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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ________TO ________.
Commission file number: 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(State or other jurisdiction) (I.R.S. Employer Identification Number)
4360 Brownsboro Road Suite 115 40207-1642
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
(502) 357-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 11, 1999
Common stock, $.25 par value 67,962,424 shares
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VENTAS, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION......................................... 3
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of December 31,1998
and March 31, 1999............................................ 3
Condensed Consolidated Statement of Income for the three
months ended March 31, 1999................................... 4
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1999................................... 5
Condensed Consolidated Statement of Stockholders' Equity...... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 19
PART II. OTHER INFORMATION............................................. 20
Item 1. Legal Proceedings............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
2
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) (Audited)
Assets
Real estate investments:
Land................................................ $ 120,928 $ 120,928
Building and improvements........................... 1,065,037 1,065,037
---------- ----------
1,185,965 1,185,965
Accumulated depreciation............................ (257,453) (246,509)
---------- ----------
Total real estate investments..................... 928,512 939,456
Cash and equivalents.................................. 58,497 338
Deferred financing costs, net......................... 7,598 8,816
Due from Vencor, Inc.................................. -- 6,967
Notes receivable from employees....................... 4,027 4,027
Other................................................. 864 102
---------- ----------
Total assets...................................... $ 999,498 $ 959,706
========== ==========
Liabilities and stockholders' equity
Liabilities:
Bank credit facility and other debt................. $ 976,889 $ 931,127
Accrued salaries, wages and other compensation...... 1,920 552
Accrued interest.................................... 2,035 3,556
Other accrued liabilities........................... 2,656 2,974
Deferred income taxes............................... 30,506 30,506
---------- ----------
Total liabilities................................. 1,014,006 968,715
Commitments and contingencies
Stockholders' equity (deficit):
Common stock........................................ 18,402 18,402
Capital in excess of par value...................... 140,173 140,103
Unearned compensation on restricted stock........... (3,154) (1,962)
Accumulated deficit................................. (15,788) (9,637)
---------- ----------
139,633 146,906
Treasury stock...................................... (154,141) (155,915)
---------- ----------
Total stockholders' equity (deficit).............. (14,508) (9,009)
---------- ----------
Total liabilities and stockholders' equity
(deficit)........................................ $ 999,498 $ 959,706
========== ==========
Note--The balance sheet at December 31, 1998, has been derived from audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
3
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the three months ended March 31, 1999
(Unaudited)
(In Thousands, Except Per Share Amounts)
Revenues
Rental income $56,436
Interest and other income 197
-------
Total revenues 56,633
Expenses
General and administrative 2,551
Non-recurring employee severance costs 1,272
Depreciation on real estate investments 10,944
Interest on bank credit facility and other debt 18,065
Net payments on interest rate swap agreement 1,593
Amortization of restricted stock grants 652
Amortization of deferred financing costs 1,218
-------
Total expenses 36,295
-------
Net Income $20,338
=======
Net income per common share:
Basic $ 0.30
Diluted $ 0.30
Shares used in computing earnings per common share:
Basic 67,691
Diluted 67,956
See notes to condensed consolidated financial statements.
4
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 1999
(Unaudited)
(In Thousands)
Cash flows from operating activities:
Net income $ 20,338
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 10,945
Amortization of deferred financing fees 1,218
Amortization of restricted stock grants 652
Increase in other assets (641)
Decrease in accounts payable and accrued liabilities (471)
Decrease in amount due from Vencor, Inc. 6,967
---------
Net cash provided by operating activities 39,008
Cash flows from investing activities:
Purchase of furniture and equipment (122)
---------
Net cash used in investing activities (122)
Cash flows from financing activities:
Net change in borrowings under revolving line of credit 173,143
Repayment of other bank credit facility and other debt (127,381)
Cash distributions to shareholders (26,489)
---------
Net cash provided by financing activities 19,273
---------
Increase in cash and equivalents 58,159
Cash and equivalents at beginning of period 338
---------
Cash and cash equivalents at end of period $ 58,497
=========
See notes to condensed consolidated financial statements.
5
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
March 31, 1999
(Unaudited)
Capital Unearned
in Compensation
Common Excess on
Stock of Par Restricted Accumulated Treasury
Par Value Value Stock Deficit Stock Total
--------- -------- ------------ ----------- ---------- --------
Balance at December 31,
1998 $18,402 $140,103 $(1,962) $ (9,637) $ (155,915) $ (9,009)
Net Income 20,338 20,338
Proceeds from issuance
of shares for stock
incentive plans --
Award and amortization
of restricted stock
grants, net of
forfeitures 70 (1,192) 1,774 652
Cash dividends paid (26,489) (26,489)
------- -------- ------- -------- ---------- --------
Balance at March 31,
1999 $18,402 $140,173 $(3,154) $(15,788) $ (154,141) $(14,508)
======= ======== ======= ======== ========== ========
See notes to condensed consolidated financial statements.
6
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Ventas, Inc. (the "Company"), formerly named Vencor, Inc., is a real estate
company that owns or leases 45 hospitals, 219 nursing centers and eight
personal care facilities in 36 states as of March 31, 1999. The Company
conducts all of its business through a wholly owned operating partnership,
Ventas Realty, Limited Partnership ("Ventas Realty"). The Company anticipates
that it will meet the requirements to qualify as a real estate investment
trust ("REIT") for federal income tax purposes for the tax year beginning
January 1, 1999. Accordingly, no provision for income taxes has been made for
the three months ended March 31, 1999, in the accompanying condensed
consolidated financial statements. The Company operates in one segment which
consists of owning and leasing healthcare facilities to third parties.
On April 30, 1998, the Company changed its name to Ventas, Inc. and on May
1, 1998, refinanced substantially all of its long-term debt in connection with
the spin off of its healthcare operations through the distribution of the
common stock of a new entity (which assumed the Company's former name, Vencor,
Inc. ("Vencor")) to stockholders of the Company of record as of April 27, 1998
(the "Reorganization"). The distribution was effected on May 1, 1998 (the
"Distribution Date"). For financial reporting periods subsequent to the
Distribution Date, the historical financial statements of the Company were
assumed by Vencor and the Company is deemed to have commenced operations on
May 1, 1998. Accordingly, the Company does not have comparable financial
results for prior periods. In addition, for certain reporting purposes under
this Form 10-Q and other filings, the Securities and Exchange Commission
treats the Company as having commenced operations on May 1, 1998.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered for a fair presentation
have been included. Operating results for the three months ended March 31,
1999 are not necessarily an indication of the results that may be expected for
the year ending December 31, 1999. These financial statements and related
notes should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
Beginning in May 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which established new rules for the reporting of comprehensive income
and its components. SFAS 130 requires, among other things, unrealized gains or
losses on available-for-sale securities to be disclosed as other comprehensive
income. The adoption of SFAS 130 had no impact on the Company's net income or
stockholders' equity for the three months ended March 31, 1999.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which became effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
report certain information about operating segments, products and services,
the geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has determined that the Company operates in a single
business segment. Accordingly, the adoption of SFAS 131 will have no effect on
the consolidated financial statement disclosures.
7
In June 1998, FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 1999. SFAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company expects to adopt SFAS 133 effective January 1, 2000. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be recognized immediately in earnings. Based on the
Company's derivative positions and their related fair values at March 31,
1999, the Company estimates that upon adoption it will report a reduction of
$9.3 million in other comprehensive income (assuming the Company has qualified
as a REIT for federal income tax purposes). The Company was not required to
report this $9.3 million unrealized loss for the three months ended March 31,
1999.
NOTE 3--CONCENTRATION OF CREDIT RISK AND GOING CONCERN
The Company leases substantially all of its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to satisfy its rent obligations under certain
master lease agreements (the "Master Leases") and certain other agreements
will impact the Company's revenues and its ability to service its indebtedness
and to make distributions to its stockholders. Because the operations of
Vencor have been negatively impacted by changes in reimbursement rates, by its
current level of indebtedness and by certain other factors, and because of the
potential effect of such events on Vencor's ability to meet its rent
obligations to the Company, the Company's auditors have included an
explanatory paragraph in its report to the Company's consolidated financial
statements for the year ended December 31, 1998 that expresses substantial
doubt as to the Company's ability to continue as a going concern. The
existence of the explanatory paragraph may have a material adverse effect on
the Company's relationships with its creditors and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management has taken certain initiatives to address the issues noted above.
The Company has retained Merrill Lynch & Co. ("Merrill Lynch"), as financial
advisor, to assist in its review of Vencor's financial condition. Merrill
Lynch is advising the Company in its ongoing discussions with Vencor regarding
its recent results of operations and Vencor's need to amend or restructure its
existing capital structure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments." Merrill
Lynch is also advising the Company in its review of alternatives to repay the
$275 million portion of its credit facility that matures on October 30, 1999,
and to assess other strategic alternatives for the Company.
As of May 11, 1999, the Company had cash and cash equivalents totaling $70.6
million.
In connection with the discussions between the Company and Vencor regarding
Vencor's recent results of operations and Vencor's need to amend or
restructure its existing capital structure, the Company and Vencor have
entered into certain agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments."
NOTE 4--BANK CREDIT FACILITY AND OTHER DEBT
On April 30, 1998, the Company, through Ventas Realty, consummated a $1.2
billion bank credit agreement (the "Bank Credit Agreement") and retained
approximately $6.0 million of prior debt obligations. The Bank Credit
Agreement is comprised of (i) a three year $250 million revolving credit
facility (the "Revolving Credit Facility") priced at the London Interbank
Offered Rate ("LIBOR") plus 2 1/4 to 2 1/2%, (ii) a $200 million Term A Loan
(the "Term A Loan") payable in various installments over three years priced at
LIBOR plus 2 1/4 to 2 1/2%, (iii) a $350 million Term B Loan (the "Term B
Loan") payable in various installments over five years priced at LIBOR plus 2
3/4 to 3%, and (iv) a $400 million loan due October 30, 1999 and priced at
LIBOR plus 2 3/4 to 3% (the "Bridge Facility Loan"). The Bank Credit Agreement
is secured by a pledge of the Company's general partnership interest in Ventas
Realty and contains various covenants and restrictions.
8
The following is a summary of long-term borrowings at March 31, 1999 (in
thousands):
Revolving line of credit, bearing interest at a base rate of
LIBOR plus 2.25% (7.19% at March 31, 1999), due April 30, 2001.. $202,743
Bridge Facility Loan, bearing interest at a base rate of LIBOR
plus 2.75% (7.69% at March 31, 1999), due October 30, 1999...... 275,000
Term A Loan, bearing interest at a base rate of LIBOR plus 2.25%
(7.19% at March 31, 1999),
due April 30, 2001.............................................. 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus 2.75%
(7.69% at March 31, 1999), due in quarterly installments of $875
with the balance due April 30, 2003............................. 317,307
Other............................................................ 21
--------
$976,889
========
In connection with the Reorganization and the consummation of the Bank
Credit Agreement, the Company entered into an interest rate swap agreement
($900 million outstanding at March 31, 1999) to eliminate the impact of
changes in interest rates on the Company's floating rate debt. The agreement
expires in varying amounts through December 2006 and provides for the Company
to pay a fixed rate at 5.985% and receive LIBOR (floating rate). The fair
value of the swap agreement is not recognized in the condensed consolidated
financial statements (See Note 2--Basis of Presentation). The terms of the
swap agreement require that the Company make a cash payment or otherwise post
collateral, such as a letter of credit from one of the banks identified in the
Bank Credit Agreement (which limits the aggregate amount of any such letters
of credit to $25 million), to the counterparty if the market value loss to the
Company exceeds certain levels. The threshold levels vary based on the
relationship between the Company's debt obligations and the tangible fair
market value of its assets as defined in the Bank Credit Agreement. As of
March 31, 1999, no collateral was required to be posted under the interest
rate swap agreement.
NOTE 5--LITIGATION
The following litigation and other matters arose from the Company's
operations prior to the Reorganization. In connection with the Reorganization,
Vencor agreed to assume the defense, on behalf of the Company, of any claims
that were pending at the time of the Reorganization and which arose out of the
ownership or operation of the healthcare operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the Reorganization
which arose out of the ownership and operation of the healthcare operations.
However, there can be no assurance that Vencor will continue to defend the
Company in such proceedings and actions or that Vencor will have sufficient
assets, income and access to financing to enable it to satisfy such
obligations or its obligations incurred in connection with the Reorganization.
In addition, the following descriptions are based on information included in
Vencor's public filings and information provided to the Company by Vencor.
Because Vencor is defending the Company in each of these proceedings or
actions, the Company has not conducted an independent investigation to verify
the facts surrounding these proceedings or actions.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially inflated. In particular, the
complaint alleges that the Company issued false and misleading financial
statements
9
during the first, second and third calendar quarters of 1997 which
misrepresented and understated the impact that changes in Medicare
reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful
integration of its recent acquisitions and prospective earnings per share for
1997 and 1998 which the Company knew lacked any reasonable basis and were not
being achieved. The suit seeks damages in an amount to be proven at trial,
pre-judgment and post-judgment interest, reasonable attorneys' fees, expert
witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted the Company's
motion to dismiss the case. The plaintiff has appealed the dismissal to the
United States Court of Appeals for the Sixth Circuit. Vencor, on behalf of the
Company, is defending this action vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of Vencor and the Company against certain current and
former executive officers and directors of Vencor and the Company. The
complaint alleges that the defendants damaged Vencor and the Company by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of Vencor and the
Company. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the plaintiff has an effective remedy. Vencor and the
Company each believe that the allegations in the complaint are without merit
and Vencor, for and on behalf of the Company, intends to defend this action
vigorously.
As set forth in the Company's Form 10-K for the year ended December 31,
1998, Vencor has been informed by the Department of Justice that it is the
subject of ongoing investigations into various aspects of its claims for
reimbursement from government payors, billing practices and various quality of
care issues in the hospitals and nursing centers operated by Vencor. These
investigations also include the Company's healthcare operations prior to the
date of the Reorganization. Thus, the Department of Justice has informed the
Company that for the period prior to the date of the Reorganization, if any
liability exists in connection with such investigations, the Company may be
liable for such liability. However, the Company believes that under agreements
entered into at the time of the Reorganization, Vencor is obligated to assume
the defense of, and to indemnify the Company for any liabilities that arise
out of, any claims that may result from the investigations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy these obligations. Vencor is in discussions
with the Department of Justice concerning the nature of the issues under
investigation and the possible settlement of some or all of the claims. Vencor
is cooperating fully in the investigations.
Unasserted Claim--Potential Liabilities Due to Fraudulent Transfer
Considerations
Transfers made and obligations incurred in the Reorganization and the
simultaneous distribution of the Vencor common stock to the Company's
stockholders (the "Distribution") are subject to review under state fraudulent
conveyance laws, and in the event of a bankruptcy proceeding, federal
fraudulent conveyance laws. Under these laws a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee or debtor-in-
possession in bankruptcy) could avoid the transfer if it determined that, as
of the time of the Reorganization, the party making the transfer or incurring
the obligation did not receive fair consideration or reasonably equivalent
value and, at the time of the Reorganization, the party making the transfer or
incurring the obligation (i) was insolvent or was rendered insolvent, (ii) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage, or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay such debts as they
would mature. Although Vencor has not formally asserted a claim, Vencor's
legal counsel has raised questions relating to potential fraudulent conveyance
or obligation issues relating to the Reorganization. At the time of the
Reorganization, the Company obtained an opinion from an independent third
party that addressed issues of solvency and adequate capitalization.
10
Nevertheless, if a fraudulent conveyance or obligation claim is ultimately
asserted by Vencor, creditors, or others, the ultimate outcome of such a claim
cannot presently be determined. The Company intends to defend these claims
vigorously if they are asserted in a legal proceeding or mediation.
The Company and Vencor have entered into certain tolling agreements related
to claims which may arise in a bankruptcy proceeding, as discussed below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments." During the Company's discussions with Vencor
discussed below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments," Vencor has asserted
various potential claims against the Company arising out of the
Reorganization. The Company intends to defend these claims vigorously if they
are asserted in a legal or mediation proceeding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background Information
The Company has announced its intention to operate and be treated as a self-
administered, self-managed real estate investment trust ("REIT") for federal
income tax purposes beginning January 1, 1999. The Company is a real estate
company that owns or leases 45 hospitals (comprised of two acute care
hospitals and 43 long-term care hospitals), 219 nursing centers and eight
personal care facilities as of March 31, 1999. The Company's portfolio of
properties are located in 36 states and are leased and operated primarily by
Vencor or its subsidiaries. The Company conducts all of its business through a
wholly owned operating partnership, Ventas Realty, Limited Partnership.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987 and changed its name to Vencor, Incorporated in 1989 and to Vencor, Inc.
in 1993. On September 28, 1995, The Hillhaven Corporation merged with and into
the Company. On March 21, 1997, the Company acquired TheraTx, Incorporated, a
provider of subacute rehabilitation and respiratory therapy program management
services to nursing centers and an operator of 26 nursing centers. On June 24,
1997, the Company acquired Transitional Hospitals Corporation, an operator of
16 long-term acute care hospitals and three satellite facilities located in 13
states.
On May 1, 1998, the Company effected the Reorganization pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently renamed Vencor, Inc., was formed to operate the
hospital, nursing center and ancillary services businesses. Pursuant to the
terms of the Reorganization, the Company distributed the common stock of
Vencor to stockholders of record of the Company as of April 27, 1998. The
Company, through its subsidiaries, continued to hold title to substantially
all of the real property and to lease such real property to Vencor. At such
time, the Company also changed its name to Ventas, Inc. and refinanced
substantially all of its long-term debt. For financial reporting periods
subsequent to the Reorganization, the historical financial statements of the
Company were assumed by Vencor, and the Company is deemed to have commenced
operations on May 1, 1998. Accordingly, the Company does not have comparable
financial results for prior periods. In addition, for certain reporting
purposes under this Form 10-Q and other filings, the Securities and Exchange
Commission (the "Commission") treats the Company as having commenced
operations on May 1, 1998.
The Company's principal objectives are to maximize funds from operations for
distribution to stockholders, to enhance capital growth through the
appreciation of the residual value of its portfolio of properties, and to
preserve and maintain the stockholders' capital.
Recent Developments
As is discussed in the Company's Form 10-K for the year ended December 31,
1998, the Company and Vencor had discussions regarding Vencor's recent results
of operations. In those discussions, Vencor requested interim rent concessions
under the Master Leases and the Company rejected that request. In connection
with
11
those discussions, the Company entered into an agreement (the "Original
Standstill Agreement") with Vencor whereby the Company agreed not to exercise
remedies for non-payment of rent due from Vencor on April 1, 1999 for a period
ending April 12, 1999.
On April 12, 1999, the Company entered into an agreement (the "Second
Standstill Agreement") with Vencor which provided that if Vencor paid the full
amount of April 1999 rent pursuant to a specified schedule, the Company would
not exercise its remedies under its lease agreements with Vencor. These
payments, totaling $18.5 million, represented the full amount of rent that was
due for April under the lease agreements between the companies. Vencor made
all rent payments required by the Second Standstill Agreement with respect to
April rent.
Pursuant to the Second Standstill Agreement, each of the Company and Vencor
also agreed not to pursue any claims against the other or any third party
relating to the Reorganization as long as Vencor made the full lease payments
for April and May 1999 under the specified schedule. The Second Standstill
Agreement provided that it would terminate on the earliest to occur of May 5,
1999, any date that a voluntary or involuntary bankruptcy proceeding was
commenced by or against Vencor or Vencor's failure to pay rent in accordance
with the specified schedule.
The Company and Vencor also entered into an agreement (the "Tolling
Agreement") pursuant to which they agreed that any statutes of limitations or
other time constraints in a bankruptcy proceeding that might be asserted by
one party against the other would be extended or tolled from April 12, 1999
until May 5, 1999 or until the Second Standstill Agreement terminated due to
Vencor's failure to make the contemplated lease payments.
On April 12, 1999, the Company and Vencor also agreed to amend each of the
lease agreements between the companies, effective as of their date of original
execution, to delete a provision that permitted the Company to require Vencor
to purchase a facility upon the occurrence of certain events of default by
Vencor.
On April 15, 1999, Vencor filed its Annual Report on Form 10-K for the year
ended December 31, 1998 with the Commission. Vencor's auditors included an
explanatory statement in its report to Vencor's financial statements for the
year ended December 31, 1998 that expresses substantial doubt as to Vencor's
ability to continue as a going concern. On April 15, 1999, Vencor announced
that it had reported a net loss of $605.9 million for the fourth quarter of
1998 and $572.9 million for the year ended December 31, 1998. Vencor also
announced that its results for the fourth quarter of 1998 included pretax
charges of $411.9 million related to certain unusual transactions and $78.9 in
pretax charges recorded in connection with recurring year-end accounting
adjustments.
On April 21, 1999, Vencor announced that it reached an agreement with the
Health Care Financing Administration to extend its repayment of approximately
$90 million of Medicare reimbursement overpayments over 60 months.
On May 3, 1999, Vencor announced that it had elected not to make the
interest payment of approximately $14.8 million due on May 3, 1999 on its $300
million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "Notes").
Vencor also announced that if the interest is not paid within a 30 day grace
period, and subject to providing notice to Vencor's senior bank lenders, the
Notes may be declared immediately due and payable.
On May 5, 1999, the Company and Vencor agreed to extend the term of the
Second Standstill Agreement through the earlier of May 7, 1999 or any date
that a voluntary or involuntary bankruptcy proceeding is commenced by or
against Vencor. As a result of this extension, neither Vencor nor the Company
could exercise remedies against the other during this period, including any
remedies for the failure of Vencor to pay the $18.5 million of May rent due to
the Company.
Vencor did not pay the May rent on May 7, 1999, and, as a result, the
Company served Vencor with a notice of non-payment of rent under each of the
lease agreements between the companies. If the May rent is not paid by June
11, 1999, the Company will be entitled to exercise remedies for non-payment of
rent under each of the lease agreements between the companies.
12
On May 8, 1999, the Company and Vencor agreed to extend the term of the
Second Standstill Agreement through the earlier of June 6, 1999 or any date
that a voluntary or involuntary bankruptcy proceeding is commenced by or
against Vencor. The Company and Vencor also agreed to extend the term of the
Tolling Agreement until June 6, 1999.
On May 14, 1999, the Company announced that in order to preserve its current
cash position, it will not declare or pay a dividend at this time. The Company
expects that it will once again pay a dividend when Vencor resolves the
financial difficulties contributing to the uncertainties about Vencor's
continuing ability to make rent payments to the Company. However, there can be
no assurances that Vencor will resolve its financial difficulties and pay the
rent due the Company. The Company still intends to qualify as a REIT for the
year ending December 31, 1999. The Company is not required to distribute its
taxable income in quarterly installments in order to qualify as a REIT. The
Company will continue to evaluate its dividend policy in light of future
developments in Vencor's financial performance and ongoing discussions
regarding a global restructuring of Vencor's capital structure.
The Company believes that the best outcome for the Company, Vencor and their
respective banks and other creditors is a consensual, global restructuring of
Vencor's financial obligations. The Company has offered to make meaningful
rental concessions to Vencor in the context of such a restructuring. The
Company will consider appropriate action to take in response to any further
proposals by Vencor as may be in the best interests of the Company. There can
be no assurance that any such agreement regarding a restructuring of Vencor's
financial obligations will be reached. During the Company's discussions with
Vencor, Vencor has asserted various potential claims against the Company
arising out of the Reorganization. See Note 5 to Condensed Consolidated
Financial Statements. The Company intends to defend these claims vigorously if
they are asserted in a legal or mediation proceeding.
As a result of the developments related to Vencor and other healthcare
industry factors, the Company has suspended the implementation of its original
business strategy. Instead, management is reviewing the possible financial
impact on the Company of the recent announcements by Vencor. In particular,
the Company is reviewing Vencor's financial condition and Vencor's need to
amend or restructure its existing capital structure. The Company has retained
Merrill Lynch, as financial advisor, to assist it in this review. In addition,
the Company, together with Merrill Lynch, is reviewing alternatives to repay
the $275 million portion of its credit facility that matures on October 30,
1999. These alternatives include obtaining the necessary proceeds to pay down
or refinance the $275 million loan through cash flows from operations,
available borrowings under the Company's credit facility, the issuance of
public or private debt or equity and asset sales, or a combination of the
foregoing.
Vencor is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Vencor provided in this Form 10-Q is
derived from filings made with the Commission or other publicly available
information. The Company is providing this data for informational purposes
only, and the reader of this Form 10-Q is encouraged to obtain Vencor's
publicly available filings from the Commission. The Company has no reason to
believe that the information is inaccurate in any material respects, but the
Company has not independently verified such information and there can be no
assurances that all such information is accurate.
Results of Operations
Rental income for the quarter ended March 31, 1999 was $56.4 million, of
which $55.5 million resulted from leases with Vencor. Net income was $20.3
million, or $0.30 per diluted share. The Company anticipates that it will meet
the requirements to qualify as a REIT for federal income tax purposes for the
tax year beginning January 1, 1999. Accordingly, no provision for income taxes
has been made for the three months ended March 31, 1999 in the accompanying
condensed consolidated financial statements.
13
Funds from operations ("FFO") for the three months ended March 31, 1999
totaled $31.3 million. In calculating net income and FFO, the Company included
in its expenses (and thus reduced net income and FFO) non-recurring employee
severance costs of $1.3 million and unusual legal and financial advisory
expenses associated with evaluating the current situation with Vencor,
including all agreements related thereto, and addressing alternatives related
to the $275 million loan due October 30, 1999. Substantial legal and financial
advisory expenses will continue to be incurred by the Company until a
resolution of these matters is reached, although there can be no assurance that
such a resolution will be reached. FFO for the quarter ended March 31, 1999 is
summarized in the following table:
(in thousands)
Net Income.................................................... $20,338
Depreciation on real estate investments....................... 10,944
-------
Funds from operations....................................... $31,282
=======
The Company considers FFO an appropriate measure of performance of an equity
REIT and the Company uses the National Association of Real Estate Investment
Trusts ("NAREIT") definition of FFO. NAREIT defines FFO as net income (computed
in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO presented herein is not necessarily
comparable to FFO presented by other real estate companies due to the fact that
not all real estate companies use the same definition. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indicator of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it necessarily indicative of sufficient cash flow
to fund all of the Company's needs. The Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be examined in conjunction with net income
as presented in the condensed consolidated financial statements and data
included elsewhere in this Form 10-Q.
Liquidity and Capital Resources
Cash provided by operations totaled $39.0 million for the three months ended
March 31, 1999. Net cash flows used in investing activities were $122,000. Net
cash provided by financing activities totaled $19.3 million. The Company paid a
cash dividend on its common stock of $26.5 million, or $.39 per common share,
on February 17, 1999 to shareholders of record as of January 29, 1999.
At March 31, 1999, available borrowings under the Revolving Credit Facility
approximated $47.3 million, subject to certain restrictions under the Bank
Credit Agreement. The Company intends to pay down or refinance the remaining
$275 million principal balance of the original $400 million bridge loan due
October 30, 1999, on or prior to its maturity. The Company expects to obtain
the necessary proceeds to pay down or refinance the remaining $275 million
principal balance of the bridge loan due October 30, 1999 and to meet other
liquidity requirements through cash flows from operations, available borrowings
under the Revolving Credit Facility, the issuance of public or private debt or
equity and asset sales, or a combination of the foregoing. However, there can
be no assurance that the Company will be successful in its efforts to pay down
or refinance the remaining $275 million principal balance of the bridge loan
and to meet its other liquidity requirements. The Company had cash and cash
equivalents of $58.5 million and outstanding debt aggregated $976.9 million at
March 31, 1999, of which $277.6 million is payable within the next twelve
months. As of May 11, 1999, the Company had cash and cash equivalents of $70.6
million and outstanding debt aggregated $976.0 million.
The Company leases substantially all of its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to satisfy its rent obligations under the
Master Leases will impact the Company's revenues and its ability to service its
indebtedness and to make distributions to its stockholders. Because the
operations of Vencor have been negatively impacted by changes in
14
the reimbursement rates, by its current level of indebtedness and by certain
other factors, and because of the potential effect of such events on Vencor's
ability to meet its rent obligations to the Company, the Company's auditors
have included an explanatory paragraph in its report to the Company's
consolidated financial statements for the year ended December 31, 1998 that
expresses substantial doubt as to the Company's ability to continue as a going
concern. The existence of the explanatory paragraph may have a material
adverse effect on the Company's relationships with its creditors and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Management has taken certain initiatives to address the issues noted above.
The Company has retained Merrill Lynch, as financial advisor, to assist in its
review of Vencor's financial condition. Merrill Lynch is advising the Company
in its ongoing discussions with Vencor regarding its recent results of
operations and Vencor's need to amend or restructure its existing capital
structure. See "--Recent Developments." Merrill Lynch is also advising the
Company in its review of alternatives to repay the $275 million portion of its
credit facility that matures on October 30, 1999, and to assess other
strategic alternatives for the Company.
In order to qualify as a REIT, the Company must make annual distributions to
its stockholders of at least 95% of its taxable income. Under certain
circumstances, the Company may be required to make distributions in excess of
FFO in order to meet such distribution requirements. In such event, the
Company presently would expect to borrow funds, or to sell assets for cash, to
the extent necessary to obtain cash sufficient to make the distributions
required for it to qualify as a REIT for federal income tax purposes. Although
the Company currently expects to qualify as a REIT as of January 1, 1999, it
is possible that future economic, market, legal, tax or other considerations
may cause the Company to fail to qualify as a REIT.
In order to preserve its current cash position, the Company announced on May
14, 1999 that it will not declare or pay a dividend at this time. The Company
expects that it will once again pay a dividend when Vencor resolves the
financial difficulties contributing to the uncertainties about Vencor's
continuing ability to make rent payments to the Company. However, there can be
no assurances that Vencor will resolve its financial difficulties and pay the
rent due the Company. The Company still intends to qualify as a REIT for the
year ending December 31, 1999. The Company is not required to distribute its
taxable income in quarterly installments in order to qualify as a REIT. The
Company will continue to evaluate its dividend policy in light of future
developments in Vencor's financial performance and ongoing discussions
regarding a global restructuring of Vencor's capital structure.
Capital expenditures to maintain and improve the leased properties generally
will be incurred by the tenants. Accordingly, the Company does not believe
that it will incur any major expenditures in connection with the leased
properties. After the terms of the leases expire, or in the event that the
tenants are unable to meet their obligations under the leases, the Company
anticipates that any expenditures for which it may become responsible to
maintain the leased properties will be funded by cash flows from operations
and, in the case of major expenditures, through additional borrowings or
issuances of equity. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's liquidity may be affected
adversely.
Available sources of capital to finance any future growth will include cash
flows from operations, available borrowings under the Revolving Credit
Facility, the issuance of public or private debt or equity, and asset sales.
Availability and terms of any such issuance will depend upon the market for
such securities and other conditions at such time. There can be no assurance
that such additional financing, capital or asset disposition transaction will
be available on terms acceptable to the Company. The Company may, under
certain circumstances, borrow additional amounts in connection with the
acquisition of additional properties, and as necessary, to meet certain
distribution requirements imposed on REITs under the Internal Revenue Code of
1986, as amended. To the extent the Company uses equity as consideration for
future acquisitions, the Company will not require additional liquidity to
finance such acquisitions. The Company does not currently intend to acquire
any additional properties in 1999.
15
Year 2000 Compliance
Year 2000 Readiness Disclosure--The Company
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the
applicable year. Without corrective action, computer programs and embedded
chips potentially could recognize the date ending in "00" as the year 1900 (or
some other year) rather than 2000, causing many computer applications to fail
or to create erroneous results. The Company's information technology systems
("IT") and non-IT systems such as building infrastructure components (e.g.,
elevators, alarm systems, electrical systems and other systems) are affected by
the Y2K issue.
During 1998, the Company outsourced all of its information systems support to
Vencor under a transition services agreement, which terminated on December 31,
1998. After December 31, 1998, Vencor continued to provide the Company with
certain administrative and support services (primarily computer systems,
telephone networks, mail delivery and other office services). Effective March
15, 1999, the Company moved to new office space and those services are no
longer provided by Vencor.
In January 1999, the Company purchased a new file server and converted to a
new financial information system platform that is Y2K compliant. That
conversion was completed during the first quarter of 1999 with the exception of
the fixed asset system, which should be completed in the second quarter of
1999. The Company has received certification from all of its significant
software and operating systems vendors that the versions of their products
currently being installed are Y2K compliant. The Company has not and does not
anticipate independently verifying such compliance. The Company estimates that
the total cost it will incur to install a new server, financial system platform
and update its computer hardware is less than $100,000.
The Company also has Y2K exposure in non-IT applications with respect to its
real estate properties. Computer technology employed in elevators, alarm
systems, electrical systems, built-in healthcare systems and similar
applications involved in the operations of the Company's properties may cause
interruptions of service with respect to those properties. Under the terms of
its lease agreements with Vencor, Vencor is responsible for upgrading all
building infrastructure components to be Y2K compliant. Vencor has advised the
Company that it has tested and verified as Y2K compliant approximately 70% of
the facility components as of March 31, 1999. Vencor has indicated to the
Company that it does not expect any material Y2K issues with respect to the
Company's facility components. Consequently, the Company does not expect that
its costs for Y2K remediation of its building infrastructure components will be
material. However, there can be no assurance that Vencor's estimate with
respect to estimated costs of remediation is accurate. In addition, there can
be no assurance that Vencor will continue to honor its obligations under the
lease agreements to upgrade all building components to be Y2K compliant or that
Vencor will have sufficient assets, income and access to financing to enable it
to satisfy such obligations.
The most reasonably likely worse case scenario for the Company associated
with the Y2K issue is the risk of significant disruptions of Vencor's business
resulting from either (i) Vencor's failure to upgrade all building
infrastructure components to be Y2K compliant or (ii) the failure of Vencor's
significant third party payors, business partners, suppliers and vendors to be
fully Y2K compliant. Failures of critical utility systems could also lead to
significant business disruptions for Vencor. These occurrences could negatively
impact Vencor's ability to operate the Company's properties and/or make rental
payments under the lease agreements thereby negatively impacting the Company's
liquidity and results of operations. The Y2K issues facing Vencor and Vencor's
Y2K compliance program are discussed below under "--Year 2000 Readiness
Disclosure--Vencor."
To date, the Company has not established any contingency plan for the Y2K
issue. Because the Company's most significant risks associated with the Y2K
issue relate to significant disruptions of Vencor's business, the Company
anticipates developing contingency plans during 1999, as is appropriate, based
upon its continuing assessment of Vencor's progress in implementing its Y2K
compliance program and developing its own contingency plans.
16
The Company's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or
timely assessed all Y2K issues or that the estimated costs to remediate the
Y2K issues will not be exceeded. While the Company believes it has
substantially completed its assessment of all Y2K issues, its estimate of the
costs to address such issues may change as it proceeds with the remediation
and implementation of its new financial systems. The Company's ability to
identify and remediate critical Y2K issues and the availability and cost of
external resources will impact the Company's total Y2K costs and the impact of
Y2K on the Company's results of operations.
Year 2000 Readiness Disclosure--Vencor
As a result of the Company's dependence upon Vencor as its primary tenant,
the Company may also be impacted negatively by Y2K issues facing Vencor. If
Vencor is unable to meet its Y2K compliance schedules or incurs costs
substantially higher than its current expectations, Vencor's ability to
operate the properties and/or make rental payments under the lease agreements
could be impaired thereby impacting negatively the Company's liquidity and
results of operations. The following discussion briefly describes the Y2K
program instituted by Vencor. The information contained in this section was
derived from Vencor's public filings and from disclosures made by Vencor to
the Company. The Company is not the source of this information and has not
verified independently the truth or accuracy thereof or the activities of
Vencor. There can be no assurance that Vencor has provided the Company
complete and accurate information in all instances
In response to the Y2K issue, Vencor established five teams to address Y2K
issues in the following specific areas: (i) IT software and hardware; (ii)
third party relationships; (iii) facility components; (iv) medical equipment;
and (v) telephone systems. Each team is responsible for all phases of Vencor's
Y2K compliance program for both IT and non-IT systems in its designated area.
Vencor's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business
assessment phase identified potential Y2K issues confronting Vencor. The
inventory and assessment phase consisted of a company-wide assessment of all
facility systems and components, medical devices, and IT software and
hardware. During the remediation and testing phase, Vencor is repairing,
upgrading or replacing any non-compliant IT and non-IT systems. Additionally,
Vencor is performing verification and validation testing of IT and non-IT
systems that have been remediated and those Vencor believes are Y2K compliant.
For IT and non-IT systems that are developed internally, Vencor verifies
compliance status directly with the development staff and performs validation
testing to confirm its status. For IT and non-IT systems that are purchased
from outside vendors, Vencor is requesting written assurances of compliance
directly from the vendors. When non-compliant systems are identified, Vencor
will either replace, upgrade or remediate the system. The implementation and
rollout phase involves the installation of the new financial information and
patient accounting systems and any IT or non-IT systems that have been
remediated and tested to Vencor's corporate office and its facilities. The
final phase, post-implementation, involves finalizing the documentation of the
Y2K program and any corrective efforts surrounding date issues associated with
the year 2000 being a leap year. Vencor has indicated that it has employed and
will continue to employ external consultants to assist it through each of the
phases.
Vencor derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Vencor relies on these entities for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
Vencor has indicated that it believes that while many commercial insurance
carriers will be Y2K compliant, federal and state agencies are more likely to
have system failures caused by Y2K issues. Vencor is contacting all of its
significant reimbursement sources to determine their Y2K compliance status in
order to make a determination of this potential risk. Vencor has not received
assurance that systems used by Medicare and Medicaid will be Y2K compliant.
The failure of information systems of federal and state governmental agencies
17
and other third party payors could have a material adverse effect on Vencor's
liquidity and financial condition, which in turn could have a material adverse
effect on the Company's liquidity and financial condition.
Vencor also has initiated communications with its critical suppliers and
vendors. Vencor is evaluating information provided by third party vendors and
is conducting limited independent testing of critical systems and applications.
In most cases, Vencor is relying on information being provided to it by such
third parties. While Vencor is attempting to evaluate the information provided,
there can be no assurance that in all instances accurate information is being
provided. If third party suppliers and vendors fail to respond to Vencor's
request for information, Vencor may seek to procure other sources of supplies.
Although Vencor is assessing the readiness of the Medicare and Medicaid
programs and other third party payers and preparing contingency plans, there
can be no guarantee that the failure of these third parties to remediate their
systems to be Y2K compliant will not have a material adverse effect on Vencor,
which in turn could have a material adverse effect on the Company.
Other Information
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's expected future
financial position, results of operations, cash flows, funds from operations,
dividends and dividend plans, financing plans, business strategy, budgets,
projected costs, capital expenditures, competitive positions, growth
opportunities, expected lease income, ability to qualify as a real estate
investment trust, plans and objectives of management for future operations and
statements that include words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions are forward-
looking statements. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ from the
Company's expectations. Forward-looking statements made in this Form 10-Q
relating to the operations of a partnership or limited liability company,
including the Company's realty partnership, are not forward-looking statements
within the meaning of Section 27A of the Securities Act or Section 21E of the
Exchange Act.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this Form 10-Q and elsewhere in
the Company's filings with the Securities and Exchange Commission (the
"Commission"). Factors that may affect the plans or results of the Company
include, without limitation, (i) the ability of the Company's operators to
maintain the financial strength and liquidity necessary to satisfy their
obligations and duties under leases and other agreements with the Company, (ii)
success in implementing its business strategy, (iii) the nature and extent of
future competition, (iv) the extent of future healthcare reform and regulation,
including cost containment measures and changes in reimbursement policies and
procedures, (v) increases in the cost of borrowing for the Company, (vi) the
ability of the Company's operators to deliver high quality care and to attract
patients, (vii) the results of the ongoing investigation of the Company by the
U.S. Department of Justice and other litigation affecting the Company; (viii)
the Company's ability to acquire additional properties, (ix) changes in the
general economic conditions and/or in the markets in which the Company may,
from time to time, compete, (x) the ability of the Company to pay and/or
refinance its indebtedness as it becomes due, and (xi) the ability of the
Company and the Company's operators and other third parties to replace, modify
or upgrade computer systems in ways that adequately address the Year 2000
issue. Many of such factors are beyond the control of the Company and its
management.
In addition, please note that certain information contained in this Form 10-Q
has been provided by Vencor. Vencor is subject to the reporting requirements of
the Commission and is required to file with the Commission annual reports
containing audited financial information and quarterly reports containing
unaudited financial information. Although Vencor has provided certain
information to the Company, the Company has not verified this information
either through an independent investigation or by reviewing Vencor's Annual
Report on Form 10-K for the year ended December 31, 1998 or its Form 10-Q for
the three months ended March 31, 1999.
18
The Company has no reason to believe that such information in inaccurate in any
material respects, but there can be no assurance that all such information is
accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's exposure to various market risks
contains "forward looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Nevertheless, because of the inherent unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected in such forward looking information.
The Company earns revenue by leasing its assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators,
subject to certain limitations. The Company's debt obligations are floating
rate obligations whose interest rate and related cash flows vary with the
movement in LIBOR. See Note 4 to the Company's Condensed Consolidated Financial
Statements included elsewhere herein. The general fixed nature of the Company's
assets and the variable nature of the Company's debt obligations creates
interest rate risk. If interest rates were to rise significantly, the Company's
lease revenue might not be sufficient to meet its debt obligations. In order to
mitigate this risk, at or about the date the Company spun off its healthcare
operations in connection with the Reorganization, it also entered into interest
rate swaps to convert most of its floating rate debt obligations to fixed rate
debt obligations. Interest rate swaps generally involve the exchange of fixed
and floating rate interest payments on an underlying notional amount. As of
March 31, 1999, the Company had $900 million of interest rate swaps outstanding
with a highly rated counterparty in which the Company pays a fixed rate of
5.985% and receives LIBOR from the counterparty. When interest rates rise the
interest rate swap agreement increases in market value to the Company and when
interest rates fall the interest rate swap agreement declines in value to the
Company. Since the interest rate swap agreement was executed, interest rates
have generally been lower and the market value of the interest rate swap
agreement has been an unrealized loss to the Company. As of March 31, 1999, the
interest rate swap agreement was in an unrealized loss position to the Company
of approximately $9.3 million. To highlight the sensitivity of the interest
rate swap agreement to changes in interest rates the following summary shows
the effects of an instantaneous change of 100 basis points (BPS) in interest
rates as of March 31, 1999:
Market Value to the Company
Reflecting Change in Interest Rates
Market Value to the Company -------------------------------------
Notional Amount at March 31, 1999 -100 BPS +100 BPS
- --------------- --------------------------- ------------------ -----------------
$900,000,000 ($9,254,699) ($ 62,608,000) $ 38,676,000
The terms of this interest rate swap agreement require that the Company make
a cash payment or otherwise post collateral, such as a letter of credit from
one of the banks identified in the Bank Credit Agreement to the counterparty if
the market value loss to the Company exceed certain levels (the "threshold
levels"). See Note 4 to the Company's Condensed Consolidated Financial
Statements included elsewhere herein. The threshold levels vary based on the
relationship between the Company's debt obligations and the tangible fair
market value of its assets as defined in the Bank Credit Agreement. As of March
31, 1999, the threshold level under the interest rate swap agreement was a
market value loss of $35 million and the interest rate swap agreement was in an
unrealized loss position to the Company of $9.3 million. Under the interest
rate swap agreement, if collateral must be posted, the principal amount of such
collateral must equal the difference between the market value of the interest
rate swap at the time of such determination and the threshold amount. As of
March 31, 1999, the market value loss of the interest rate swap agreement was
below the $35 million threshold and therefore no collateral was required to be
posted under the interest rate swap agreement. As of May 11, 1999, the market
value of the unrealized loss of the interest rate swap agreement was $1.4
million.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, based on information provided to the Company by
Vencor, there has been no material change in the status of the litigation
reported in the Company's Form 10-K for the year ended December 31, 1998. The
information contained in this section was derived from Vencor's public filings
and from disclosures made by Vencor to the Company. The Company is not the
source of this information and has not verified independently the truth or
accuracy thereof or the activities of Vencor. There can be no assurance that
Vencor has provided the Company complete and accurate information in all
instances.
As set forth in the Company's Form 10-K for the year ended December 31,
1998, Vencor has been informed by the Department of Justice that it is the
subject of ongoing investigations into various aspects of its claims for
reimbursement from government payors, billing practices and various quality of
care issues in the hospitals and nursing centers operated by Vencor. These
investigations also include the Company's healthcare operations prior to the
date of the Reorganization. Thus, the Department of Justice has informed the
Company that for the period prior to the date of the Reorganization, if any
liability exists in connection with such investigations, the Company may be
liable for such liability. However, the Company believes that under agreements
entered into at the time of the Reorganization, Vencor is obligated to assume
the defense of, and to indemnify the Company for any liabilities that arise
out of, any claims that may result from the investigations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy these obligations. Vencor is in discussions
with the Department of Justice concerning the nature of the issues under
investigation and the possible settlement of some or all of the claims. Vencor
is cooperating fully in the investigations.
As set forth in the Company's Form 10-K, Vencor, on behalf of the Company,
is defending a class action lawsuit captioned Jules Brody v. Transitional
Hospitals Corporation, et al., Case No. CV-S-97-0047-PMP, which was filed on
June 19, 1997 in the United States District Court for the District of Nevada
on behalf of a class consisting of all persons who sold shares of Transitional
Hospitals Corporation common stock during the period from February 26, 1997
through May 4, 1997. On June 18, 1998, the court denied Vencor's motion,
acting on behalf of the Company, to dismiss the Section 14(e) and Section
20(a) claims, after which Vencor filed a motion for reconsideration. On March
23, 1999, the court granted Vencor's motion to dismiss all remaining claims,
and the case has been dismissed. The plaintiff has appealed this ruling.
Vencor, on behalf of the Company, is defending this action vigorously.
During the Company's discussions with Vencor discussed above under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments," Vencor has asserted various potential claims
against the Company arising out of the Reorganization. The Company intends to
defend these claims vigorously if they are asserted in a legal or mediation
proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
4.1 Fourth Amendment to Rights Agreement, dated as of April 15, 1999,
between the Company and National City Bank, as Rights Agent. Exhibit
1 to the Company's Form 8-A/A, filed on April 19, 1999, is
incorporated herein by reference.
10.1 Employment Agreement dated March 5, 1999, between the Company and
Debra A. Cafaro.
10.2 Form of Second Amendment to Master Lease, dated April 12, 1999,
between the Company and Vencor, Inc. Exhibit 99.1 to the Company's
Form 8-K, filed on April 19, 1999, is incorporated herein by
reference.
10.3 Second Standstill Agreement, dated April 12, 1999, between the
Company and Vencor, Inc. Exhibit 99.2 to the Company's Form 8-K,
filed on April 19, 1999, is incorporated herein by reference.
20
10.4 Tolling Agreement, dated April 12, 1999, between the Company and
Vencor, Inc. Exhibit 99.3 to the Company's Form 8-K, filed on April
19, 1999, is incorporated herein by reference.
10.5 Standstill Agreement, dated March 31, 1999, between the Company and
Vencor, Inc. Exhibit 99.4 to the Company's Form 8-K, filed on April
19, 1999, is incorporated herein by reference.
10.6 Amendment Number 1 to the Second Standstill Agreement dated April 12,
1999, dated May 5, 1999, between the Company and Vencor, Inc.
10.7 Amendment Number 2 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 1 to the Tolling Agreement dated April 12,
1999, dated May 8, 1999 between the Company and Vencor, Inc.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
On February 5, 1999, the Company filed a Current Report on Form 8-K
announcing that on January 13, 1999, the Company's Board of Directors declared
a quarterly cash dividend on its common stock of $.39 per share to be
distributed February 17, 1999. The dividend was paid to shareholders of record
as of January 29, 1999. The Company also announced its intention to qualify as
a real estate investment trust for federal income tax purposes for 1999.
On March 10, 1999, the Company filed a Current Report on Form 8-K announcing
that Debra A. Cafaro had been appointed President, Chief Executive Officer and
Director, replacing Thomas T. Ladt in each of those positions effective March
5, 1999.
On April 19, 1999, the Company filed a Current Report on Form 8-K announcing
certain agreements with Vencor, Inc., its principal tenant. Under the first
agreement, the Company agreed not to exercise remedies for non-payment of rent
due from Vencor on April 1, 1999 for a period ending April 12, 1999. Under a
second agreement (the "Second Standstill Agreement"), the Company agreed with
Vencor that if Vencor paid the full amount of April 1999 rent on an agreed
schedule, the Company would not exercise its remedies under its lease
agreements with Vencor. Under the Second Standstill Agreement, each of the
Company and Vencor also agreed not to pursue any claims against the other or
any third party relating to the April 1998 reorganization of the Company as
long as Vencor made the full lease payments for April 1999 and May 1999 under
the specified schedule. The Second Standstill Agreement provided that it would
terminate on May 5, 1999, on any date that a voluntary or involuntary
bankruptcy proceeding was commenced by or against Vencor or if Vencor failed to
pay rent in accordance with the specified schedule. The Company and Vencor also
agreed to amend each of the lease agreements between the companies to delete a
provision that permitted the Company to require Vencor to purchase a facility
upon the occurrence of certain events of default by Vencor. Finally, the
Company and Vencor agreed that any statutes of limitations or other time
constraints in a bankruptcy proceeding that might be asserted by one party
against the other will be extended or tolled from April 12, 1999 until May 5,
1999 or until the Second Standstill Agreement terminated due to Vencor's
failure to make the contemplated lease payments. These arrangements have been
subsequently modified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments."
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENTAS, INC.
Date: May 17, 1999 /s/ Debra A. Cafaro
_____________________________________
Debra A. Cafaro
President and Chief Executive Officer
Date: May 17, 1999 /s/ Steven T. Downey
_____________________________________
Steven T. Downey Vice President and
Chief Financial Officer
(Principal Financial Officer)
22