There can be no assurance that the Company will be able to locate a
satisfactory tenant for the facilities or that the Company will be able to relet
the facilities upon the same or better terms. If the Company is unable to locate
satisfactory tenants for the facilities as the leases expire or if the Company
is unable to lease the facilities on the same or better terms, then the
Company's rental revenues from the affected facilities will decrease.
ONE OF THE COMPANY'S INTEREST RATE SWAP AGREEMENTS MAY OBLIGATE THE COMPANY
TO POST COLLATERAL WHICH COULD NEGATIVELY IMPACT ITS LIQUIDITY AND ACCESS TO
FINANCING.
The terms of the Company's interest rate swap agreement entered into at the
time of the 1998 Spin Off (the "1998 Swap") requires that the Company make a
cash payment or otherwise post collateral to the other party to the 1998 Swap if
the fair value loss to the Company exceeds specified threshold levels. Under the
1998 Swap, if collateral must be posted, the amount of that collateral must
equal the difference between the fair value unrealized loss of the 1998 Swap at
the time of such determination and the threshold amount. The posting of
collateral under the 1998 Swap could negatively impact the Company's liquidity
and access to financing. There can be no assurance that the Company will have
sufficient assets, income and access to financing to enable it to post
collateral if required to do so under the 1998 Swap. Failure to post collateral
under the terms of the 1998 Swap could have a Material Adverse Effect on the
Company.
THE COMPANY HEDGES FLOATING-RATE DEBT WITH INTEREST RATE SWAPS AND MAY
RECORD CHARGES ASSOCIATED WITH THE TERMINATION OR CHANGE IN VALUE OF THESE
INTEREST SWAPS.
The Company has interest rate swaps that hedge interest payment obligations
on floating-rate debt. The Company periodically assesses its interest rate swaps
in relation to its outstanding balances of floating-rate debt, and based on such
assessments may terminate portions of its swaps or enter into additional swaps.
Termination of swaps with accrued losses, or changes in the value of swaps as a
result of falling interest rates, would result in charges to the Company's
earnings, which could be significant.
IF THE COMPANY OR ITS PROPERTIES BECOME INVOLVED IN ENVIRONMENTAL CLAIMS,
IT COULD INCUR SUBSTANTIAL LIABILITIES AND COSTS.
Under environmental laws and regulations, a current or former owner of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances at, under or disposed of in connection with such property, as
well as other costs relating to hazardous or toxic substances (including
government fines and damages for injuries to persons, natural resources and
adjacent property). Such laws and regulations often impose liability without
regard to whether the owner knew of, or was responsible for, the presence or
disposal of such substances
35
and may be imposed on the owner in connection with the activities of a current
or former operator of the property. While the Company is generally indemnified
by the operators of its properties for any environmental costs or liabilities
relating to conditions arising while they operate the facilities, this
indemnification may not be sufficient. See "Business--Environmental Regulation."
Item 2. Properties
The Company believes that it has a diversified portfolio of healthcare
facilities in terms of geography and the healthcare services provided at such
facilities. The Company believes that the geographic diversity of the properties
makes the portfolio less susceptible to adverse changes in state regulation and
regional economic downturns after consideration of the changes to the terms of
the Original Master Leases that were affected by the Master Leases. The
long-term acute care hospitals owned or ground leased by the Company primarily
provide long-term acute care to medically complex, chronically ill patients,
covering approximately 4,033 beds in 44 hospitals as of December 31, 2001. The
nursing facilities owned or ground leased by the Company are leading providers
of rehabilitation services, including physical, occupational and speech
therapies, and care for patients with Alzheimer's disease, covering
approximately 27,952 beds in 216 nursing facilities as of December 31, 2001. The
personal care facilities owned by the Company provide services including
supporting living services, neurorehabilitation, neurobehavioral management and
vocational programs, covering approximately 136 beds in eight centers as of
December 31, 2001.
The Company leases its corporate offices in Louisville, Kentucky.
The following tables set forth information for each of the Master Leases
and the facilities leased thereunder. The chart also includes under the heading
"Other Facilities" those properties under leases with non-Kindred lessees. The
Company and Ventas Realty granted mortgage liens on all of the properties
covered by Master Leases No. 1, 2, 3 and 4 and all of the "Other Facilities"
effective February 28, 2000 as security for the indebtedness under the Credit
Agreement. Ventas Finance granted mortgage liens on all of the properties
covered by the CMBS Master Lease effective December 12, 2001 as security for the
indebtedness under the CMBS Loan Agreement.
Number of Number of Number of
--------- --------- ---------
Number of Skilled Skilled Number of Personal
--------- ------- ------- --------- --------
Hospital Licensed Nursing Nursing Personal Care
-------- -------- ------- ------- -------- -----
Facilities Hospital Facilities Facility Care Facility
---------- -------- ---------- -------- ---- --------
("H") Beds ("SNF") Beds Facilities Beds
----- ---- ------- ---- ---------- ----
Master Lease 1 ................... 17 1,532 43 4,801 -- --
Master Lease 2 ................... 9 968 45 5,846 -- --
Master Lease 3 ................... 9 708 38 4,919 -- --
Master Lease 4 ................... 9 825 44 5,762 -- --
CMBS Master Lease(a) ............. -- -- 40 5,668 -- --
-- ----- --- ------- -- --
Total All Kindred Leases ......... 44 4,033 210 26,996
Other Leases ..................... -- -- 6 956 8 136
-- -- - ------- -- ---
Total All Leases ................. 44 4,033 216 27,952 8 136
== ===== === ====== == ===
(a) The 40 facilities presently covered by the CMBS Master Lease were
carved out of Master Lease 1. Master Lease 1 originally contained 100 facilities
and now contains 60 facilities.
MASTER LEASE NO. 1
Facility
--------
Facility Name City State Type
- ------------- ------------------------ ------ ----
Kindred Hospital--Phoenix ............................. Phoenix AZ H
Valley Healthcare & Rehabilitation Center ............. Tucson AZ SNF
Sonoran Rehabilitation & Care Center .................. Phoenix AZ SNF
Kindred Hospital--San Leandro ......................... San Leandro CA H
Kindred Hospital--Orange County ....................... Westminster CA H
Kindred Hospital--San Diego ........................... San Diego CA H
Recovery Inn of Menlo Park ............................ Menlo Park CA H
La Veta Healthcare Center (a) ......................... Orange CA SNF
Bay View Nursing & Rehabilitation Center .............. Alameda CA SNF
Aurora Care Center .................................... Aurora CO SNF
Andrew House Healthcare ............................... New Britain CT SNF
Nutmeg Pavilion Healthcare ............................ New London CT SNF
Kindred Hospital--Coral Gables ........................ Coral Gables FL H
Kindred Hospital--North Florida ....................... Green Cove Spr. FL H
36
East Manor Medical Care Center ........................ Sarasota FL SNF
Cascade Care Center ................................... Caldwell ID SNF
Mountain Valley Care and Rehabilitation ............... Kellogg ID SNF
Kindred Hospital--Chicago North ....................... Chicago IL H
Kindred Hospital--Northlake ........................... Northlake IL H
Kindred Hospital--LaGrange ............................ LaGrange IN H
Kindred Hospital--Indianapolis ........................ Indianapolis IN H
Westview Nursing & Rehabilitation Center .............. Bedford IN SNF
Kindred Hospital--Louisville .......................... Louisville KY H
Lexington Centre for Health & Rehabilitation .......... Lexington KY SNF
Northfield Centre for Health & Rehabilitation ......... Louisville KY SNF
Laurel Ridge Rehabilitation & Nursing Center .......... Jamaica Plain MA SNF
Country Manor Rehabilitation & Nursing Center ......... Newburyport MA SNF
Hammersmith House Nursing Care Center ................. Saugus MA SNF
Timberlyn Heights Nursing & Alz. Center ............... Great Barrington MA SNF
Briarwood Health Care Nursing Ctr ..................... Needham MA SNF
West Roxbury Manor .................................... West Roxbury MA SNF
Colony House Nursing & Rehabilitation Center .......... Abington MA SNF
Harrington House Nursing & Rehabilitation Center ...... Walpole MA SNF
Norway Rehabilitation & Living Center ................. Norway ME SNF
Shore Village Rehabilitation & Nursing Center ......... Rockland ME SNF
Brentwood Rehabilitation & Nursing Center ............. Yarmouth ME SNF
Fieldcrest Manor Nursing Home ......................... Waldoboro ME SNF
Kindred Hospital--Minneapolis ......................... Golden Valley MN H
Kindred Hospital--St. Louis ........................... St. Louis MO H
Park Place Health Care Center ......................... Great Falls MT SNF
Parkview Acres Care & Rehabilitation Center ........... Dillon MT SNF
Silas Creek Manor ..................................... Winston-Salem NC SNF
Chapel Hill Rehabilitation & Healthcare Center ........ Chapel Hill NC SNF
Las Vegas Healthcare & Rehabilitation Center .......... Las Vegas NV SNF
Minerva Park Nursing & Rehabilitation Center .......... Columbus OH SNF
Lebanon Country Manor ................................. Lebanon OH SNF
Kindred Hospital--Oklahoma City ....................... Oklahoma City OK H
Sunnyside Care Center ................................. Salem OR SNF
Kindred Hospital--Pittsburgh .......................... Oakdale A H
Kindred Hospital--Chattanooga ......................... Chattanooga N H
Madison Healthcare & Rehabilitation Center ............ Madison TN SNF
Wasatch Care Center ................................... Ogden UT SNF
Arden Rehabilitation & Healthcare Ctr ................. Seattle WA SNF
Northwest Continuum Care Center ....................... Longview WA SNF
Heritage Health & Rehabilitation Center ............... Vancouver WA SNF
Queen Anne Healthcare ................................. Seattle WA SNF
Colony Oaks Care Center ............................... Appleton WI SNF
North Ridge Med. & Rehabilitation Center .............. Manitowoc WI SNF
Family Heritage Med. & Rehabilitation Center .......... Wisconsin Rapids WI SNF
Mountain Towers Healthcare & Rehabilitation ........... Cheyenne WY SNF
MASTER LEASE NO. 2
Facility
--------
Facility Name City State Type
- ------------- ------------------------ ------ ----
Rehabilitation & Healthcare Center of Birmingham (a)... Birmingham AL SNF
Desert Life Rehabilitation & Care Center .............. Tucson AZ SNF
Kindred Hospital--Ontario ............................. Ontario CA H
Magnolia Gardens Care Center .......................... Burlingame CA SNF
Maywood Acres Healthcare Center ....................... Oxnard CA SNF
Cherry Hills Health Care Center ....................... Englewood CO SNF
Hamilton Rehabilitation & Healthcare Center ........... Norwich CT SNF
Homestead Health Center ............................... Stamford CT SNF
Kindred Hospital--St. Petersburg ...................... St. Petersburg FL H
Kindred Hospital--Central Tampa ....................... Tampa FL H
Titusville Rehabilitation & Nursing Center ............ Titusville FL SNF
37
Bay Pointe Nursing Pavilion ........................... St. Petersburg FL SNF
Rehabilitation & Healthcare Center of Tampa ........... Tampa FL SNF
Rehabilitation & Health Center of Cape Coral .......... Cape Coral FL SNF
Casa Mora Rehabilitation & Ext Care (a) ............... Bradenton FL SNF
Lafayette Nursing & Rehabilitation Center ............. Fayetteville GA SNF
Hillcrest Rehabilitation Care Center .................. Boise ID SNF
Nampa Care Center ..................................... Nampa ID SNF
Weiser Rehabilitation and Care Center ................. Weiser ID SNF
Kindred Hospital--Sycamore ............................ Sycamore IL H
Rolling Hills Health Care Center ...................... New Albany IN SNF
Windsor Estates Health & Rehabilitation Ctr ........... Kokomo IN SNF
Parkwood Health Care Center ........................... Lebanon IN SNF
Columbus Health & Rehabilitation Center ............... Columbus IN SNF
Oakview Nursing & Rehabilitation Center ............... Calvert City KY SNF
Maple Manor Healthcare Center ......................... Greenville KY SNF
Crawford Skilled Nursing & Rehabilitation Center ...... Fall River MA SNF
Hallmark Nursing & Rehabilitation Center .............. New Bedford MA SNF
Hillcrest Nursing Home ................................ Fitchburg MA SNF
Country Gardens Sk. Nursing & Rehabilitation .......... Swansea MA SNF
Franklin Sk. Nursing & Rehabilitation Center .......... Franklin MA SNF
Eastside Rehabilitation and Living Center ............. Bangor ME SNF
Kennebunk Nursing Center .............................. Kennebunk ME SNF
Kindred Hospital--Metro Detroit ....................... Detroit MI H
Kindred Hospital--Kansas City ......................... Kansas City MO H
LaSalle Healthcare Center ............................. Durham NC SNF
Guardian Care of Henderson ............................ Henderson NC SNF
Guardian Care of Kinston .............................. Kinston NC SNF
Guardian Care of Elizabeth City ....................... Elizabeth City NC SNF
Greenbriar Terrace Healthcare (a) ..................... Nashua NH SNF
Torrey Pines Care Center .............................. Las Vegas NV SNF
West Lafayette Rehabilitation & Nursing Ctr ........... West Lafayette OH SNF
Cambridge Health & Rehabilitation Center .............. Cambridge OH SNF
Health Havens Nursing & Rehabilitation Center ......... E. Providence RI SNF
Primacy Healthcare & Rehabilitation Center ............ Memphis TN SNF
Kindred Hospital--Ft. Worth Southwest ................. Ft. Worth TX H
Kindred Hospital--Houston Northwest ................... Houston TX H
Kindred Hospital--Ft. Worth West ...................... Ft. Worth TX H
Wasatch Valley Rehabilitation ......................... Salt Lake City UT SNF
Harbour Pointe Med. & Rehabilitation Ctr .............. Norfolk VA SNF
Bay Pointe Medical & Rehabilitation Centre ............ Virginia Beach VA SNF
Lakewood Healthcare Center ............................ Lakewood WA SNF
San Luis Medical & Rehabilitation Center .............. Greenbay WI SNF
Colonial Manor Medical & Rehabilitation Center ........ Wausau WI SNF
MASTER LEASE NO. 3
Facility
--------
Facility Name City State Type
- ------------- ------------------------ ------ ----
Rehabilitation & Healthcare Center of Mobile (a) ...... Mobile AL SNF
Villa Campana Health Center ........................... Tucson AZ SNF
THC--Orange County .................................... Brea CA H
Californian Care Center ............................... Bakersfield CA SNF
Alta Vista Healthcare Center .......................... Riverside CA SNF
Brighton Care Center .................................. Brighton CO SNF
Camelot Nursing & Rehabilitation Center ............... New London CT SNF
Parkway Pavilion Healthcare ........................... Enfield CT SNF
Kindred Hospital--Hollywood ........................... Hollywood FL H
Healthcare & Rehabilitation Ctr of Sanford ............ Sanford FL SNF
Carrollwood Care Center ............................... Tampa FL SNF
Windsor Woods Convalescent Center ..................... Hudson FL SNF
Highland Pines Rehabilitation Center .................. Clearwater FL SNF
Savannah Rehabilitation & Nursing Center .............. Savannah GA SNF
Specialty Care of Marietta ............................ Marietta GA SNF
38
Emmett Rehabilitation and Healthcare .................. Emmett ID SNF
Meadowvale Health & Rehabilitation Center ............. Bluffton IN SNF
Wedgewood Healthcare Center ........................... Clarksville IN SNF
Cedars of Lebanon Nursing Center ...................... Lebanon KY SNF
Riverside Manor Health Care ........................... Calhoun KY SNF
Danville Centre for Health & Rehabilitation ........... Danville KY SNF
Kindred Hosp--Boston Northshore ....................... Peabody MA H
Kindred Hospital--Boston .............................. Boston MA H
Presentation Nursing & Rehabilitation Center .......... Brighton MA SNF
Sachem Nursing & Rehabilitation Center ................ East Bridgewater MA SNF
Newton and Wellesley Alzheimer Center ................. Wellesley MA SNF
River Terrace ......................................... Lancaster MA SNF
Augusta Rehabilitation Center ......................... Augusta ME SNF
Brewer Rehabilitation & Living Center ................. Brewer ME SNF
Westgate Manor ........................................ Bangor ME SNF
Kindred Hospital--Detroit ............................. Lincoln Park MI H
Kindred Hospital--Greensboro .......................... Greensboro NC H
Pettigrew Rehabilitation & Healthcare Center .......... Durham NC SNF
Raleigh Rehabilitation & Healthcare Center ............ Raleigh NC SNF
Lincoln Nursing Center (a) ............................ Lincolnton NC SNF
Guardian Care of Zebulon .............................. Zebulon NC SNF
THC--Las Vegas Hospital ............................... Las Vegas NV H
Medford Rehab & Healthcare Centre ..................... Medford OR SNF
Wyomissing Nursing & Rehabilitation Center ............ Reading PA SNF
Cordova Rehabilitation & Nursing Center ............... Cordova TN SNF
Kindred Hospital--San Antonio ......................... San Antonio TX H
Kindred Hospital--Mansfield ........................... Mansfield TX H
Crosslands Rehabilitation & Health Care Ctr ........... Sandy UT SNF
Edmonds Rehabilitation & Healthcare Center ............ Edmonds WA SNF
Vallhaven Care Center ................................. Neenah WI SNF
Mt. Carmel Medical & Rehabilitation Center ............ Burlington WI SNF
Mt. Carmel Medical & Rehabilitation Center ............ Milwaukee WI SNF
MASTER LEASE NO. 4
Facility
--------
Facility Name City State Type
- ------------- ------------------------ ------ ----
Rehabilitation & Healthc. Center of Huntsville ........ Huntsville AL SNF
Kindred Hospital--Tucson .............................. Tucson AZ H
Kachina Point Health Care & Rehabilitation ............ Sedona AZ SNF
Valley Gardens HC & Rehabilitation .................... Stockton CA SNF
Village Square Nursing & Rehabilitation Center ........ San Marcos CA SNF
Kindred Hospital--Denver .............................. Denver CO H
Castle Garden Care Center ............................. Northglenn CO SNF
Windsor Rehabilitation & Healthcare Center ............ Windsor CT SNF
Courtland Gardens Health Center, Inc. ................. Stamford CT SNF
Kindred Hospital--Ft. Lauderdale ...................... Ft. Lauderdale FL H
Colonial Oaks Rehabilitation Center--Ft. Myers ........ Ft. Meyers FL SNF
Evergreen Woods Health & Rehabilitation ............... Springhill FL SNF
North Broward Rehabilitation & Nursing Center ......... Pompano Beach FL SNF
Pompano Rehabilitation/Nursing Center ................. Pompano Beach FL SNF
Abbey Rehabilitation & Nsg. Center .................... St. Petersburg FL SNF
Tucker Nursing Center ................................. Tucker GA SNF
Moscow Care Center .................................... Moscow ID SNF
Kindred Hospital--Lake Shore .......................... Chicago IL H
Valley View Health Care Center ........................ Elkhart IN SNF
Wildwood Healthcare Center ............................ Indianapolis IN SNF
Bremen Health Care Center ............................. Bremen IN SNF
Rosewood Healthcare Center ............................ Bowling Green KY SNF
Hillcrest Health Care Center .......................... Owensboro KY SNF
Woodland Terrace Health Care Fac. ..................... Elizabethtown KY SNF
Harrodsburg Health Care Center ........................ Harrodsburg KY SNF
39
Kindred Hospital--New Orleans ......................... New Orleans LA H
Brigham Manor Nursing & Rehabilitation Ctr ............ Newburyport MA SNF
Oakwood Rehabilitation & Nursing Center ............... Webster MA SNF
Star of David Nursing & Rehabilitation/Alz Center ..... West Roxbury MA SNF
Brittany Healthcare Center ............................ Natick MA SNF
Den-Mar Rehabilitation & Nursing Center (a) ........... Rockport MA SNF
Embassy House Sk. Nursing & Rehabilitation ............ Brockton MA SNF
Great Barrington Rehabilitation & Nursing Center ...... Great Barrington MA SNF
Winship Green Nursing Center .......................... Bath ME SNF
Rose Manor Health Care Center ......................... Durham NC SNF
Guardian Care of Rocky Mount. (a) ..................... Rocky Mount NC SNF
Homestead Health Care & Rehabilitation Ctr ............ Lincoln NE SNF
Kindred Hospital--Albuquerque (a) ..................... Albuquerque NM H
Chillicothe Nursing & Rehabilitation Center ........... Chillicothe OH SNF
Pickerington Nursing & Rehabilitation Center .......... Pickerington OH SNF
Logan Health Care Center .............................. Logan OH SNF
Bridgepark Center for Rehabilitation & Nursing Sv. .... Akron OH SNF
Kindred Hospital--Philadelphia ........................ Philadelphia PA H
Oak Hill Nursing & Rehabilitation Center .............. Pawtucket RI SNF
Kindred Hospital--Houston (a) ......................... Houston TX H
San Pedro Manor ....................................... San Antonio TX SNF
Kindred Hospital--Arlington, VA ....................... Arlington VA H
Birchwood Terrace Healthcare (a) ...................... Burlington VT SNF
Bellingham Health Care & Rehabilitation Svc ........... Bellingham WA SNF
Eastview Medical & Rehabilitation Center .............. Antigo WI SNF
Kennedy Park Medical & Rehabilitation Center .......... Schofield WI SNF
South Central Wyoming HC. & Rehabilitation ............ Rawlins WY SNF
Kindred Corydon ....................................... Corydon IN SNF
(a) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of the ground lease, the improvements revert to
the landlord.
CMBS MASTER LEASE
Facility Name City State Facility Type
- ------------- ------------------------ ------ -------------
Canyonwood Nursing & Rehab. Ctr. Redding CA SNF
Muncie Health Care & Rehab. Muncie IN SNF
Winchester Centre for Health/Rehab. Winchester KY SNF
Wind River Healthcare & Rehab. Ctr. Riverton WY SNF
Guardian Care of Roanoke Rapids Roanoke Rapids NC SNF
Coshocton Health & Rehab. Ctr. Coshocton OH SNF
Lewiston Rehabilitation & Care Ctr. Lewiston ID SNF
St. George Care and Rehab. Center St. George UT SNF
Vancouver Healthcare & Rehab. Ctr. Vancouver WA SNF
Nob Hill Healthcare Center San Francisco CA SNF
Lawton Healthcare Center San Francisco CA SNF
Southwood Health & Rehab Center Terre Haute IN SNF
Columbia Healthcare Facility Evansville IN SNF
Blue Hills Alzheimers Care Center Stoughton MA SNF
Quincy Rehab. & Nursing Center Quincy MA SNF
Eagle Pond Rehab. & Living Center South Dennis MA SNF
Blueberry Hill Healthcare Beverly MA SNF
Walden Rehab. & Nursing Center Concord MA SNF
Sunnybrook & HC Rehab Spec. Raleigh NC SNF
Cypress Pointe Rehab & HC Center Wilmington NC SNF
Winston-Salem Rehab & HC Center Winston-Salem NC SNF
Rehab. & Nursing Center of Monroe Monroe NC SNF
Hanover Terrace Healthcare Hanover NH SNF
Franklin Woods Health Care Center Columbus OH SNF
Winchester Place Nsg. & Rehab. Ctr. Canal Winchester OH SNF
Masters Health Care Center Algood TN SNF
40
Nansemond Pointe Rehab. & HC Ctr. ..................... Suffolk VA SNF
River Pointe Rehab. & Healthc. Ctr. ................... Virginia Beach VA SNF
Rainier Vista Care Center ............................. Puyallup WA SNF
Savannah Specialty Care Center ........................ Savannah GA SNF
Sheridan Medical Complex .............................. Kenosha WI SNF
Woodstock Health & Rehab. Center ...................... Kenosha WI SNF
Royal Oaks Healthcare & Rehab Ctr. .................... Terre Haute IN SNF
Westridge Healthcare Center ........................... Marlborough MA SNF
Bolton Manor Nursing Home ............................. Marlborough MA SNF
Blue Ridge Rehab. & Healthcare Ctr. ................... Asheville NC SNF
Rehab. & Health Center of Gastonia .................... Gastonia NC SNF
Dover Rehab. & Living Center .......................... Dover NH SNF
Federal Heights Rehab. & Nsg. Ctr. .................... Salt Lake City UT SNF
Sage View Care Center ................................. Rock Springs WY SNF
OTHER FACILITIES
Facility Name City State Facility Type
- ------------- ------------------------ ------ -------------
Birchwood Care Center ................................. Marne MI SNF
Clara Barton Terrace .................................. Flint MI SNF
Autumnwood Manor ...................................... Lansing MI SNF
Bear Creek Rehabilitation Center ...................... Rochester MN SNF
Shadow Mountain Convalescent Center ................... Las Vegas NV SNF
Marietta Convalescent Center .......................... Marietta OH SNF
Tangram--8 sites ...................................... San Marcos TX Personal Care
Item 3. Legal Proceedings
Reference is made to "Note 12--Litigation" to the Consolidated Financial
Statements included in the Annual Report, which is incorporated by reference
herein.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
41
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by this Item is incorporated by reference from
page 18 of the Annual Report.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference from
page 17 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is incorporated by reference from
pages 19 to 29 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is incorporated by reference from
pages 24 to 27 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements
included on pages 30 through 56 of the Annual Report are incorporated by
reference herein. Quarterly Results of Operations on page 56 of the Annual
Report is incorporated by reference herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
42
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items is incorporated by reference from
the Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 14, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(1) The following consolidated financial statements of the Company, included in
the Annual Report, are incorporated by reference in Part II, Item 8 of this
Report:
Consolidated Balance Sheets--December 31, 2001 and 2000;
Consolidated Statement of Operations--For the Years ended December 31,
2001, 2000, and 1999; Consolidated Statements of Shareholders'
Equity--For the years ended December 31, 2001, 2000 and 1999;
Consolidated Statements of Cash Flows--For the Years ended December 31,
2001, 2000, and 1999; and Notes to the Consolidated Financial
Statements--December 31, 2001
(2) The following consolidated financial statement schedule is filed as part of
this report beginning on page S-1.
Schedule III--Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits:
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
3.1.1(a) Certificate of Incorporation of the Company, as amended.
3.1.2(b) Certificate of Amendment to Certificate of Incorporation of
the Company.
3.2(c) Third Amended and Restated Bylaws of the Company.
4.1(d) Specimen Common Stock Certificate.
4.2.1(e) Loan and Security Agreement, dated as of December 12, 2001,
between Ventas Finance I, LLC, as Borrower, and Merrill
Lynch Mortgage Lending, Inc., as Lender.
4.2.2(f) Form of Assignment of Leases and Rents, dated as of
December 12, 2001, by Ventas Finance I, LLC, as Assignor,
to Merrill Lynch Mortgage Lending, Inc., as Assignee.
4.2.3(g) Form of Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing, dated as of December
12, 2001, by Ventas Finance I, LLC, as Trustor, to first
American Title Insurance Company, as Trustee, for the
benefit of Merrill Lynch Mortgage Lending, Inc., as
Beneficiary.
4.2.4(h) Form of Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of December 12,
2001, by Ventas Finance I, LLC, as Mortgagor, to Merrill
Lynch Mortgage Lending, Inc., as Mortgagee.
4.2.5(i) Letter Agreement, dated December 12, 2001, from Merrill
Lynch Mortgage Lending, Inc. to the Company and Ventas
Finance I, LLC, regarding the use of certain insurance
proceeds received in connection with a casualty to a
collateral property under the Loan and Security Agreement.
43
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
4.2.6(j) Letter Agreement, dated as of December 12, 2001, from
Merrill Lynch Mortgage Lending, Inc. to JP Morgan Chase
Bank, as Senior Collateral Agent and Junior Collateral
Agent under various credit agreements with Kindred
Healthcare, Inc., and Ventas Finance I, LLC, as Landlord,
concerning various notice requirements regarding the
collateral property under the Loan and Security Agreement.
4.2.7(k) Letter Agreement, dated as of December 12, 2001, from
Merrill Lynch Mortgage Lending, Inc. to Ventas Realty,
Limited Partnership and Ventas Finance I, LLC concerning
various rent reset rights under the Master Lease Agreement
among Ventas Finance I, LLC, as Landlord, and Kindred
Healthcare, Inc. and Kindred Healthcare Operating, Inc., as
Tenants.
4.2.8(l) Collateral Assignment of Interest Rate Protection Agreement,
dated as of December 12, 2001, by Ventas Finance I, LLC, as
Assignor, to Merrill Lynch Mortgage Lending, Inc., as
Assignee.
4.2.9(m) Mortgage Loan Purchase Agreement, dated as of December 12,
2001, between Ventas Specialty I, LLC, as Purchaser, and
Merrill Lynch Mortgage Lending, Inc., as Seller.
4.2.10(n) Promissory Note, dated as of December 12, 2001, from Ventas
Finance I, LLC as Borrower, to Merrill Lynch Mortgage
Lending, Inc., as Lender.
4.2.11(o) Form of Subordination, Non-Disturbance and Attornment
Agreement, dated as of December 12, 2001, by and among
Kindred Healthcare, Inc. and Kindred Healthcare Operating,
Inc., as Tenant, Ventas Finance I, LLC, as Landlord, and
Merrill Lynch Mortgage Lending, Inc., as Lender.
4.2.12(p) Trust and Servicing Agreement, dated as of December 12,
2001, among Ventas Specialty I, LLC, as Depositor, First
Union National Bank, as Servicer and Special Servicer,
LaSalle Bank National Association, as Trustee and as Tax
Administrator, and ABN Amro Bank N.V., as Fiscal Agent.
4.2.13(q) Cash Management Agreement, dated as of December 12, 2001,
among Ventas Finance I, LLC, as Borrower, Merrill Lynch
Mortgage Lending, Inc., as Lender, and First Union National
Bank, as Agent.
4.2.14(r) Environmental Indemnity Agreement, dated as of December 12,
2001, by Ventas Finance I, LLC, as Borrower, and the
Company, as Guarantor, in favor of Merrill Lynch Mortgage
Lending, Inc., as Lender.
4.2.15(s) Exceptions to Non-recourse Guaranty, dated as of December
12, 2001, by the Company, as Guarantor, for the benefit of
Merrill Lynch Mortgage Lending, Inc., as Lender.
4.2.16(t) Certificate Purchase Agreement, dated as of December 4,
2001, by Ventas Specialty I, LLC and the Company to Merrill
Lynch Pierce, Fenner & Smith Incorporated and Morgan Stanley
& Co. Incorporated.
4.2.17 Schedule of Agreements Substantially Identical in all
Material Respects to Agreements filed as Exhibits 4.2.2,
4.2.3, 4.2.4 and 4.2.11 to this filing, pursuant to
Instruction 2 to Item 601 of Regulation S-K.
4.3.1(u) Amended and Restated Credit, Security, Guaranty and Pledge
Agreement, by and among Ventas Realty, Limited Partnership,
a Delaware limited partnership, as borrower thereunder, each
of the Company and Ventas LP Realty, L.L.C., a Delaware
limited liability company, as Guarantors, each of the
Lenders therein named, Bank of America, N.A., as
Administrative Agent, and Morgan Guaranty Trust Company of
New York, as Documentation Agent, dated as of January 31,
2000.
4.3.2(v) Amendment and Waiver, dated as of December 20, 2000, to the
Credit Agreement, among Ventas Realty, Limited Partnership,
as Borrower, the Guarantors referred to in the Credit
Agreement, Bank of America, N.A., as Lender, Issuing Bank
and as Administrative Agent for the Lenders under the Credit
Agreement, Morgan Guaranty Trust Company of New York, as a
Lender and as Documentation Agent for the Lenders under the
Credit Agreement, and the Consenting Lenders.
44
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
4.3.3(w) Amendment No. 2 and Waiver, dated as of September 26, 2001,
to the Credit Agreement, among Ventas Realty, Limited
Partnership, as Borrower, the Guarantors referred to in the
Credit Agreement, Bank of America, N.A., as Lender, Issuing
Bank and Administrative Agent for the Lenders under the
Credit Agreement, Morgan Guaranty Trust Company of New York,
as a Lender and as Documentation Agent for Lenders under the
Credit Agreement, and the Consenting Lenders.
4.3.4(x) Assignment of Leases and Rents, dated as of January 31,
2000, from Ventas Realty, Limited Partnership, Assignor, to
Bank of America, N.A., as Administrative Agent, Assignee,
with respect to Facility no. 111 located at Rolling Hills
Health Care Center, 36255 St. Joseph Road, New Albany,
Indiana (Floyd County).
4.3.5(y) Mortgage, Open End Mortgage, Deed of Trust, Trust Deed, Deed
to Secure Debt, Credit Line Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Financing
Statement, dated as of January 31, 2000, between Ventas
Realty, Limited Partnership, Mortgagor/Trustor/Grantor/
Debtor, to Bank of America, N.A., as Administrative Agent,
Mortgagee/Beneficiary/Grantee/Secured Party, with respect to
Facility no. 111 located at Rolling Hills Health Care
Center, 36255 St. Joseph Road, New Albany, Indiana (Floyd
County).
4.3.6(z) Schedule of Agreements Substantially Identical in all
Material Respects to Agreements filed as Exhibits 4.3.4 and
4.3.5 to this filing, pursuant to Instruction 2 to Item 601
of Regulation S-K.
4.4.1(aa) Rights Agreement, dated as of July 20, 1993, between the
Company and National City Bank, as Rights Agent.
4.4.2(bb) First Amendment to Rights Agreement, dated as of August 11,
1995, between the Company and National City Bank, as Rights
Agent.
4.4.3(cc) Second Amendment to Rights Agreement, dated February 1,
1998, between the Company and National City Bank, as Rights
Agent.
4.4.4(dd) Third Amendment to Rights Agreement, dated July 27, 1998,
between the Company and National City Bank, as Rights Agent.
4.4.5(ee) Fourth Amendment to Rights Agreement, dated as of April 15,
1999, between the Company and National City Bank, as Rights
Agent.
4.4.6(ff) Fifth Amendment to Rights Agreement, dated as of December
15, 1999, between the Company and National City Bank, as
Rights Agent.
4.4.7(gg) Sixth Amendment to Rights Agreement, dated as of May 22,
2000, between the Company and National City Bank, as Rights
Agent.
4.5(hh) Ventas, Inc. Distribution Reinvestment and Stock Purchase
Plan.
4.6(ii) Letter Agreement relating to a waiver of the provisions of
Article XII of the Certificate of Incorporation of the
Company in favor of the Baupost Group, LLC, dated February
28, 2001.
4.7(jj) Letter Agreement relating to a waiver of the provisions of
Article XII of the Certificate of Incorporation of the
Company in favor of Cohen & Steers Capital Management, Inc.,
dated May 8, 2000.
4.8 Letter Agreement relating to a waiver of the provisions of
Article XII of the Certificate of Incorporation of the
Company in favor of Cohen & Steers Management, Inc., dated
February 25, 2002.
4.9(kk) Letter Agreement relating to a waiver of the provisions of
Article XII of the Certificate of Incorporation of the
Company in favor of Cramer Rosenthal & McGlynn, LLC, Inc.,
dated February 14, 2001.
45
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
10.1(ll)* Directors and Officers Insurance and Company Reimbursement
Policies.
10.2(mm)* Form of Ventas, Inc. Promissory Note.
10.3(nn)* Amendment to Promissory Note entered into as of December 31,
1998 by and between Ventas Realty, Limited Partnership and
W. Bruce Lunsford.
10.4.1 Agreement and Plan of Reorganization by and between the
Company and Kindred Healthcare, Inc., dated as of April 30,
1998.
10.4.2 Distribution Agreement by and between Kindred Healthcare,
Inc. and the Company, dated as of April 30, 1998.
10.4.3.1(oo) Tax Allocation Agreement, dated as of April 30, 1998, by and
between the Company and Kindred Healthcare, Inc.
10.4.3.2(pp) Tax Refund Escrow Agreement and First Amendment of the Tax
Allocation Agreement, dated as of April 20, 2001, by and
between Kindred Healthcare, Inc., on behalf of itself and
each of its subsidiaries, and the Company, on behalf of
itself and each of Ventas Realty, Limited Partnership and
Ventas LP, Realty, L.L.C.
10.4.3.3 Cash Escrow Agreement, dated as of April 20, 2001, by and
among Kindred Healthcare, Inc., the Company and State Street
Bank and Trust Company.
10.4.4(qq) Agreement of Indemnity--Third Party Leases, dated April 30,
1998, by and between Kindred Healthcare, Inc. and its
subsidiaries and the Company.
10.4.5(rr) Agreement of Indemnity--Third Party Contracts, dated
April 30, 1998, by and between Kindred Healthcare, Inc. and
its subsidiaries and the Company.
10.5.1(ss) Amended and Restated Master Lease Agreement No. 1, dated as
of April 20, 2001, for lease executed by Ventas Realty,
Limited Partnership, as Lessor, and Kindred Healthcare, Inc.
and Kindred Operating, Inc., as Tenant.
10.5.2(tt) Schedule of Agreements Substantially Identical in all
Material Respects to the Agreement filed as Exhibit 10.5.1
to this filing, pursuant to Instruction 2 to Item 601 of
Regulation S-K.
10.5.1(uu) Lease Severance and Amendment Agreement, dated as of
December 12, 2001, by and among Kindred Healthcare, Inc., as
Tenant, Kindred Healthcare Operating, Inc., as Operator and
Tenant, and Ventas Realty, Limited Partnership, as Lessor.
10.5.2(vv) Master Lease Agreement, dated as of December 12, 2001, by
and among Ventas Realty, Limited Partnership, as Lessor, and
Kindred Healthcare, Inc., and Kindred Healthcare Operating,
Inc., as Tenants.
10.6.1(ww)* Form of Employment Agreement, dated as of July 31, 1998,
between the Company and each of W. Bruce Lunsford and Thomas
T. Ladt.
10.6.2(xx)* Amendment to Employment Agreement entered into as of
December 31, 1998 by and between the Company and W. Bruce
Lunsford.
10.7(yy)* Separation and Release Agreement, dated February 29, 2000,
between the Company and Steven T. Downey.
10.8(zz)* Employment Agreement, dated as of July 31, 1998, between the
Company and T. Richard Riney.
10.9(aaa)* Employment Agreement, dated as of January 13, 1999, between
the Company and John Thompson.
10.10.1(bbb)* 1987 Non-Employee Directors Stock Option Plan.
46
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
10.10.2(ccc)* Amendment to the 1987 Non-Employee Directors Stock Option
Plan, dated April 30, 1998.
10.11.1(ddd)* 1987 Incentive Compensation Program.
10.11.2(eee)* Amendment to the 1987 Incentive Compensation Program, dated
May 15, 1991.
10.11.3(fff)* Amendment to the 1987 Incentive Compensation Program, dated
May 18, 1994.
10.11.4(ggg)* Amendment to the 1987 Incentive Compensation Program, dated
February 15, 1995.
10.11.5(hhh)* Amendment to the 1987 Incentive Compensation Program, dated
September 27, 1995.
10.11.6(iii)* Amendment to the 1987 Incentive Compensation Program, dated
May 15, 1996.
10.11.7(jjj)* Amendment to 1987 Incentive Compensation Program, dated
April 30, 1998.
10.11.8(kkk)* Amendment to the 1987 Incentive Compensation Program, dated
December 31, 1998.
10.12(lll)* Ventas, Inc. 2000 Incentive Compensation Plan.
10.13(mmm)* Ventas, Inc. 2000 Stock Option Plan for Directors.
10.14(nnn)* TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan.
10.15(ooo)* Ventas, Inc. Common Stock Purchase Plan for Directors.
10.16.1(ppp)* Form of Ventas, Inc., formerly known as Vencor, Inc.,
Change-in-Control Severance Agreement.
10.16.2(qqq)* Amendment No. 1 to Change-in-Control Severance Agreement
entered into as November 19, 1997 between the Company and W.
Bruce Lunsford.
10.16.3(rrr)* Amendment No. 2 to Change-in-Control Severance Agreement
entered into as of December 31, 1998 by and between the
Company and W. Bruce Lunsford.
10.16.4(sss)* Form of Amendment to Change-in-Control Severance Agreement,
dated as of September 30, 1999, between the Company and each
of Steven T. Downey, T. Richard Riney and John C. Thompson.
10.17(ttt) Form of Indemnification Agreement for directors of TheraTx.
10.18(uuu) Form of Assignment and Assumption of Lease Agreement between
Hillhaven and certain subsidiaries, on the one hand, and
Tenet and certain subsidiaries on the other hand, together
with the related Guaranty by Hillhaven, dated on or prior to
January 31, 1990.
10.19(vvv) Amended and Restated Guarantee Reimbursement Agreement,
dated as of April 28, 1998, among Kindred, Inc., Kindred
Healthcare, Inc. and Tenet Healthcare Corporation, Inc.
10.20(www)* Employment Agreement, dated March 5, 1999, between the
Company and Debra A. Cafaro.
10.21(xxx)* Form of Amendment to Employment Agreement, dated as of
September 30, 1999, between the Company and each of Steven
T. Downey, T. Richard Riney and John C. Thompson.
10.22(yyy) First Amended and Restated Agreement of Limited Partnership,
executed and delivered by the Company and Ventas LP Realty,
L.L.C., dated as of January 31, 2000.
10.23(zzz)* Employment Agreement, dated May 6, 2000, by and between the
Company and Brian Wood.
10.24.1 ISDA Master Agreement, dated as of December 11, 2001,
between Banc of America Financial Products, Inc. and Ventas
Finance I, LLC.
47
Exhibit
Number Description of Document
- ------------------ ------------------------------------------------------------
10.24.2 Letter Agreement between Ventas Finance I, LLC and Banc of
America Financial Products, Inc., dated December 11, 2001.
10.24.3 Letter Agreement between Ventas Realty, Limited Partnership
and Bank of America, N.A., dated December 11, 2001.
10.25.1 ISDA Master Agreement, dated as of September 28, 2001,
between Bank of America, N.A. and Ventas Realty, Limited
Partnership.
10.25.2 Letter Agreement, dated October 25, 2001, between Bank of
America, N.A. and Ventas Realty, Limited Partnership.
10.26.1(aaaa) Registration Rights Agreement, dated as of April 20, 2001,
by and among Kindred, Inc. and the Persons identified on
Schedule 1 thereto.
10.26.2(bbbb) Amendment No. 1 to Registration Rights Agreement, dated as
of August 13, 2001, by and among Kindred Healthcare, Inc.,
Ventas Realty, Limited Partnership and the other signatories
thereto.
10.26.3(cccc) Amendment No. 2 to Registration Rights Agreement, dated as
of October 22, 2001, by and among Kindred Healthcare, Inc.,
Ventas Realty, Limited Partnership and the other signatories
thereto.
10.26.4(dddd) Waiver Agreement, dated as of August 13, 2001, by and among
Ventas Realty, Limited Partnership, Kindred Healthcare, Inc.
and Kindred Operating, Inc.
10.27* First Amendment to Employment Agreement, dated January 2,
2002, between Brian K. Wood and the Company.
10.28* Consulting Agreement, dated as of February 10, 2002, between
Paragon Consulting Group, LLC and the Company.
13 Portions of the Annual Report to stockholders for the year
ended December 31, 2001.
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(a) Incorporated herein by reference to Exhibit 3 to the Company's Form 10-Q
for the quarterly period ended September 30, 1995.
(b) Incorporated herein by reference to Exhibit 3.1 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(c) Incorporated herein by reference to Exhibit 3.2 to the Company's Form
10-K for the year ended December 31, 1997.
(d) Incorporated herein by reference to Exhibit 4.1 to the Company's Form
10-K for the year ended December 31, 1998.
(e) Incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K
filed January 2, 2002.
(f) Incorporated herein by reference to Exhibit 4.2 to the Company's Form 8-K
filed January 2, 2002.
(g) Incorporated herein by reference to Exhibit 4.3 to the Company's Form 8-K
filed January 2, 2002.
(h) Incorporated herein by reference to Exhibit 4.4 to the Company's Form 8-K
filed January 2, 2002.
(i) Incorporated herein by reference to Exhibit 4.5 to the Company's Form 8-K
filed January 2, 2002.
(j) Incorporated herein by reference to Exhibit 4.6 to the Company's Form 8-K
filed January 2, 2002.
(k) Incorporated herein by reference to Exhibit 4.7 to the Company's Form 8-K
filed January 2, 2002.
48
(l) Incorporated herein by reference to Exhibit 4.8 to the Company's Form 8-K
filed January 2, 2002.
(m) Incorporated herein by reference to Exhibit 4.9 to the Company's Form 8-K
filed January 2, 2002.
(n) Incorporated herein by reference to Exhibit 4.10 to the Company's Form
8-K filed January 2, 2002.
(o) Incorporated herein by reference to Exhibit 4.11 to the Company's Form
8-K filed January 2, 2002.
(p) Incorporated herein by reference to Exhibit 4.12 to the Company's Form
8-K filed January 2, 2002.
(q) Incorporated herein by reference to Exhibit 4.13 to the Company's Form
8-K filed January 2, 2002.
(r) Incorporated herein by reference to Exhibit 4.14 to the Company's Form
8-K filed January 2, 2002.
(s) Incorporated herein by reference to Exhibit 4.15 to the Company's Form
8-K filed January 2, 2002.
(t) Incorporated herein by reference to Exhibit 4.16 to the Company's Form
8-K filed January 2, 2002.
(u) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
8-K filed February 8, 2000.
(v) Incorporated herein by reference to Exhibit 4.2.2 to the Company's Form
10-K for the year ended December 31, 2000.
(w) Incorporated herein by reference to Exhibit 10.3 to the Company's Form
8-K filed January 2, 2002.
(x) Incorporated herein by reference to Exhibit 10.1.1 to the Company's Form
8-K filed March 8, 2000.
(y) Incorporated herein by reference to Exhibit 10.1.2 to the Company's Form
8-K filed March 8, 2000.
(z) Incorporated herein by reference to Exhibit 10.1.3 to the Company's Form
8-K filed March 8, 2000.
(aa) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A.
(bb) Incorporated herein by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A/A.
(cc) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A/A.
(dd) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A12B/A.
(ee) Incorporated herein by reference to Exhibit 1 to the Company's on
Registration Statement on Form 8-A/A.
(ff) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A12B/A.
(gg) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A/A.
(hh) Incorporated herein by reference to the Company's Registration Statement
on Form S-3, Registration No. 333-65642, as amended.
(ii) Incorporated herein by reference to Exhibit 4.4 to the Company's Form
10-K for the year ended December 31, 2000.
(jj) Incorporated herein by reference to Exhibit 4.2 to the Company's Form
10-Q for the quarterly period ended September 30, 2000.
(kk) Incorporated herein by reference to Exhibit 4.7 to the Company's Form
10-K for the year ended December 31, 2000.
(ll) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-K for the year ended December 31, 1995.
(mm) Incorporated herein by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(nn) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-K for the year ended December 31, 1998.
(oo) Incorporated herein by reference to Exhibit 10.9 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(pp) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
8-K/A filed April 24, 2001.
(qq) Incorporated herein by reference to Exhibit 10.11 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(rr) Incorporated herein by reference to Exhibit 10.12 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
49
(ss) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K/A filed April 24, 2001.
(tt) Incorporated herein by reference to Exhibit 10.3 to the Company's Form
8-K/A filed April 24, 2001.
(uu) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
8-K filed January 2, 2002.
(vv) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K filed January 2, 2002.
(ww) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended September 30, 1998.
(xx) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1998.
(yy) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K filed March 8, 2000.
(zz) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended September 30, 1998.
(aaa) Incorporated herein by reference to Exhibit 10.20 to the Company's Form
10-K for the year ended December 31, 1998.
(bbb) Incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1. (ccc) Incorporated herein by
reference to Exhibit 10.14 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998.
(ddd) Incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1. (eee) Incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8. (fff) Incorporated herein by reference to Exhibit 10.13 to
the Company's Form 10-K for the year ended December 31, 1994.
(ggg) Incorporated herein by reference to Exhibit 10.14 to the Company's Form
10-K for the year ended December 31, 1994.
(hhh) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1995.
(iii) Incorporated herein by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1996.
(jjj) Incorporated herein by reference to Exhibit 10.13 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(kkk) Incorporated herein by reference to Exhibit 10.30 to the Company's Form
10-K for the year ended December 31, 1998.
(lll) Incorporated herein by reference to Exhibit A to the Company's definitive
proxy statement on Schedule 14A dated April 18, 2000.
(mmm) Incorporated herein by reference to the Exhibit B to the Company's
definitive proxy statement on Schedule 14A dated April 18, 2000.
(nnn) Incorporated herein by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 of TheraTx. (ooo) Incorporated herein by reference
to Exhibit 10.4 to the Company's Form 10-Q for the quarterly period ended
June 30, 2001.
(ppp) Incorporated herein by reference to Exhibit 10.32 to the Company's Form
10-K for the year ended December 31, 1997.
(qqq) Incorporated herein by reference to Exhibit 10.43 to the Company's Form
10-K for the year ended December 31, 1998.
(rrr) Incorporated herein by reference to Exhibit 10.44 to the Company's Form
10-K for the year ended December 31, 1998.
(sss) Incorporated herein by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarterly period ended September 30, 1999.
(ttt) Incorporated herein by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of TheraTx.
(uuu) Incorporated herein by reference to Exhibit 10.37 to the Company's Form
10-K for the year ended December 31, 1995.
50
(vvv) Incorporated herein by reference to Exhibit 10.20 to the Company's Form
10-K for the year ended December 31, 1999.
(www) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended March 31, 1999.
(xxx) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended September 30, 1999.
(yyy) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K filed February 8, 2000.
(zzz) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended June 30, 2000.
(aaaa) Incorporated herein by reference to Exhibit 4.1 to the Company's Form
8-K/A filed April 24, 2001.
(bbbb) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended September 30, 2001.
(cccc) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended September 30, 2001.
(dddd) Incorporated herein by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarterly period ended September 30, 2001.
(b) Reports on Form 8-K:
On December 10, 2001, the Company filed a Current Report on Form 8-K announcing
that the Board of Directors announced a fourth quarter dividend of $0.26 per
share that was expected to be paid principally through a distribution of stock
in Kindred and partially in cash. The Company also announced that its
wholly-owned subsidiary, Ventas Specialty I, LLC, had priced and received
commitments to purchase $225 million principal amount of investment-grade
commercial mortgage-backed securities collateralized by 40 multi-state skilled
nursing facilities owned by the Company. Lastly, the Company announced that it
expected to provide guidance for 2002 Funds From Operation and 2002 dividend
guidance before the end of 2001.
On January 2, 2002, the Company filed a Current Report on Form 8-K announcing
that it had raised $225 million from the completion of the CMBS Transaction. The
Company also announced that it expected to report FFO of $1.24 to $1.26 per
share for 2002, assuming no additional debt reduction, no sale of any of its
equity stake in Kindred and no refinancing transactions. Finally, the Company
discussed the assumptions underlying its expectations for 2002 FFO.
On January 3, 2002, the Company filed a Current Report on Form 8-K announcing
that the Company's fourth quarter dividend of $0.26 per share would be paid
through a combination of cash and shares of common stock in Kindred. The Company
also announced that the common stock dividends it paid or declared for 2001,
including the dividend to be paid on January 7, 2002, qualified to be treated as
ordinary income in 2001, in accordance with Internal Revenue Code section 857
governing REITs. The Company further announced that it had paid $10 million to
its lenders to reduce the outstanding principal balance of its Credit Agreement
to $623 million. It also announced that the registration statement for its
Distribution Reinvestment and Stock Purchase Plan, previously announced in July
2001, was declared effective by the Securities and Exchange Commission on
December 31, 2001. Lastly, the Company announced that John C. Thompson was
promoted to Executive Vice President - Chief Investment Officer, effective
immediately.
On January 31, 2002, the Company filed a Current Report on Form 8-K announcing
that it would release its 2001 annual earnings on Tuesday, March 26, 2002. The
Company also announced that it would webcast live President and CEO Debra A.
Cafaro's presentation regarding the Company that was to be featured as part of
the UBS Warburg Healthcare Services Conference on February 5, 2002.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2002
VENTAS, INC.
By: /s/ DEBRA A. CAFARO
---------------------------------------------
Debra A. Cafaro
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ WALTER F. BERAN Director March 26, 2002
- -----------------------------
Walter F. Beran
/s/ DOUGLAS CROCKER, II Director March 26, 2002
- -----------------------------
Douglas Crocker, II
/s/ JAY M. GELLERT Director March 26, 2002
- -----------------------------
Jay M. Gellert
/s/ RONALD G. GEARY Director March 26, 2002
- -----------------------------
Ronald G. Geary
/s/ GARY W. LOVEMAN Director March 26, 2002
- -----------------------------
Gary W. Loveman
/s/ SHELI Z. ROSENBERG Director March 26, 2002
- -----------------------------
Sheli Z. Rosenberg
/s/ W. BRUCE LUNSFORD Chairman of the Board March 26, 2002
- ----------------------------- and Director
W. Bruce Lunsford
/s/ DEBRA A. CAFARO Chief Executive Officer, March 26, 2002
- ----------------------------- President (Principal Executive
Debra A. Cafaro Office and Acting Principal
Financial Officer, and Director
/s/ MARY L. SMITH Principal Accounting Officer March 26, 2002
- -----------------------------
Mary L. Smith
52
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ---------------------------------------------------------------------- and Improv- Subsequent to and Improv-
Facility name City State Land ments Acquisition Land ments
- -----------------------------------------------------------------------------------------------------------------------------------
KINDRED SKILLED NURSING FACILITIES
Rehabilitation & Healthc. Center of Huntsville Huntsville AL 534 4,216 - 534 4,216
Rehabilitation & Healthcare Center of Birmingham Birmingham AL - 1,921 - - 1,921
Rehabilitation & Healthcare Center of Mobile Mobile AL 5 2,981 - 5 2,981
Valley Healthcare & Rehabilitation Center Tucson AZ 383 1,954 - 383 1,954
Sonoran Rehabilitation & Care Center Phoenix AZ 781 2,755 - 781 2,755
Desert Life Rehabilitation & Care Center Tucson AZ 611 5,117 - 611 5,117
Villa Campana Health Center Tucson AZ 533 2,201 - 533 2,201
Kachina Point Health Care & Rehabilitation Sedona AZ 364 4,179 - 364 4,179
Nob Hill Healthcare Center San Francisco CA 1,902 7,531 - 1,902 7,531
Canyonwood Nursing & Rehab. Ctr. Redding CA 401 3,784 - 401 3,784
Californian Care Center Bakersfield CA 1,439 5,609 - 1,439 5,609
Magnolia Gardens Care Center Burlingame CA 1,832 3,186 - 1,832 3,186
Lawton Healthcare Center San Francisco CA 943 514 - 943 514
Valley Gardens HC & Rehabilitation Stockton CA 516 3,405 - 516 3,405
Alta Vista Healthcare Center Riverside CA 376 1,669 - 376 1,669
Maywood Acres Healthcare Center Oxnard CA 465 2,363 - 465 2,363
La Veta Healthcare Center Orange CA 47 1,459 - 47 1,459
Bay View Nursing & Rehabilitation Center Alameda CA 1,462 5,981 - 1,462 5,981
Village Square Nursing & Rehabilitation Center San Marcos CA 766 3,507 - 766 3,507
Cherry Hills Health Care Center Englewood CO 241 2,180 - 241 2,180
Aurora Care Center Aurora CO 197 2,328 - 197 2,328
Castle Garden Care Center Northglenn CO 501 8,294 - 501 8,294
Brighton Care Center Brighton CO 282 3,377 - 282 3,377
Andrew House Healthcare New Britain CT 247 1,963 - 247 1,963
Camelot Nursing & Rehabilitation Center New London CT 202 2,363 - 202 2,363
Hamilton Rehabilitation & Healthcare Center Norwich CT 456 2,808 - 456 2,808
Windsor Rehabilitation & Healthcare Center Windsor CT 368 2,520 - 368 2,520
Nutmeg Pavilion Healthcare New London CT 401 2,777 - 401 2,777
Parkway Pavilion Healthcare Enfield CT 337 3,607 - 337 3,607
Courtland Gardens Health Center, Inc. Stamford CT 1,126 9,399 - 1,126 9,399
Homestead Health Center Stamford CT 511 2,764 - 511 2,764
East Manor Medical Care Center Sarasota FL 390 5,499 - 390 5,499
Healthcare & Rehabilitation Ctr of Sanford Sanford FL 329 3,074 - 329 3,074
Titusville Rehabilitation & Nursing Center Titusville FL 398 3,810 - 398 3,810
Bay Pointe Nursing Pavilion St. Petersburg FL 750 4,392 - 750 4,392
Colonial Oaks Rehabilitation Center - Ft. Myers Ft. Meyers FL 1,058 5,754 - 1,058 5,754
Carrollwood Care Center Tampa FL 268 4,128 - 268 4,128
Evergreen Woods Health & Rehabilitation Springhill FL 234 3,566 - 234 3,566
Life on Which
Depreciation
Location in Income
- ---------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- ----------------------------------------------------------------------------------------------------------------------------------
KINDRED SKILLED NURSING FACILITIES
Rehabilitation & Healthc. Center of Huntsville Huntsville AL 1,781 1968 1991 25 years
Rehabilitation & Healthcare Center of Birmingham Birmingham AL 1,069 1971 1992 20 years
Rehabilitation & Healthcare Center of Mobile Mobile AL 1,044 1967 1992 29 years
Valley Healthcare & Rehabilitation Center Tucson AZ 743 1964 1993 28 years
Sonoran Rehabilitation & Care Center Phoenix AZ 869 1962 1992 29 years
Desert Life Rehabilitation & Care Center Tucson AZ 2,546 1979 1982 37 years
Villa Campana Health Center Tucson AZ 650 1983 1993 35 years
Kachina Point Health Care & Rehabilitation Sedona AZ 1,748 1983 1984 45 years
Nob Hill Healthcare Center San Francisco CA 2,618 1967 1993 28 years
Canyonwood Nursing & Rehab. Ctr. Redding CA 1,077 1989 1989 45 years
Californian Care Center Bakersfield CA 1,376 1988 1992 40 years
Magnolia Gardens Care Center Burlingame CA 1,089 1955 1993 28.5 years
Lawton Healthcare Center San Francisco CA 243 1962 1996 20 years
Valley Gardens HC & Rehabilitation Stockton CA 1,098 1988 1988 29 years
Alta Vista Healthcare Center Riverside CA 647 1966 1992 29 years
Maywood Acres Healthcare Center Oxnard CA 805 1964 1993 29 years
La Veta Healthcare Center Orange CA 514 1964 1992 28 years
Bay View Nursing & Rehabilitation Center Alameda CA 2,062 1967 1993 45 years
Village Square Nursing & Rehabilitation Center San Marcos CA 745 1989 1993 42 years
Cherry Hills Health Care Center Englewood CO 893 1960 1995 30 years
Aurora Care Center Aurora CO 781 1962 1995 30 years
Castle Garden Care Center Northglenn CO 2,638 1971 1993 29 years
Brighton Care Center Brighton CO 1,100 1969 1992 30 years
Andrew House Healthcare New Britain CT 617 1967 1992 29 years
Camelot Nursing & Rehabilitation Center New London CT 712 1969 1994 28 years
Hamilton Rehabilitation & Healthcare Center Norwich CT 945 1969 1994 29 years
Windsor Rehabilitation & Healthcare Center Windsor CT 872 1965 1994 30 years
Nutmeg Pavilion Healthcare New London CT 998 1968 1992 29 years
Parkway Pavilion Healthcare Enfield CT 1,257 1968 1994 28 years
Courtland Gardens Health Center, Inc. Stamford CT 1,161 1956 1990 45 years
Homestead Health Center Stamford CT 369 1959 1990 20 years
East Manor Medical Care Center Sarasota FL 1,830 1966 1993 28 years
Healthcare & Rehabilitation Ctr of Sanford Sanford FL 1,044 1965 1992 29 years
Titusville Rehabilitation & Nursing Center Titusville FL 1,281 1966 1993 29 years
Bay Pointe Nursing Pavilion St. Petersburg FL 1,030 1984 1994 35 years
Colonial Oaks Rehabilitation Center - Ft. Myers Ft. Meyers FL 882 1995 1995 45 years
Carrollwood Care Center Tampa FL 1,409 1986 1994 37.5 years
Evergreen Woods Health & Rehabilitation Springhill FL 1,149 1988 1993 25 years
S-1
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ---------------------------------------------------------------------- and Improv- Subsequent to and Improv-
Facility name City State Land ments Acquisition Land ments
- ----------------------------------------------------------------------------------------------------------------------------------
Rehabilitation & Healthcare Center of Tampa Tampa FL 355 8,291 - 355 8,291
Rehabilitation & Health Center of Cape Coral Cape Coral FL 1,002 4,153 - 1,002 4,153
Windsor Woods Convalescent Center Hudson FL 859 3,172 - 859 3,172
Casa Mora Rehabilitation & Ext Care Bradenton FL 823 6,093 - 823 6,093
North Broward Rehabilitation & Nursing Center Pompano Beach FL 1,360 5,913 - 1,360 5,913
Highland Pines Rehabilitation Center Clearwater FL 863 5,793 - 863 5,793
Pompano Rehabilitation/Nursing Center Pompano Beach FL 890 3,252 - 890 3,252
Abbey Rehabilitation & Nsg. Center St. Petersburg FL 563 2,842 - 563 2,842
Savannah Rehabilitation & Nursing Center Savannah GA 213 2,772 - 213 2,772
Specialty Care of Marietta Marietta GA 241 2,782 - 241 2,782
Savannah Specialty Care Center Savannah GA 157 2,219 - 157 2,219
Lafayette Nursing & Rehabilitation Center Fayetteville GA 598 6,623 - 598 6,623
Tucker Nursing Center Tucker GA 512 8,153 - 512 8,153
Hillcrest Rehabilitation Care Center Boise ID 256 3,593 - 256 3,593
Cascade Care Center Caldwell ID 312 2,050 - 312 2,050
Emmett Rehabilitation and Healthcare Emmett ID 185 1,670 - 185 1,670
Lewiston Rehabilitation & Care Ctr. Lewiston ID 133 3,982 - 133 3,982
Nampa Care Center Nampa ID 252 2,810 - 252 2,810
Weiser Rehabilitation and Care Center Weiser ID 157 1,760 - 157 1,760
Moscow Care Center Moscow ID 261 2,571 - 261 2,571
Mountain Valley Care and Rehabilitation Kellogg ID 68 1,281 - 68 1,281
Rolling Hills Health Care Center New Albany IN 81 1,894 - 81 1,894
Royal Oaks Healthcare & Rehab Ctr. Terre Haute IN 418 5,779 - 418 5,779
Southwood Health & Rehab Center Terre Haute IN 90 2,868 - 90 2,868
Kindred Corydon Corydon IN 125 6,068 - 125 6,068
Valley View Health Care Center Elkhart IN 87 2,665 - 87 2,665
Wildwood Healthcare Center Indianapolis IN 134 4,983 - 134 4,983
Meadowvale Health & Rehabilitation Center Bluffton IN 7 787 - 7 787
Columbia Healthcare Facility Evansville IN 416 6,317 - 416 6,317
Bremen Health Care Center Bremen IN 109 3,354 - 109 3,354
Windsor Estates Health & Rehabilitation Ctr Kokomo IN 256 6,625 - 256 6,625
Muncie Health Care & Rehab. Muncie IN 108 4,202 - 108 4,202
Parkwood Health Care Center Lebanon IN 121 4,512 - 121 4,512
Wedgewood Healthcare Center Clarksville IN 119 5,115 - 119 5,115
Westview Nursing & Rehabilitation Center Bedford IN 255 4,207 - 255 4,207
Columbus Health & Rehabilitation Center Columbus IN 345 6,817 - 345 6,817
Rosewood Healthcare Center Bowling Green KY 248 5,371 - 248 5,371
Oakview Nursing & Rehabilitation Center Calvert City KY 124 2,882 - 124 2,882
Cedars of Lebanon Nursing Center Lebanon KY 40 1,253 - 40 1,253
Life on Which
Depreciation
Location in Income
- ---------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- ----------------------------------------------------------------------------------------------------------------------------------
Rehabilitation & Healthcare Center of Tampa Tampa FL 2,330 1969 1993 28 years
Rehabilitation & Health Center of Cape Coral Cape Coral FL 1,349 1978 1991 32 years
Windsor Woods Convalescent Center Hudson FL 958 N/A 1993 45 years
Casa Mora Rehabilitation & Ext Care Bradenton FL 754 1977 1995 45 years
North Broward Rehabilitation & Nursing Center Pompano Beach FL 667 1965 1995 45 years
Highland Pines Rehabilitation Center Clearwater FL 693 1965 1995 20 years
Pompano Rehabilitation/Nursing Center Pompano Beach FL 365 1975 1995 45 years
Abbey Rehabilitation & Nsg. Center St. Petersburg FL 685 1962 1995 35 years
Savannah Rehabilitation & Nursing Center Savannah GA 938 1968 1993 28.5 years
Specialty Care of Marietta Marietta GA 1,034 1968 1993 28.5 years
Savannah Specialty Care Center Savannah GA 871 1972 1991 26 years
Lafayette Nursing & Rehabilitation Center Fayetteville GA 1,620 1989 1995 20 years
Tucker Nursing Center Tucker GA 1,012 1972 1997 45 years
Hillcrest Rehabilitation Care Center Boise ID 642 1977 1998 45 years
Cascade Care Center Caldwell ID 375 1974 1998 45 years
Emmett Rehabilitation and Healthcare Emmett ID 1,130 1960 1984 28 years
Lewiston Rehabilitation & Care Ctr. Lewiston ID 1,500 1964 1984 29 years
Nampa Care Center Nampa ID 1,873 1950 1983 25 years
Weiser Rehabilitation and Care Center Weiser ID 1,319 1963 1983 25 years
Moscow Care Center Moscow ID 1,161 1955 1990 25 years
Mountain Valley Care and Rehabilitation Kellogg ID 892 1971 1984 25 years
Rolling Hills Health Care Center New Albany IN 641 1984 1993 25 years
Royal Oaks Healthcare & Rehab Ctr. Terre Haute IN 880 1995 1995 45 years
Southwood Health & Rehab Center Terre Haute IN 886 1988 1993 25 years
Kindred Corydon Corydon IN 480 N/A 1998 45 years
Valley View Health Care Center Elkhart IN 874 1985 1993 25 years
Wildwood Healthcare Center Indianapolis IN 1,550 1988 1993 25 years
Meadowvale Health & Rehabilitation Center Bluffton IN 159 1962 1995 22 years
Columbia Healthcare Facility Evansville IN 1,801 1983 1993 35 years
Bremen Health Care Center Bremen IN 805 1982 1996 45 years
Windsor Estates Health & Rehabilitation Ctr Kokomo IN 1,552 1962 1995 35 years
Muncie Health Care & Rehab. Muncie IN 1,210 1980 1993 25 years
Parkwood Health Care Center Lebanon IN 1,346 1977 1993 25 years
Wedgewood Healthcare Center Clarksville IN 1,054 1985 1995 35 years
Westview Nursing & Rehabilitation Center Bedford IN 1,256 1970 1993 29 years
Columbus Health & Rehabilitation Center Columbus IN 2,767 1966 1991 25 years
Rosewood Healthcare Center Bowling Green KY 2,003 1970 1990 30 years
Oakview Nursing & Rehabilitation Center Calvert City KY 1,072 1967 1990 30 years
Cedars of Lebanon Nursing Center Lebanon KY 466 1930 1990 30 years
S-2
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ---------------------------------------------------------------------- and Improv- Subsequent to and Improv-
Facility name City State Land ments Acquisition Land ments
- -----------------------------------------------------------------------------------------------------------------------------------
Winchester Centre for Health/Rehab. Winchester KY 137 6,120 - 137 6,120
Riverside Manor Health Care Calhoun KY 103 2,119 - 103 2,119
Maple Manor Healthcare Center Greenville KY 59 3,187 - 59 3,187
Danville Centre for Health & Rehabilitation Danville KY 322 3,538 - 322 3,538
Lexington Centre for Health & Rehabilitation Lexington KY 647 4,892 - 647 4,892
Northfield Centre for Health & Rehabilitation Louisville KY 285 1,555 - 285 1,555
Hillcrest Health Care Center Owensboro KY 544 2,619 - 544 2,619
Woodland Terrace Health Care Fac. Elizabethtown KY 216 1,795 - 216 1,795
Harrodsburg Health Care Center Harrodsburg KY 137 1,830 - 137 1,830
Laurel Ridge Rehabilitation & Nursing Center Jamaica Plain MA 194 1,617 - 194 1,617
Blue Hills Alzheimers Care Center Stoughton MA 511 1,026 - 511 1,026
Brigham Manor Nursing & Rehabilitation Ctr Newburyport MA 126 1,708 - 126 1,708
Presentation Nursing & Rehabilitation Center Brighton MA 184 1,220 - 184 1,220
Country Manor Rehabilitation & Nursing Center Newburyport MA 199 3,004 - 199 3,004
Crawford Skilled Nursing &
Rehabilitation Center Fall River MA 127 1,109 - 127 1,109
Hallmark Nursing & Rehabilitation Center New Bedford MA 202 2,694 - 202 2,694
Sachem Nursing & Rehabilitation Center East Bridgewater MA 529 1,238 - 529 1,238
Hammersmith House Nursing Care Center Saugus MA 112 1,919 - 112 1,919
Oakwood Rehabilitation & Nursing Center Webster MA 102 1,154 - 102 1,154
Timberlyn Heights Nursing & Alz. Center Great Barrington MA 120 1,305 - 120 1,305
Star of David Nursing &
Rehabilitation/Alz Center West Roxbury MA 359 2,324 - 359 2,324
Brittany Healthcare Center Natick MA 249 1,328 - 249 1,328
Briarwood Health Care Nursing Ctr Needham MA 154 1,502 - 154 1,502
Westridge Healthcare Center Marlborough MA 453 3,286 - 453 3,286
Bolton Manor Nursing Home Marlborough MA 222 2,431 - 222 2,431
Hillcrest Nursing Home Fitchburg MA 175 1,461 - 175 1,461
Country Gardens Sk. Nursing & Rehabilitation Swansea MA 415 2,675 - 415 2,675
Quincy Rehab. & Nursing Center Quincy MA 216 2,911 - 216 2,911
West Roxbury Manor West Roxbury MA 91 1,001 - 91 1,001
Newton and Wellesley Alzheimer Center Wellesley MA 297 3,250 - 297 3,250
Den-Mar Rehabilitation & Nursing Center Rockport MA 23 1,560 - 23 1,560
Eagle Pond Rehab. & Living Center South Dennis MA 296 6,896 - 296 6,896
Blueberry Hill Healthcare Beverly MA 129 4,290 - 129 4,290
Colony House Nursing & Rehabilitation Center Abington MA 132 999 - 132 999
Embassy House Sk. Nursing & Rehabilitation Brockton MA 166 1,004 - 166 1,004
Franklin Sk. Nursing & Rehabilitation Center Franklin MA 156 757 - 156 757
Great Barrington Rehabilitation &
Nursing Center Great Barrington MA 60 1,142 - 60 1,142
River Terrace Lancaster MA 268 957 - 268 957
Walden Rehab. & Nursing Center Concord MA 181 1,347 - 181 1,347
Life on Which
Depreciation
Location in Income
- ---------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- ----------------------------------------------------------------------------------------------------------------------------------
Winchester Centre for Health/Rehab. Winchester KY 2,258 1967 1990 30 years
Riverside Manor Health Care Calhoun KY 798 1963 1990 30 years
Maple Manor Healthcare Center Greenville KY 1,195 1968 1990 30 years
Danville Centre for Health & Rehabilitation Danville KY 1,004 1962 1995 30 years
Lexington Centre for Health & Rehabilitation Lexington KY 1,683 1963 1993 28 years
Northfield Centre for Health & Rehabilitation Louisville KY 659 1969 1985 30 years
Hillcrest Health Care Center Owensboro KY 2,110 1963 1982 22 years
Woodland Terrace Health Care Fac. Elizabethtown KY 1,400 1969 1982 26 years
Harrodsburg Health Care Center Harrodsburg KY 915 1974 1985 35 years
Laurel Ridge Rehabilitation & Nursing Center Jamaica Plain MA 702 1968 1989 30 years
Blue Hills Alzheimers Care Center Stoughton MA 842 1965 1982 28 years
Brigham Manor Nursing & Rehabilitation Ctr Newburyport MA 831 1806 1982 27 years
Presentation Nursing & Rehabilitation Center Brighton MA 873 1968 1982 28 years
Country Manor Rehabilitation & Nursing Center Newburyport MA 1,454 1968 1982 27 years
Crawford Skilled Nursing &
Rehabilitation Center Fall River MA 730 1968 1982 29 years
Hallmark Nursing & Rehabilitation Center New Bedford MA 1,350 1968 1982 26 years
Sachem Nursing & Rehabilitation Center East Bridgewater MA 967 1968 1982 27 years
Hammersmith House Nursing Care Center Saugus MA 871 1965 1982 28 years
Oakwood Rehabilitation & Nursing Center Webster MA 749 1967 1982 31 years
Timberlyn Heights Nursing & Alz. Center Great Barrington MA 801 1968 1982 29 years
Star of David Nursing &
Rehabilitation/Alz Center West Roxbury MA 1,740 1968 1982 26 years
Brittany Healthcare Center Natick MA 803 1996 1982 31 years
Briarwood Health Care Nursing Ctr Needham MA 877 1970 1982 30 years
Westridge Healthcare Center Marlborough MA 2,095 1964 1984 28.5 years
Bolton Manor Nursing Home Marlborough MA 1,299 1973 1984 34.5 years
Hillcrest Nursing Home Fitchburg MA 1,048 1957 1984 25 years
Country Gardens Sk. Nursing & Rehabilitation Swansea MA 1,259 1969 1984 27 years
Quincy Rehab. & Nursing Center Quincy MA 1,721 1965 1984 24 years
West Roxbury Manor West Roxbury MA 892 1960 1984 20 years
Newton and Wellesley Alzheimer Center Wellesley MA 1,477 1971 1984 30 years
Den-Mar Rehabilitation & Nursing Center Rockport MA 850 1963 1985 30 years
Eagle Pond Rehab. & Living Center South Dennis MA 2,101 1985 1987 50 years
Blueberry Hill Healthcare Beverly MA 2,029 1965 1968 40 years
Colony House Nursing & Rehabilitation Center Abington MA 765 1965 1969 40 years
Embassy House Sk. Nursing & Rehabilitation Brockton MA 701 1968 1969 40 years
Franklin Sk. Nursing & Rehabilitation Center Franklin MA 584 1967 1969 40 years
Great Barrington Rehabilitation &
Nursing Center Great Barrington MA 836 1967 1969 40 years
River Terrace Lancaster MA 768 1969 1969 40 years
Walden Rehab. & Nursing Center Concord MA 1,042 1969 1968 40 years
S-3
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ---------------------------------------------------------------------- and Improv- Subsequent to and Improv-
Facility name City State Land ments Acquisition Land ments
- -----------------------------------------------------------------------------------------------------------------------------------
Harrington House Nursing & Rehabilitation Center Walpole MA 4 4,444 - 4 4,444
Augusta Rehabilitation Center Augusta ME 152 1,074 - 152 1,074
Eastside Rehabilitation and Living Center Bangor ME 316 1,349 - 316 1,349
Winship Green Nursing Center Bath ME 110 1,455 - 110 1,455
Brewer Rehabilitation & Living Center Brewer ME 228 2,737 - 228 2,737
Kennebunk Nursing Center Kennebunk ME 99 1,898 - 99 1,898
Norway Rehabilitation & Living Center Norway ME 133 1,658 - 133 1,658
Shore Village Rehabilitation & Nursing Center Rockland ME 100 1,051 - 100 1,051
Westgate Manor Bangor ME 287 2,718 - 287 2,718
Brentwood Rehabilitation & Nursing Center Yarmouth ME 181 2,789 - 181 2,789
Fieldcrest Manor Nursing Home Waldoboro ME 101 1,020 - 101 1,020
Park Place Health Care Center Great Falls MT 600 6,311 - 600 6,311
Parkview Acres Care & Rehabilitation Center Dillon MT 207 2,578 - 207 2,578
Pettigrew Rehabilitation & Healthcare Center Durham NC 101 2,889 - 101 2,889
LaSalle Healthcare Center Durham NC 140 3,238 - 140 3,238
Sunnybrook & HC Rehab Spec. Raleigh NC 187 3,409 - 187 3,409
Blue Ridge Rehab. & Healthcare Ctr. Asheville NC 250 3,819 - 250 3,819
Raleigh Rehabilitation & Healthcare Center Raleigh NC 316 5,470 - 316 5,470
Rose Manor Health Care Center Durham NC 201 3,527 - 201 3,527
Cypress Pointe Rehab & HC Center Wilmington NC 233 3,710 - 233 3,710
Winston-Salem Rehab & HC Center Winston-Salem NC 305 5,142 - 305 5,142
Silas Creek Manor Winston-Salem NC 211 1,893 - 211 1,893
Lincoln Nursing Center Lincolnton NC 39 3,309 - 39 3,309
Guardian Care of Roanoke Rapids Roanoke Rapids NC 339 4,132 - 339 4,132
Guardian Care of Henderson Henderson NC 206 1,997 - 206 1,997
Rehab. & Nursing Center of Monroe Monroe NC 185 2,654 - 185 2,654
Guardian Care of Kinston Kinston NC 186 3,038 - 186 3,038
Guardian Care of Zebulon Zebulon NC 179 1,933 - 179 1,933
Guardian Care of Rocky Mount. Rocky Mount NC 240 1,732 - 240 1,732
Rehab. & Health Center of Gastonia Gastonia NC 158 2,359 - 158 2,359
Guardian Care of Elizabeth City Elizabeth City NC 71 561 - 71 561
Chapel Hill Rehabilitation & Healthcare Center Chapel Hill NC 347 3,029 - 347 3,029
Homestead Health Care & Rehabilitation Ctr Lincoln NE 277 1,528 1,178 277 2,706
Dover Rehab. & Living Center Dover NH 355 3,797 - 355 3,797
Greenbriar Terrace Healthcare Nashua NH 776 6,011 - 776 6,011
Hanover Terrace Healthcare Hanover NH 326 1,825 - 326 1,825
Las Vegas Healthcare & Rehabilitation Center Las Vegas NV 454 1,018 - 454 1,018
Torrey Pines Care Center Las Vegas NV 256 1,324 - 256 1,324
Franklin Woods Health Care Center Columbus OH 190 4,712 - 190 4,712
Life on Which
Depreciation
Location in Income
- ---------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- ----------------------------------------------------------------------------------------------------------------------------------
Harrington House Nursing & Rehabilitation Center Walpole MA 1,078 1991 1991 45 years
Augusta Rehabilitation Center Augusta ME 594 1968 1985 30 years
Eastside Rehabilitation and Living Center Bangor ME 623 1967 1985 30 years
Winship Green Nursing Center Bath ME 687 1974 1985 35 years
Brewer Rehabilitation & Living Center Brewer ME 1,149 1974 1985 33 years
Kennebunk Nursing Center Kennebunk ME 807 1977 1985 35 years
Norway Rehabilitation & Living Center Norway ME 735 1972 1985 39 years
Shore Village Rehabilitation & Nursing Center Rockland ME 568 1968 1985 30 years
Westgate Manor Bangor ME 1,199 1969 1985 31 years
Brentwood Rehabilitation & Nursing Center Yarmouth ME 1,208 1945 1985 45 years
Fieldcrest Manor Nursing Home Waldoboro ME 574 1963 1985 32 years
Park Place Health Care Center Great Falls MT 2,147 1963 1993 28 years
Parkview Acres Care & Rehabilitation Center Dillon MT 876 1965 1993 29 years
Pettigrew Rehabilitation & Healthcare Center Durham NC 1,032 1969 1993 28 years
LaSalle Healthcare Center Durham NC 1,010 1969 1993 29 years
Sunnybrook & HC Rehab Spec. Raleigh NC 1,395 1971 1991 25 years
Blue Ridge Rehab. & Healthcare Ctr. Asheville NC 1,217 1977 1991 32 years
Raleigh Rehabilitation & Healthcare Center Raleigh NC 2,245 1969 1991 25 years
Rose Manor Health Care Center Durham NC 1,388 1972 1991 26 years
Cypress Pointe Rehab & HC Center Wilmington NC 1,361 1966 1993 28.5 years
Winston-Salem Rehab & HC Center Winston-Salem NC 2,086 1968 1991 25 years
Silas Creek Manor Winston-Salem NC 649 1966 1993 28.5 years
Lincoln Nursing Center Lincolnton NC 1,460 1976 1986 35 years
Guardian Care of Roanoke Rapids Roanoke Rapids NC 1,649 1967 1991 25 years
Guardian Care of Henderson Henderson NC 684 1957 1993 29 years
Rehab. & Nursing Center of Monroe Monroe NC 1,052 1963 1993 28 years
Guardian Care of Kinston Kinston NC 1,007 1961 1993 29 years
Guardian Care of Zebulon Zebulon NC 657 1973 1993 29 years
Guardian Care of Rocky Mount. Rocky Mount NC 622 1975 1997 25 years
Rehab. & Health Center of Gastonia Gastonia NC 855 1968 1992 29 years
Guardian Care of Elizabeth City Elizabeth City NC 507 1977 1982 20 years
Chapel Hill Rehabilitation & Healthcare Center Chapel Hill NC 1,139 1984 1993 28 years
Homestead Health Care & Rehabilitation Ctr Lincoln NE 1,872 1961 1994 45 years
Dover Rehab. & Living Center Dover NH 1,727 1969 1990 25 years
Greenbriar Terrace Healthcare Nashua NH 2,510 1963 1990 25 years
Hanover Terrace Healthcare Hanover NH 610 1969 1993 29 years
Las Vegas Healthcare & Rehabilitation Center Las Vegas NV 253 1940 1992 30 years
Torrey Pines Care Center Las Vegas NV 474 1971 1992 29 years
Franklin Woods Health Care Center Columbus OH 1,266 1986 1992 38 years
S-4
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ------------------------------------------------------------------------- and Improve- Subsequent to and Improve-
Facility name City State Land ments Acquisition Land ments
- ------------------------------------------------------------------------------------------------------------------------------------
Chillicothe Nursing & Rehabilitation Center Chillicothe OH 128 3,481 - 128 3,481
Pickerington Nursing & Rehabilitation Center Pickerington OH 312 4,382 - 312 4,382
Logan Health Care Center Logan OH 169 3,750 - 169 3,750
Winchester Place Nsg. & Rehab. Ctr. Canal Winchester OH 454 7,149 - 454 7,149
Minerva Park Nursing & Rehabilitation Center Columbus OH 210 3,684 - 210 3,684
West Lafayette Rehabilitation & Nursing Ctr West Lafayette OH 185 3,278 - 185 3,278
Cambridge Health & Rehabilitation Center Cambridge OH 108 2,642 - 108 2,642
Coshocton Health & Rehab. Ctr. Coshocton OH 203 1,979 - 203 1,979
Bridgepark Center for Rehabilitation & Nursing Sv. Akron OH 341 5,491 - 341 5,491
Lebanon Country Manor Lebanon OH 105 3,617 - 105 3,617
Sunnyside Care Center Salem OR 1,519 2,688 - 1,519 2,688
Medford Rehab. & Healthcare Centre Medford OR 362 4,610 - 362 4,610
Wyomissing Nursing & Rehabilitation Center Reading PA 61 5,095 - 61 5,095
Health Havens Nursing & Rehabilitation Center E. Providence RI 174 2,643 - 174 2,643
Oak Hill Nursing & Rehabilitation Center Pawtucket RI 91 6,724 - 91 6,724
Madison Healthcare & Rehabilitation Center Madison TN 168 1,445 - 168 1,445
Cordova Rehabilitation & Nursing Center Cordova TN 322 8,830 - 322 8,830
Primacy Healthcare & Rehabilitation Center Memphis TN 1,222 8,344 - 1,222 8,344
Masters Health Care Center Algood TN 524 4,370 - 524 4,370
San Pedro Manor San Antonio TX 602 4,178 - 602 4,178
Wasatch Care Center Ogden UT 374 596 - 374 596
Crosslands Rehabilitation & Health Care Ctr Sandy UT 334 4,300 - 334 4,300
St. George Care and Rehab. Center St. George UT 420 4,465 - 420 4,465
Federal Heights Rehab. & Nsg. Ctr. Salt Lake City UT 201 2,322 - 201 2,322
Wasatch Valley Rehabilitation Salt Lake City UT 389 3,545 - 389 3,545
Nansemond Pointe Rehab. & HC Ctr. Suffolk VA 534 6,990 - 534 6,990
Harbour Pointe Med. & Rehabilitation Ctr Norfolk VA 427 4,441 - 427 4,441
River Pointe Rehab. & Healthc. Ctr. Virginia Beach VA 770 4,440 - 770 4,440
Bay Pointe Medical & Rehabilitation Centre Virginia Beach VA 805 2,886 - 425 2,886
Birchwood Terrace Healthcare Burlington VT 15 4,656 - 15 4,656
Arden Rehabilitation & Healthcare Ctr Seattle WA 1,111 4,013 - 1,111 4,013
Northwest Continuum Care Center Longview WA 145 2,563 - 145 2,563
Bellingham Health Care & Rehabilitation Svc Bellingham WA 442 3,823 - 442 3,823
Rainier Vista Care Center Puyallup WA 520 4,780 - 520 4,780
Lakewood Healthcare Center Lakewood WA 504 3,511 - 504 3,511
Vancouver Healthcare & Rehab. Ctr. Vancouver WA 449 2,964 - 449 2,964
Heritage Health & Rehabilitation Center Vancouver WA 76 835 - 76 835
Edmonds Rehabilitation & Healthcare Center Edmonds WA 355 3,032 - 355 3,032
Queen Anne Healthcare Seattle WA 570 2,750 - 570 2,750
Life on Which
Depreciation
Location in Income
- ------------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- -----------------------------------------------------------------------------------------------------------------------------------
Chillicothe Nursing & Rehabilitation Center Chillicothe OH 1,552 1976 1985 34 years
Pickerington Nursing & Rehabilitation Center Pickerington OH 1,154 1984 1992 37 years
Logan Health Care Center Logan OH 1,273 1979 1991 30 years
Winchester Place Nsg. & Rehab. Ctr. Canal Winchester OH 2,722 1974 1993 28 years
Minerva Park Nursing & Rehabilitation Center Columbus OH 629 1973 1997 45 years
West Lafayette Rehabilitation & Nursing Ctr West Lafayette OH 686 1972 1996 45 years
Cambridge Health & Rehabilitation Center Cambridge OH 890 1975 1993 25 years
Coshocton Health & Rehab. Ctr. Coshocton OH 667 1974 1993 25 years
Bridgepark Center for Rehabilitation & Nursing Sv. Akron OH 1,941 1970 1993 28 years
Lebanon Country Manor Lebanon OH 1,290 1984 1986 43 years
Sunnyside Care Center Salem OR 902 1981 1991 30 years
Medford Rehab. & Healthcare Centre Medford OR 1,561 N/A 1991 34 years
Wyomissing Nursing & Rehabilitation Center Reading PA 641 1966 1993 45 years
Health Havens Nursing & Rehabilitation Center E. Providence RI 339 1962 1990 45 years
Oak Hill Nursing & Rehabilitation Center Pawtucket RI 853 1966 1990 45 years
Madison Healthcare & Rehabilitation Center Madison TN 516 1968 1992 29 years
Cordova Rehabilitation & Nursing Center Cordova TN 3,465 1979 1986 39 years
Primacy Healthcare & Rehabilitation Center Memphis TN 2,421 1980 1990 37 years
Masters Health Care Center Algood TN 1,670 1981 1987 38 years
San Pedro Manor San Antonio TX 570 1985 1995 45 years
Wasatch Care Center Ogden UT 411 1964 1990 25 years
Crosslands Rehabilitation & Health Care Ctr Sandy UT 1,033 1987 1992 40 years
St. George Care and Rehab. Center St. George UT 1,560 1976 1993 29 years
Federal Heights Rehab. & Nsg. Ctr. Salt Lake City UT 809 1962 1992 29 years
Wasatch Valley Rehabilitation Salt Lake City UT 1,120 1962 1995 29 years
Nansemond Pointe Rehab. & HC Ctr. Suffolk VA 2,249 1963 1991 32 years
Harbour Pointe Med. & Rehabilitation Ctr Norfolk VA 1,536 1969 1993 28 years
River Pointe Rehab. & Healthc. Ctr. Virginia Beach VA 1,930 1953 1991 25 years
Bay Pointe Medical & Rehabilitation Centre Virginia Beach VA 951 1971 1993 29 years
Birchwood Terrace Healthcare Burlington VT 2,014 1965 1990 27 years
Arden Rehabilitation & Healthcare Ctr Seattle WA 1,354 1950 1993 28.5 years
Northwest Continuum Care Center Longview WA 895 1955 1992 29 years
Bellingham Health Care & Rehabilitation Svc Bellingham WA 1,285 1972 1993 28.5 years
Rainier Vista Care Center Puyallup WA 1,243 1986 1991 40 years
Lakewood Healthcare Center Lakewood WA 919 1989 1989 45 years
Vancouver Healthcare & Rehab. Ctr. Vancouver WA 1,060 1970 1993 28 years
Heritage Health & Rehabilitation Center Vancouver WA 268 1955 1992 29 years
Edmonds Rehabilitation & Healthcare Center Edmonds WA 1,207 1961 1991 25 years
Queen Anne Healthcare Seattle WA 964 1970 1993 29 years
S-5
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ---------------------------------------------------------------------- and Improve- Subsequent to and Improve-
Facility name City State Land ments Acquisition Land ments
- -----------------------------------------------------------------------------------------------------------------------------------
San Luis Medical & Rehabilitation Center Greenbay WI 259 5,299 - 259 5,299
Eastview Medical & Rehabilitation Center Antigo WI 200 4,047 - 200 4,047
Colonial Manor Medical & Rehabilitation Center Wausau WI 169 3,370 - 169 3,370
Colony Oaks Care Center Appleton WI 353 3,571 - 353 3,571
North Ridge Med. & Rehabilitation Center Manitowoc WI 206 3,785 - 206 3,785
Vallhaven Care Center Neenah WI 337 5,125 - 337 5,125
Kennedy Park Medical & Rehabilitation Center Schofield WI 301 3,596 - 301 3,596
Family Heritage Med. & Rehabilitation Center Wisconsin Rapids WI 240 3,350 - 240 3,350
Mt. Carmel Medical & Rehabilitation Center Burlington WI 274 7,205 - 274 7,205
Mt. Carmel Medical & Rehabilitation Center Milwaukee WI 2,678 25,867 - 2,678 25,867
Sheridan Medical Complex Kenosha WI 282 4,910 - 282 4,910
Woodstock Health & Rehab. Center Kenosha WI 562 7,424 - 562 7,424
Mountain Towers Healthcare & Rehabilitation Cheyenne WY 342 3,814 - 342 3,814
South Central Wyoming HC. & Rehabilitation Rawlins WY 151 1,738 - 151 1,738
Wind River Healthcare & Rehab. Ctr Riverton WY 179 1,559 - 179 1,559
Sage View Care Center Rock Springs WY 287 2,392 - 287 2,392
------------------------------------------------------------
TOTAL KINDRED NURSING HOMES 75,264 734,661 1,178 74,884 735,839
NON-KINDRED SKILLED NURSING FACILITIES
Birchwood Care Center MI 291 6,187 - 285 3,095
Clara Barton Terrace MI 375 2,219 - 375 2,219
Mary Avenue Care Center MI 162 1,744 - 162 1,744
Woodside Convalescent Center MN 639 3,440 56 639 3,496
Hillhaven Convalescent Center NV 121 1,181 - 121 1,181
Marietta Convalescent Center OH 158 3,266 75 158 3,341
------------------------------------------------------------
TOTAL NON-KINDRED SKILLED NURSING FACILITIES 1,746 18,037 131 1,740 15,076
------------------------------------------------------------
TOTAL FOR SKILLED NURSING FACILITIES 77,010 752,698 1,309 76,624 750,915
KINDRED HOSPITALS
Kindred Hospital - Phoenix Phoenix AZ 226 3,359 - 226 3,359
Kindred Hospital - Tucson Tucson AZ 130 3,091 - 130 3,091
Kindred Hospital - Ontario Ontario CA 523 2,988 - 523 2,988
Kindred Hospital - San Leandro San Leandro CA 2,735 5,870 - 2,735 5,870
Kindred Hospital - Orange County Westminster CA 728 7,384 - 728 7,384
THC - Orange County Brea CA 3,144 2,611 - 3,144 2,611
Kindred Hospital - San Diego San Diego CA 670 11,764 - 670 11,764
Recovery Inn of Menlo Park Menlo Park CA - 2,799 - - 2,799
Kindred Hospital - Denver Denver CO 896 6,367 - 896 6,367
Life on Which
Depreciation
Location in Income
- ---------------------------------------------------------------------- Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- ----------------------------------------------------------------------------------------------------------------------------------
San Luis Medical & Rehabilitation Center Greenbay WI 1,685 N/A 1996 25 years
Eastview Medical & Rehabilitation Center Antigo WI 1,612 1962 1991 28 years
Colonial Manor Medical & Rehabilitation Center Wausau WI 1,194 1964 1995 30 years
Colony Oaks Care Center Appleton WI 1,318 1967 1993 29 years
North Ridge Med. & Rehabilitation Center Manitowoc WI 1,307 1964 1992 29 years
Vallhaven Care Center Neenah WI 1,828 1966 1993 28 years
Kennedy Park Medical & Rehabilitation Center Schofield WI 2,360 1966 1982 29 years
Family Heritage Med. & Rehabilitation Center Wisconsin Rapids WI 2,401 1966 1982 26 years
Mt. Carmel Medical & Rehabilitation Center Burlington WI 2,236 1971 1991 30 years
Mt. Carmel Medical & Rehabilitation Center Milwaukee WI 9,366 1958 1991 30 years
Sheridan Medical Complex Kenosha WI 2,003 1964 1991 25 years
Woodstock Health & Rehab. Center Kenosha WI 3,164 1970 1991 25 years
Mountain Towers Healthcare & Rehabilitation Cheyenne WY 1,199 1964 1992 29 years
South Central Wyoming HC. & Rehabilitation Rawlins WY 579 1955 1993 29 years
Wind River Healthcare & Rehab. Ctr Riverton WY 514 1967 1992 29 years
Sage View Care Center Rock Springs WY 819 1964 1993 30 years
----------
TOTAL KINDRED NURSING HOMES 256,848
NON-KINDRED SKILLED NURSING FACILITIES
Birchwood Care Center MI 1,313 N/A 1986 36 years
Clara Barton Terrace MI 2,220 N/A 1982 21 years
Mary Avenue Care Center MI 1,661 N/A 1982 21 years
Woodside Convalescent Center MN 2,418 N/A 1982 28 years
Hillhaven Convalescent Center NV 805 N/A 1978 40 years
Marietta Convalescent Center OH 988 N/A 1993 25 years
----------
TOTAL NON-KINDRED SKILLED NURSING FACILITIES 9,405
----------
TOTAL FOR SKILLED NURSING FACILITIES 266,253
KINDRED HOSPITALS
Kindred Hospital - Phoenix Phoenix AZ 1,263 N/A 1992 30 years
Kindred Hospital - Tucson Tucson AZ 1,332 N/A 1994 25 years
Kindred Hospital - Ontario Ontario CA 1,069 N/A 1994 25 years
Kindred Hospital - San Leandro San Leandro CA 3,646 N/A 1993 25 years
Kindred Hospital - Orange County Westminster CA 3,265 N/A 1993 20 years
THC - Orange County Brea CA 341 1990 1995 40 years
Kindred Hospital - San Diego San Diego CA 3,902 N/A 1994 25 years
Recovery Inn of Menlo Park Menlo Park CA 1,263 1992 1992 20 years
Kindred Hospital - Denver Denver CO 2,905 N/A 1994 20 years
S-6
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period
----------------------- Cost --------------------
Location Buildings Capitalized Buildings
- ------------------------------------------------------------------ and Improve- Subsequent to and Improve-
Facility name City State Land ments Acquisition Land ments
- --------------------------------------------------------------------------------------------------------------------------------
Kindred Hospital - Coral Gables Coral Gables FL 1,071 5,348 - 1,071 5,348
Kindred Hospital - St. Petersburg St. Petersburg FL 1,418 17,525 7 1,418 17,532
Kindred Hospital - Ft. Lauderdale Ft. Lauderdale FL 1,758 14,080 - 1,758 14,080
Kindred Hospital - North Florida Green Cove Spr. FL 145 4,613 - 145 4,613
Kindred Hospital - Central Tampa Tampa FL 2,732 7,676 - 2,732 7,676
Kindred Hospital - Hollywood Hollywood FL 605 5,229 - 605 5,229
Kindred Hospital - Sycamore Sycamore IL 77 8,549 - 77 8,549
Kindred Hospital - Chicago North Chicago IL 1,583 19,980 - 1,583 19,980
Kindred Hospital - Lake Shore Chicago IL 1,513 9,525 - 1,513 9,525
Kindred Hospital - Northlake Northlake IL 850 6,498 - 850 6,498
Kindred Hospital - LaGrange LaGrange IN 173 2,330 - 173 2,330
Kindred Hospital - Indianapolis Indianapolis IN 985 3,801 - 985 3,801
Kindred Hospital - Louisville Louisville KY 3,041 12,330 - 3,041 12,330
Kindred Hospital - New Orleans New Orleans LA 648 4,971 - 648 4,971
Kindred Hosp - Boston Northshore Peabody MA 543 7,568 - 543 7,568
Kindred Hospital - Boston Boston MA 1,551 9,796 - 1,551 9,796
Kindred Hospital - Detroit Lincoln Park MI 355 3,544 - 355 3,544
Kindred Hospital - Metro Detroit Detroit MI 564 4,896 - 564 4,896
Kindred Hospital - Minneapolis Golden Valley MN 223 8,120 - 223 8,120
Kindred Hospital - Kansas City Kansas City MO 277 2,914 - 277 2,914
Kindred Hospital - St. Louis St. Louis MO 1,126 2,087 - 1,126 2,087
Kindred Hospital - Greensboro Greensboro NC 1,010 7,586 - 1,010 7,586
Kindred Hospital - Albuquerque Albuquerque NM 11 4,253 - 11 4,253
THC - Las Vegas Hospital Las Vegas NV 1,110 2,177 - 1,110 2,177
Kindred Hospital - Oklahoma City Oklahoma City OK 293 5,607 - 293 5,607
Kindred Hospital - Philadelphia Philadelphia PA 135 5,223 - 135 5,223
Kindred Hospital - Pittsburgh Oakdale PA 662 12,854 - 662 12,854
Kindred Hospital - Chattanooga Chattanooga TN 757 4,415 - 757 4,415
Kindred Hospital - San Antonio San Antonio TX 249 11,413 - 249 11,413
Kindred Hospital - Ft. Worth Southwest Ft. Worth TX 2,342 7,458 - 2,342 7,458
Kindred Hospital - Houston Northwest Houston TX 1,699 6,788 - 1,699 6,788
Kindred Hospital - Mansfield Mansfield TX 267 2,462 - 267 2,462
Kindred Hospital - Ft. Worth West Ft. Worth TX 648 10,608 - 648 10,608
Kindred Hospital - Houston Houston TX 33 7,062 - 33 7,062
Kindred Hospital - Arlington, VA Arlington VA 3,025 3,105 - 3,025 3,105
------------------------------------------------------------
TOTAL FOR KINDRED HOSPITALS 42,531 298,624 7 42,531 298,631
PERSONAL CARE FACILITIES
ResCare - Tangram - 8 sites San Marcos TX 616 6,512 4 616 6,521
------------------------------------------------------------
Life on Which
Depreciation
Location in Income
- ------------------------------------------------------------------ Accumulated Date of Date Statement is
Facility name City State Depreciation Construction Acquired Computed
- --------------------------------------------------------------------------------------------------------------------------------
Kindred Hospital - Coral Gables Coral Gables FL 2,399 N/A 1992 30 years
Kindred Hospital - St. Petersburg St. Petersburg FL 4,740 1968 1997 40 years
Kindred Hospital - Ft. Lauderdale Ft. Lauderdale FL 5,768 N/A 1989 30 years
Kindred Hospital - North Florida Green Cove Spr. FL 1,516 N/A 1994 20 years
Kindred Hospital - Central Tampa Tampa FL 1,349 1970 1993 40 years
Kindred Hospital - Hollywood Hollywood FL 1,364 1937 1995 20 years
Kindred Hospital - Sycamore Sycamore IL 2,787 N/A 1993 20 years
Kindred Hospital - Chicago North Chicago IL 6,187 N/A 1995 25 years
Kindred Hospital - Lake Shore Chicago IL 4,399 1995 1976 20 years
Kindred Hospital - Northlake Northlake IL 2,658 N/A 1991 30 years
Kindred Hospital - LaGrange LaGrange IN 1,712 N/A 1985 25 years
Kindred Hospital - Indianapolis Indianapolis IN 1,614 N/A 1993 30 years
Kindred Hospital - Louisville Louisville KY 4,111 N/A 1995 20 years
Kindred Hospital - New Orleans New Orleans LA 2,377 1968 1978 20 years
Kindred Hosp - Boston Northshore Peabody MA 1,377 1974 1993 40 years
Kindred Hospital - Boston Boston MA 4,735 N/A 1994 25 years
Kindred Hospital - Detroit Lincoln Park MI 1,714 N/A 1991 20 years
Kindred Hospital - Metro Detroit Detroit MI 662 1980 1997 40 years
Kindred Hospital - Minneapolis Golden Valley MN 1,830 1952 1994 40 years
Kindred Hospital - Kansas City Kansas City MO 1,274 N/A 1992 30 years
Kindred Hospital - St. Louis St. Louis MO 1,064 N/A 1991 40 years
Kindred Hospital - Greensboro Greensboro NC 3,014 N/A 1994 20 years
Kindred Hospital - Albuquerque Albuquerque NM 670 1985 1993 40 years
THC - Las Vegas Hospital Las Vegas NV 348 1980 1994 40 years
Kindred Hospital - Oklahoma City Oklahoma City OK 1,884 N/A 1993 30 years
Kindred Hospital - Philadelphia Philadelphia PA 1,086 N/A 1995 35 years
Kindred Hospital - Pittsburgh Oakdale PA 2,900 N/A 1996 40 years
Kindred Hospital - Chattanooga Chattanooga TN 1,904 N/A 1993 22 years
Kindred Hospital - San Antonio San Antonio TX 3,564 N/A 1993 30 years
Kindred Hospital - Ft. Worth Southwest Ft. Worth TX 2,593 1987 1986 20 years
Kindred Hospital - Houston Northwest Houston TX 1,477 1986 1985 40 years
Kindred Hospital - Mansfield Mansfield TX 918 N/A 1990 40 years
Kindred Hospital - Ft. Worth West Ft. Worth TX 3,242 N/A 1994 34 years
Kindred Hospital - Houston Houston TX 2,611 N/A 1994 20 years
Kindred Hospital - Arlington, VA Arlington VA 1,356 N/A 1995 28 years
---------
TOTAL FOR KINDRED HOSPITALS 102,190
PERSONAL CARE FACILITIES
ResCare - Tangram - 8 sites San Marcos TX 1,059 N/A 1998 20 years
S-7
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Gross Amount Carried
Initial Cost to Company at Close of Period Life on Which
----------------------- Cost -------------------- Depreciation
Location Buildings Capitalized Buildings in Income
- -------------------------- and Improv- Subsequent to and Improv- Accumulated Date of Date Statement is
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired Computed
- ------------------------------------------------------------------------------------------------------------------------------------
120,157 1,057,834 1,320 119,771 1,056,067 369,502
=========================================================================
Note: Total aggregate cost for federal income tax purposes is $1,166,971.
For the years ended December 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Reconciliation of real estate:
Carrying cost:
Balance at beginning of period $1,176,143 $1,182,547 $1,185,969
Additions during period:
Acquisitions 75 - -
Dispositions:
Asset Impairment (3,422)
Sale of facility (6,404)
Sale of land parcel (380)
---------- ---------- ----------
Balance end of period $1,175,838 $1,176,143 $1,182,547
========== ========== ==========
Accumulated depreciation:
Balance at beginning of period $ 327,598 $ 287,756 $ 246,509
Additions during period:
Depreciation expense 41,904 42,188 42,742
Dispositions:
Asset Impairment (1,495)
Sale of facility (2,346)
---------- ---------- ----------
Balance end of period $ 369,502 $ 327,598 $ 287,756
========== ========== ==========
S-8