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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 JUNE 30, 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 August 10, 1999
Common Stock, $.25 par value 67,960,498 shares
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VENTAS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
------ ---------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998............................................ 3
Condensed Consolidated Statements of Income for the three
months and
six months ended June 30, 1999 and two months ended June 30,
1998......................................................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and two months ended June 30,
1998......................................................... 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.................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 20
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings............................................ 22
Item 2. Changes in Securities and Use of Proceeds.................... 22
Item 4. Submission of Matters to a Vote of Security Holders.......... 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
2
PART 1
ITEM 1. FINANCIAL STATEMENTS
VENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 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............................. (268,397) (246,509)
---------- ----------
Total real estate investments....................... 917,568 939,456
Cash and cash equivalents............................. 70,070 338
Deferred financing costs, net......................... 6,382 8,816
Due from Vencor, Inc.................................. 18,883 6,967
Notes receivable from employees....................... 4,078 4,027
Other................................................. 1,196 102
---------- ----------
Total assets........................................ $1,018,177 $ 959,706
========== ==========
Liabilities and stockholders' equity:
Liabilities:
Bank credit facility and other debt.................. $ 976,009 $ 931,127
Accounts payable and accrued liabilities............. 5,785 7,082
Deferred income taxes................................ 30,506 30,506
---------- ----------
Total liabilities................................... 1,012,300 968,715
Commitments and contingencies:
Stockholders' equity (deficit):
Common stock......................................... 18,402 18,402
Capital in excess of par value....................... 140,139 140,103
Unearned compensation on restricted stock............ (2,939) (1,962)
Retained earnings (deficit).......................... 4,378 (9,637)
---------- ----------
159,980 146,906
Treasury stock....................................... (154,103) (155,915)
---------- ----------
Total stockholders' equity (deficit)................ 5,877 (9,009)
---------- ----------
Total liabilities and stockholders' equity.......... $1,018,177 $ 959,706
========== ==========
Note--The condensed consolidated balance sheet as of December 31, 1998 has
been derived from the Company's audited consolidated financial statements for
the year ended December 31, 1998.
See notes to condensed consolidated financial statements.
3
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE
MONTHS TWO SIX
ENDED MONTHS MONTHS
JUNE ENDED ENDED
30, JUNE 30, JUNE 30,
1999 1998 1999
------- -------- --------
Revenues
Rental income....................................... $57,175 $37,356 $113,611
Interest and other income........................... 734 43 931
------- ------- --------
Total revenues..................................... 57,909 37,399 114,542
Expenses
General and administrative.......................... 4,562 1,537 7,113
Non-recurring employee severance costs.............. -- -- 1,272
Depreciation on real estate investments............. 10,944 7,135 21,888
Interest on bank credit facility and other debt..... 18,565 14,377 36,630
Net payment on interest rate swap agreement......... 2,241 245 3,834
Amortization of restricted stock grants............. 215 82 867
Amortization of deferred financing costs............ 1,216 800 2,434
------- ------- --------
Total expenses..................................... 37,743 24,176 74,038
------- ------- --------
Income before income taxes and extraordinary item.... 20,166 13,223 40,504
Provision for income taxes........................... -- 5,025 --
------- ------- --------
Income from operations before extraordinary item..... 20,166 8,198 40,504
Extraordinary loss on extinguishment of debt, net of
income tax benefit.................................. -- (7,970) --
------- ------- --------
Net income......................................... $20,166 $ 228 $ 40,504
======= ======= ========
Earnings per common share:
Basic:
Income from operations.............................. $ .30 $ .12 $ .60
Extraordinary loss on extinguishment of debt........ -- (.12) --
------- ------- --------
Net income......................................... $ .30 $ -- $ .60
======= ======= ========
Diluted:
Income from operations.............................. $ .30 $ .12 $ .60
Extraordinary loss on extinguishment of debt........ -- (.12) --
------- ------- --------
Net income......................................... $ .30 $ -- $ .60
======= ======= ========
Shares used in computing earnings per common share:
Basic............................................... 67,811 67,653 67,762
Diluted............................................. 68,008 68,021 68,019
See notes to condensed consolidated financial statements.
4
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED TWO MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
Cash flows from operating activities:
Net income................................... $ 40,504 $ 228
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 21,890 7,135
Amortization of deferred financing costs.... 2,434 800
Amortization of restricted stock grants..... 867 82
Extraordinary loss on extinguishment of
debt....................................... -- 12,855
Increase in other assets.................... (796) (419)
(Decrease) increase in accounts payable and
accrued liabilities........................ (1,297) 5,006
Increase in amount due from Vencor, Inc..... (11,916) --
--------- -----------
Net cash provided by operating activities.. 51,686 25,687
Cash flows from investing activities:
Purchases of furniture and equipment........ (300) --
Purchases of real estate properties......... -- (1,184)
Advances to employees....................... (51) (3,890)
Sale of Vencor, Inc. preferred stock in
connection with reorganization transaction. -- 17,700
--------- -----------
Net cash (used in) provided by investing
activities................................ (351) 12,626
Cash flows from financing activities:
Net change in borrowings under revolving
line of credit............................. 173,143 27,400
Repayment of other bank credit facility and
other debt................................. (128,261) (5,034)
Issuance of long-term debt.................. -- 950,000
Repayment of long-term debt in connection
with reorganization transaction............ -- (1,000,171)
Payment of deferred financing costs......... -- (10,657)
Issuance of common stock.................... 4 149
Cash distribution to shareholders........... (26,489) --
--------- -----------
Net cash provided by (used in) financing
activities................................ 18,397 (38,313)
--------- -----------
Increase in cash and cash equivalents......... 69,732 --
Cash and cash equivalents at beginning of pe-
riod......................................... 338 --
--------- -----------
Cash and cash equivalents at end of period.... $ 70,070 $ --
========= ===========
See notes to condensed consolidated financial statements.
5
VENTAS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
JUNE 30, 1999
(UNAUDITED)
UNEARNED
COMMON CAPITAL COMPENSATION
STOCK IN EXCESS ON RETAINED
PAR OF PAR RESTRICTED EARNINGS TREASURY
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 for the six
months ended June 30,
1999................... -- -- -- 40,504 -- 40,504
Proceeds from issuance
of shares for stock in-
centive plans.......... -- (58) -- -- 62 4
Restricted stock grants,
net of amortization and
forfeitures............ -- 94 (977) -- 1,750 867
Cash distributions to
shareholders........... -- -- -- (26,489) -- (26,489)
-------- --------- -------- -------- --------- --------
Balance at June 30,
1999................... $ 18,402 $ 140,139 $ (2,939) $ 4,378 $(154,103) $ 5,877
======== ========= ======== ======== ========= ========
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 June 30, 1999. The Company
conducts all of its business through a wholly owned operating partnership,
Ventas Realty, Limited Partnership ("Ventas Realty"). The Company intends 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 six-month and three-month periods ended
June 30, 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. 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. Accordingly, the comparable
financial results for the second quarter of 1998 reported herein are for the
two-month period ended June 30, 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-month and six-month
periods ended June 30, 1999 are not necessarily an indication of the results
that may be expected for the year ending December 31, 1999. The financial
statements for the two-month period ended June 30, 1998 represent the
operations of the Company from commencement of its operations on May 1, 1998.
The condensed consolidated balance sheet as of December 31, 1998 has been
derived from the Company's audited consolidated financial statements for the
year ended December 31, 1998. 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 and in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999. Certain reclassifications have been made to
the 1998 presentation to conform to the 1999 presentation.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which became effective in December 1998 and requires
interim disclosures beginning in 1999. SFAS 131 requires public companies to
report certain information about operating segments, products and services,
the geographic areas in which they operate and major customers. The operating
segments are to be based on the structure of the enterprise's internal
organization whose operating results are regularly reviewed by senior
management. Management has determined that the Company operates in a single
business segment. Accordingly, the adoption of SFAS 131 has had no effect on
the consolidated financial statement disclosures.
7
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In June 1998, the 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, 2000. 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, 2001. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be recognized immediately in earnings. Based on the
Company's derivative positions and their related fair values at June 30, 1999,
the Company estimates that upon adoption it would report a gain of $20.5
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 $20.5 million unrealized gain for the six months ended June 30, 1999. The
Company has subsequently shortened the maturity of its derivatives in exchange
for a cash payment. See Note 4--Bank Credit Facility and Other Debt--to the
Condensed Consolidated Financial Statements.
NOTE 3--CONCENTRATION OF CREDIT RISK, GOING CONCERN AND RECENT DEVELOPMENTS
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 the five
lease agreements with the Company (the "Leases") and certain other agreements
will significantly impact the Company's revenues and its ability to service
its indebtedness and to make distributions to its stockholders. The operations
of Vencor have been negatively impacted by changes in reimbursement rates, by
its current level of indebtedness and by certain other factors. The failure of
Vencor to meet its rent obligations to the Company would likely have a
material adverse effect on the business, financial condition, results of
operations and liquidity of the Company. As a result of Vencor's financial
condition, the Company's auditors included an explanatory paragraph in their
report on the Company's consolidated financial statements for the year ended
December 31, 1998 that expressed 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, results of operations and liquidity.
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. Merrill Lynch is also advising the Company in its
review of alternatives to pay down, refinance, restructure and/or extend the
$275 million portion of its credit facility that matures on October 30, 1999,
and to assess other strategic alternatives for the Company. See Note 4--Bank
Credit Facility and Other Debt--to the Condensed Consolidated Financial
Statements.
RECENT DEVELOPMENTS REGARDING VENCOR
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. There can be no assurance that
8
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
any such agreement regarding a restructuring of Vencor's financial obligations
will be reached. Vencor has advised the Company that it may file a petition
for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the
absence of such an agreement. Whether or not an agreement is reached, the
Company believes that Vencor will file a petition under Chapter 11 of the
Bankruptcy Code. There can be no assurances as to the effect that a Vencor
bankruptcy proceeding will have on the Company; however, the length and
adverse effect on the Company of any such bankruptcy proceeding could
potentially be greater in the absence of a consensual global restructuring.
During the Company's discussions with Vencor, Vencor has asserted various
potential claims against the Company arising out of the Reorganization. See
Note 5--Litigation--to the Condensed Consolidated Financial Statements. The
Company intends to defend these claims vigorously if they are asserted in a
legal or mediation proceeding.
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, including a "Second Standstill Agreement" and
a "Tolling Agreement," both as defined below.
The Standstill Agreement
On April 12, 1999, the Company entered into a Second Standstill Agreement
with Vencor, which was subsequently amended on May 5, May 8, June 6, July 6,
and August 5, 1999 (as amended, the "Second Standstill Agreement"). Under the
Second Standstill Agreement, the Company agreed not to exercise its remedies
under the Leases based on any default arising from or relating to disclosures
made by Vencor to the Company, and to accept the payment of April, May, June,
and July, 1999 rent pursuant to a specified schedule. These payments represent
the full amount of rent that was due for each month's rent under the Leases.
Vencor made all rent payments required by the Second Standstill Agreement with
respect to the April, May and June lease payments, and as of August 10, 1999,
Vencor had paid $5 million of the approximately $18.9 million of July rent in
accordance with the specified schedule.
Also, under the Second Standstill Agreement, each of the Company and Vencor
have agreed not to pursue any claims against the other or any third party
relating to the Reorganization Agreement, any Ancillary Agreement, or any of
the Leases, or with respect to certain specified disputes, during a defined
period (the "Standstill Period"). The Standstill Period is scheduled to
terminate on the first of (1) September 3, 1999, (2) the date that a voluntary
or involuntary bankruptcy proceeding is commenced by or against Vencor, (3)
Vencor's failure to make lease payments for July 1999 pursuant to the schedule
set forth in the Second Standstill Agreement, and (4) certain other specified
events.
The Tolling Agreement
The Company and Vencor have 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, including the assertion of
certain "Bankruptcy Avoidance Provisions" that might be asserted by one party
against the other were extended or tolled for a specified period. That period
currently terminates on the earliest to occur of September 3, 1999, or the
termination of the Standstill Period as a result of Vencor's failure to make
lease payments for July 1999 pursuant to the schedule set forth in the Second
Standstill Agreement, or certain other specified events.
9
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Lease Amendments
On April 12, 1999, the Company and Vencor amended each of the Leases,
effective as of the date of the original execution of the Leases, 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 under a Lease.
OTHER RECENT DEVELOPMENTS
On August 3, 1999, the Company's tenant at three of its facilities in
Michigan filed a petition for relief under the United States Bankruptcy Code.
The tenant filed a motion to reject the three leases, which motion is still
pending. These three facilities are recorded on the Company's balance sheet at
a net book value of approximately $3.4 million as of June 30, 1999, and the
annual lease revenues on these three facilities approximate $1 million.
In addition, the tenant at these three facilities also operates five
facilities under sub-leases of primary leases (the "Primary Leases"), which
sub-leases and Primary Leases have been assigned by the Company to Vencor;
however, the Company remains liable to the landlord under the Primary Leases.
The sub-tenant filed a motion to reject the sub-lease agreements, which motion
was granted. The annual lease payments on these five facilities approximate
$1.2 million and the estimated total remaining lease payments are
approximately $3.6 million. In conjunction with the Reorganization, Vencor
indemnified the Company and agreed to hold the Company harmless from and
against all claims against the Company arising from any of these obligations.
However, there can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy such obligations.
The Company is currently evaluating what effect the tenant's and sub-
tenant's actions will have on the carrying value of the Company's affected
Michigan facilities and on the Company's obligations, if any, with respect to
the Primary Leases. No reserves have been recorded in the accompanying
condensed consolidated financial statements as a result of these 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. Borrowings under the
Bank Credit Agreement bear interest at an applicable margin over an interest
rate selected by the Company. Such interest rate may be either the "Base
Rate", which is the higher of the prime rate or the federal funds rate, plus
50 basis points, or the London Interbank Offered Rate ("LIBOR"). To date, the
Company has designated all borrowings as LIBOR borrowings. The applicable
margin on borrowings varies based on the type of borrowing and the Company's
ratio of indebtedness to the tangible fair market value of its assets.
Borrowings under the Bank Credit Agreement are comprised of: (1) a $250
million revolving credit facility that expires on April 30, 2001 (the
"Revolving Credit Facility"), which bears interest at either LIBOR plus 2.00%
to 2.50% or the Base Rate plus 1.00% to 1.50%; (2) a $200 million term loan
due April 30, 2001 (the "Term A Loan"), which bears interest at either LIBOR
plus 2.25% to 2.50% or the Base Rate plus 1.25% to 1.50%; (3) a $350 million
term loan due April 30, 2003 (the "Term B Loan"), which bears interest at
either LIBOR plus 2.75% to 3.00% or the Base Rate plus 1.75% to 2.00%; and (4)
a $275 million term loan due October 30, 1999 (the "Bridge Loan"), which bears
interest at either LIBOR plus 2.75% to 3.00% or the Base Rate plus 1.75% to
2.00%. 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.
10
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The following is a summary of long-term borrowings at June 30, 1999 (in
thousands):
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25%
(7.31% at June 30, 1999), due April 30, 2001...................... $146,000
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25%
(7.28% at June 30, 1999), due April 30, 2001...................... 49,000
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25%
(7.21% at June 30, 1999), due April 30, 2001...................... 7,743
Bridge Facility Loan, bearing interest at a base rate of LIBOR plus
2.75%
(7.81% at June 30, 1999), due October 30, 1999.................... 275,000
Term A Loan, bearing interest at a base rate of LIBOR plus 2.25%
(7.31% at June 30, 1999), due April 30, 2001...................... 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus 2.75%
(7.81% at June 30, 1999), due in quarterly installments of $875
with the balance due April 30, 2003............................... 316,432
Other.............................................................. 16
--------
$976,009
========
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 June 30, 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 2007 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--to the Condensed Consolidated
Financial Statements). The terms of the 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
(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 June 30, 1999, no
collateral was required to be posted under the interest rate swap agreement.
On August 4, 1999, the Company entered into an agreement with the interest
rate swap agreement counterparty to shorten the maturity of the interest rate
swap agreement from December 31, 2007 to June 30, 2003, in exchange for a
payment from the counterparty to the Company of $21.6 million. The Company
expects to amortize such $21.6 million payment for financial accounting
purposes in future periods.
In 1998, in connection with the Reorganization, the Company refinanced
substantially all of its long-term debt. As a result, the Company incurred an
after tax extraordinary loss on extinguishment of debt of $8.0 million for the
two months ended June 30, 1998.
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 and to indemnify the
Company for any fees, costs, expenses and liabilities arising out of such
operations (the "Indemnification"). Vencor also agreed to defend, on behalf of
the Company, any claims
11
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
asserted after the Reorganization which arose out of the ownership and
operation of the healthcare operations. Vencor is presently defending the
Company in the following litigation and other matters. 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 of A. Carl Helwig v. Vencor, Inc. et al., Thomas G.
White v. W. Bruce Lunsford, et al., Gary Hibbeln et al. v. Vencor,
Incorporated et al., and Mongiovi et al. v. Vencor, Inc. et al. are based
primarily on information included in Vencor's public filings and information
provided to the Company by Vencor. There can be no assurance that Vencor has
provided the Company with complete and accurate information in all instances.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky. The class action claims were brought by an alleged
stockholder of the Company against the Company and certain executive officers
and directors of the Company. The complaint alleges that the Company and
certain current and former executive officers of the Company during a
specified time frame violated Sections 10(b) and 20(a) of the Exchange Act,
by, among other things, issuing to the investing public a series of false and
misleading statements concerning the Company's current operations and the
inherent value of the Company's common stock. The complaint further alleges
that as a result of these purported false and misleading statements concerning
the Company's revenues and successful acquisitions, the price of the Company's
common stock was artificially inflated. In particular, the complaint alleges
that the Company issued false and misleading financial statements during the
first, second and third calendar quarters of 1997 which misrepresented and
understated the impact that changes in Medicare reimbursement policies would
have on the Company's core services and profitability. The complaint further
alleges that the Company issued a series of materially false statements
concerning the purportedly successful integration of its recent acquisitions
and prospective earnings per share for 1997 and 1998 which the Company knew
lacked any reasonable basis and were not being achieved. The suit seeks
damages in an amount to be proven at trial, pre-judgment and post-judgment
interest, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that the plaintiff has an effective remedy. On January 22,
1999, the court granted the Company's motion to dismiss the case. The
plaintiff has appealed the dismissal to the United States Court of Appeals for
the Sixth Circuit. Vencor, on behalf of the Company, is defending this action
vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., 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. On March 19, 1999, the parties agreed to
stay all proceedings in the action pending the resolution of the appeal
currently before the Sixth Circuit for the Helwig case described above. The
Company believes that the allegations in the complaint are without merit and
Vencor has informed the Company that it also believes the allegations in the
complaint are without merit, and that it intends to vigorously defend this
action for and on behalf of the Company.
12
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
As set forth in the Company's Form 10-K for the year ended December 31, 1998
and Form 10-Q for the three months ended March 31, 1999, Vencor and the
Company have been informed by the Department of Justice that they are the
subject of ongoing investigations into various aspects of claims for
reimbursement from government payers, billing practices and various quality of
care issues in the hospitals and nursing centers formerly operated by the
Company and presently operated by Vencor. These investigations include the
Company's former healthcare operations prior to the date of the
Reorganization, and include matters arising out of the qui tam actions
described below, as well as additional qui tam actions that have not yet been
unsealed by the applicable court. The Department of Justice has informed the
Company that if liability exists in connection with such investigations, the
Company and Vencor will be jointly and severally liable for the period prior
to the date of the Reorganization.
As disclosed in the Company's Form 10-K for the year ended December 31,
1998, Vencor's subsidiary, American X-Rays, Inc. ("AXR"), which was previously
a subsidiary of the Company, is the defendant in a civil qui tam lawsuit which
was filed in the United States District Court for the Eastern District of
Arkansas and served on the Company on July 7, 1997. The United States of
America has intervened in the suit which was brought under the Federal Civil
False Claims Act. The civil lawsuit alleges that AXR submitted false claims to
the Medicare and Medicaid programs. On May 4, 1999, the United States of
America amended its complaint to include Vencor and the Company as defendants.
Vencor and the Company have moved to dismiss the amended complaint.
On November 24, 1997, a civil qui tam lawsuit was filed against the Company
in the United States District Court for the Middle District of Florida. This
lawsuit was brought under the Federal Civil False Claims Act and is styled
United States of America, Ex Rel., Virginia Lee Lanford and Gwendolyne
Cavanaugh v. Vencor, Inc., et al. The United States of America intervened in
the lawsuit on May 17, 1999. On July 23, 1999, the United States filed its
Amended Complaint in the lawsuit. The lawsuit alleges that the Company and
Vencor submitted false claims and false statements to the Medicare program,
including, but not limited to, claims for reimbursement of costs for certain
ancillary services performed in Vencor's nursing homes and for third party
nursing home operators that the United States of America claims are not
reimbursable costs. The lawsuit involves the Company's former healthcare
operations. The complaint does not specify the amount of damages claimed by
the plaintiffs. If it is ultimately determined that liability exists in
connection with this lawsuit, the Company will be liable for the period prior
to the date of the Reorganization, subject to the Company's rights under the
Indemnification and Vencor's ability and willingness to perform thereunder.
The Company disputes the allegations contained in the complaint and the
Company and/or Vencor, on behalf of the Company, intends to defend this action
vigorously.
If the Department of Justice investigations and the qui tam claims were
ultimately decided in a manner adverse to the Company, such adverse decisions
could have a material adverse effect on the business, financial condition,
results of operations and liquidity of the Company. Although the Company
believes it has numerous good faith, valid legal and factual defenses to the
Department of Justice's and the qui tam claims, the Company and Vencor are
engaged in discussions with the Department of Justice regarding a settlement
of such claims, which settlement could involve the payments of amounts by the
Company that would be material to the business, financial condition, results
of operations and liquidity of the Company. There can be no assurances that
the Company, Vencor and the Department of Justice will reach a settlement
relative to all or any such claims.
As set forth in the Company's Form 10-K for the year ended December 31,
1998, Vencor, on behalf of the Company, is defending a class action lawsuit
captioned Mongiovi et al. v. Vencor, Inc. et al., which was filed on April 9,
1998 in the United States District Court for the Middle District of Florida on
behalf of a purported class consisting of certain residents of the Tampa
nursing center and other residents in the Company's nursing centers
13
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
nationwide (which were subsequently transferred to Vencor in the
Reorganization). The complaint alleged various breaches of contract and
statutory regulatory violations including violations of federal and state RICO
statutes. This action was dismissed without prejudice on July 5, 1999.
A class action lawsuit styled Gary Hibbeln et al. v. Vencor, Incorporated,
et al., was filed in Jefferson Circuit Court in Kentucky on April 28, 1999.
The complaint alleges direct or indirect assertion of untrue statement or
statements of material facts, and/or omission of material facts in connection
with the sale of securities by the defendant to plaintiffs. The Company
believes that the allegations in the complaint are without merit and Vencor,
on behalf of the Company, is defending these actions vigorously.
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these other lawsuits will not, individually
or in the aggregate, have a material adverse effect on the business, financial
condition, results of operations or liquidity of the Company. If management's
assessment of the Company's liability with respect to these actions is
incorrect, such actions could have a material adverse effect on the business,
financial condition, results of operations and liquidity of the Company.
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 (a) was insolvent or was rendered insolvent, (b) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage, or (c) 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.
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 court, arbitration or mediation
proceeding.
The Company and Vencor have entered into certain tolling agreements related
to claims which may arise in a bankruptcy proceeding, as discussed in Note 3
to the Condensed Consolidated Financial Statements. During the Company's
discussions with Vencor, discussed in Note 3 to the Condensed Consolidated
Financial Statements, 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 court, arbitration or mediation
proceeding.
The condensed consolidated financial statements at June 30, 1999 do not
contain any adjustments that might result from the ultimate resolution of any
of the uncertainties identified in this Note 5.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES AND VENCOR
DISCLOSURES
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's and its subsidiaries'
(including subsidiaries that are limited liability companies and limited
partnerships) 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.
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, (a) the ability of Vencor to restructure its
obligations so that it will have the financial strength and liquidity
necessary to satisfy its obligations and duties under the Leases and other
agreements with the Company, (b) the Company's success in implementing its
business strategy, (c) the nature and extent of future competition, (d) the
extent of future healthcare reform and regulation, including cost containment
measures and changes in reimbursement policies and procedures, (e) increases
in the cost of borrowing for the Company, (f) the ability of the Company's
operators to deliver high quality care and to attract patients, (g) the
results of the ongoing investigation of the Company by the U.S. Department of
Justice and other litigation affecting the Company; (h) the Company's ability
to acquire additional properties, (i) changes in the general economic
conditions and/or in the markets in which the Company may, from time to time,
compete, (j) the ability of the Company to pay down, refinance, restructure
and/or extend its indebtedness as it becomes due, and (k) the ability of the
Company and Vencor 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, 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 public
filings. The Company has no reason to believe that such information is
inaccurate in any material respects, but there can be no assurance that all
such information is accurate.
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 June 30, 1999. The Company's portfolio of
properties is located in 36 states and is 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.
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,
15
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. In addition, for certain
reporting purposes under this Form 10-Q and other filings, the Commission
treats the Company as having commenced operations on May 1, 1998. Accordingly,
the comparable financial results for the second quarter of 1998 reported
herein are for the two-month period ended June 30, 1998.
RECENT DEVELOPMENTS REGARDING VENCOR
As is discussed in the Company's Form 10-K for the year ended December 31,
1998 and the Form 10-Q for the three months ended March 31, 1999, the Company
and Vencor have had discussions regarding Vencor's recent results of
operations. In those discussions, Vencor has requested interim rent
concessions under the Leases and the Company initially rejected that request.
In connection with 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.
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. There can be no assurance that any such
agreement regarding a restructuring of Vencor's financial obligations will be
reached. Vencor has advised the Company that it may file a petition for
bankruptcy under Chapter 11 of the United States Bankruptcy Code in the
absence of such an agreement. Whether or not an agreement is reached, the
Company believes that Vencor will file a petition under Chapter 11 of the
Bankruptcy Code. There can be no assurances as to the effect that a Vencor
bankruptcy proceeding will have on the Company; however, the length and
adverse effect on the Company of any such bankruptcy proceeding could
potentially be greater in the absence of a consensual global restructuring.
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, including a Second Standstill Agreement and a
Tolling Agreement. See Note 3--Concentration of Credit Risk, Going Concern and
Recent Developments--to the Condensed Consolidated Financial Statements.
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 their 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 was 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. As of August 10, 1999,
Vencor has not announced that such interest has been paid.
16
On May 14, 1999, Vencor filed its first quarter Form 10-Q with the
Commission and reported that it had a net loss of $23.9 million for the first
quarter of 1999.
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.
See "Cautionary Statements Regarding Forward-Looking Disclosures and Vencor
Disclosures."
RESULTS OF OPERATIONS
The Company intends 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-month and six-month periods ended June 30,
1999 in the accompanying condensed consolidated financial statements.
Three months ended June 30, 1999 and two months ended June 30, 1998
Rental income for the three months ended June 30, 1999 was $57.2 million, of
which $56.3 million resulted from leases with Vencor. Interest and other
income totaled approximately $734,000, and was primarily the result of
earnings from investment of cash reserves during the quarter. Operating
expenses totaled $37.7 million and included $10.9 million of depreciation
expense on real estate assets and $18.6 million of interest on the bank credit
facility and other debt. General and administrative expenses totaled $4.6
million and included approximately $2.8 million in unusual professional fees
(legal and financial advisory fees) incurred as a result of ongoing
discussions with Vencor as discussed above in Recent Developments and in
evaluating alternatives to pay down, refinance, restructure and/or extend the
$275 million Bridge 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. Net income for the three months ended
June 30, 1999 was $20.2 million, or $.30 per diluted share.
The data reflected in the historical financial statements for the two months
ended June 30, 1998 is not comparable to the three months ended June 30, 1999,
and accordingly, a discussion comparing these periods is not included. Rental
income for the two months ended June 30, 1998 was $37.4 million, of which
$36.9 million was received from Vencor. Operating expenses totaled $24.1
million and included $7.1 million of depreciation expense on real estate
assets and $14.4 million of interest on bank credit facilities and other debt.
General and administrative expenses totaled $1.5 million. Income from
operations was $8.2 million, or $0.12 per diluted share. The Company incurred
an extraordinary loss, net of income taxes, of $8.0 million, or $0.12 per
diluted share, related to the extinguishment of debt in connection with the
Reorganization. Net income for the two-month period was $228,000.
Six months ended June 30, 1999
Rental income for the six months ended June 30, 1999 was $113.6 million, of
which $111.8 resulted from leases with Vencor. Interest and other income
totaled approximately $931,000, and was primarily the result of earnings from
investment of cash reserves during the quarter. Operating expenses totaled
$74.0 million and included $21.9 million of depreciation expense on real
estate assets and $36.6 million of interest on the bank credit facility and
other debt. General and administrative expenses totaled $7.1 million and
included approximately $3.5 million in unusual professional fees (legal and
financial advisory fees). The Company also incurred $1.3 million in non-
recurring employee severance costs in the first quarter of 1999. Net income
for the six months ended June 30, 1999 was $40.5 million, or $.60 per diluted
share.
17
Funds from Operations
Funds from operations ("FFO") for the three months and six months ended June
30, 1999 totaled $31.1 million and $62.4 million, or $0.46 and $0.92 per
diluted share, respectively. In calculating net income and FFO for the three
months and six months ended June 30, 1999, the Company included in its
expenses (and thus reduced net income and FFO) non-recurring employee
severance costs 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. FFO for the three months and six months ended June 30,
1999 is summarized in the following table:
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE JUNE
30, 30,
1999 1999
------- -------
Net income............................................... $20,166 $40,504
Depreciation on real estate investments.................. 10,944 21,888
------- -------
Funds from operations................................... $31,110 $62,392
======= =======
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 $51.7 million for the six months ended
June 30, 1999. Net cash flows used in investing activities were $351,000. Net
cash provided by financing activities totaled $18.4 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.
For the two-month period ended June 30, 1998, cash provided by operations
totaled $25.7 million, net cash flows from investing activities totaled $12.6
million and net cash flows used in financing activities totaled $38.3 million.
At June 30, 1999, available borrowings under the Revolving Credit Facility
approximated $47.3 million, subject to certain restrictions under the Bank
Credit Agreement. The Company, together with Merrill Lynch, is reviewing
alternatives to pay down, refinance, restructure and/or extend 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 is in discussions
with its lenders regarding an extension of the October 30, 1999 maturity date
of the Bridge Loan. However, there can be no assurance that an extension will
be offered on terms which are acceptable to the Company. Nor can there be any
assurances that the Company will be successful in its efforts to pay down,
refinance, restructure and/or extend the remaining $275 million principal
balance of the Bridge Loan and to meet its other liquidity requirements. The
failure of the Company to pay down, refinance, restructure and/or extend the
Bridge Loan on or prior to its maturity date would likely have a material
adverse effect on the business, financial condition, results of operations and
liquidity of the Company. The Company had cash and cash
18
equivalents of $70.1 million and outstanding debt aggregated $976 million at
June 30, 1999, of which $276.8 million is payable within the next twelve
months.
In August 1999 the Company received a $21.6 million payment in connection
with shortening the maturity of its interest rate swap agreement outstanding.
See Note 4--Bank Credit Facility and Other Debt--to the Condensed Consolidated
Financial Statements.
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
Leases will impact the Company's revenues and its ability to service its
indebtedness and to make distributions to its stockholders. The operations of
Vencor have been negatively impacted by changes in the reimbursement rates, by
its current level of indebtedness and by certain other factors. The failure of
Vencor to meet its rent obligations to the Company would likely have a
material adverse effect on the business, financial condition, results of
operations and liquidity of the Company. As a result of Vencor's financial
condition, the Company's auditors have included an explanatory paragraph in
their 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, results of operations and liquidity. See Note
3--Concentration of Credit Risk, Going Concern and Recent Developments--to the
Condensed Consolidated Financial Statements.
The Company announced on each of May 14, 1999 and July 21, 1999, that it
would not declare or pay a dividend in the second or third quarter,
respectively. The Company expects that it will once again pay a dividend when
the uncertainties about Vencor's continuing ability to make rent payments to
the Company under the Leases are resolved; however, there can be no assurance
that Vencor will resolve its financial difficulties and pay the rent due to
the Company under the Leases. The Company will continue to evaluate the timing
and amount of dividends in light of developments in Vencor's financial
performance, including ongoing discussions regarding a global restructuring of
Vencor's obligations, and the Company's business, financial condition, taxable
income, results of operations and liquidity. The Company intends to qualify as
a REIT for the year ending December 31, 1999. Although such qualification
requires the Company to distribute 95% of its taxable income, such
distributions are not required to be made quarterly.
In order to qualify as a REIT, the Company must make 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 intends to qualify as a REIT as of January 1, 1999, it
is possible that economic, market, legal, tax or other considerations may
cause the Company to fail to qualify as a REIT.
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 transactions will
be available on terms acceptable to the Company. The Company may, under
certain circumstances, borrow
19
additional amounts in connection with the acquisition of additional
properties, and as necessary, to meet certain distribution requirements
imposed on REIT's 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.
YEAR 2000 COMPLIANCE
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.
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 by the end 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, including all costs incurred to date, is less
than $100,000.
The Company also has Y2K exposure in non-IT applications with respect to its
real estate properties. Computer technology employed in elevators, alarm
systems, electrical systems, built-in healthcare systems and similar
applications involved in the operations of the Company's properties may cause
interruptions of service with respect to those properties. Under the terms of
the Leases, Vencor is responsible for upgrading all building infrastructure
components to be Y2K compliant. 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 Leases could be impaired, which could result in a material adverse effect
on the Company's business, financial condition, results of operations and
liquidity. Vencor has not provided the Company with an up to date status
report regarding Vencor's Y2K compliance issues. The Company believes that it
is not in a position to establish a contingency plan regarding Vencor's Y2K
compliance.
Vencor derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Vencor relies on these entities for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
Vencor has indicated that it believes that while many commercial insurance
carriers will be Y2K compliant, federal and state agencies are more likely to
have system failures caused by Y2K issues. The Company believes that 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, other third party payors or suppliers could have a
material adverse effect on Vencor's liquidity and financial condition, which
in turn could have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity.
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.
20
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--Bank Credit Facility and Other Debt--to the
Condensed Consolidated Financial Statements. The general fixed nature of the
Company's assets and the variable nature of the Company's debt obligations
creates interest rate risk. If interest rates were to rise significantly, the
Company's lease revenue might not be sufficient to meet its debt obligations.
In order to mitigate this risk, at or about the date the Company spun off its
healthcare operations in connection with the Reorganization, it also entered
into an interest rate swap 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 June 30, 1999, the Company had a $900
million interest rate swap outstanding with a highly rated counterparty in
which the Company pays a fixed rate of 5.985% and receives LIBOR from the
counterparty. 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 had generally been
lower and the market value of the interest rate swap agreement had been an
unrealized loss to the Company; however, as of June 30, 1999, interest rates
had risen and the interest rate swap agreement at June 30, 1999, was in an
unrealized gain position to the Company of approximately $20.5 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 June 30, 1999:
MARKET VALUE TO THE
COMPANY
REFLECTING CHANGE IN
INTEREST RATES
MARKET VALUE TO THE COMPANY -------------------------
NOTIONAL AMOUNT AT JUNE 30, 1999 -100 BPS +100 BPS
--------------- --------------------------- ------------- -----------
$900,000,000 $20,539,397 $(26,439,000) $67,042,000
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--Bank Credit Facility and Other Debt--to the Condensed
Consolidated Financial Statements. 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 June
30, 1999, the threshold level under the interest rate swap agreement was a
market value unrealized loss of $35 million and the interest rate swap
agreement was in an unrealized gain position to the Company of $20.5 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 unrealized loss of the interest rate swap at the time of such
determination and the threshold amount. As of June 30, 1999, the interest rate
swap agreement was in an unrealized gain position and therefore no collateral
was required to be posted under the interest rate swap agreement.
On August 4, 1999, the Company agreed with the interest rate swap agreement
counterparty to shorten the maturity of the interest rate swap agreement from
December 31, 2007 to June 30, 2003, in exchange for a payment from the
counterparty to the Company of $21.6 million. See Note 4--Bank Credit Facility
and Other Debt--to the Condensed Consolidated Financial Statements. The
shortening of the maturity date of the interest rate swap agreement will
reduce the sensitivity of the interest rate swap agreement to changes in
interest rates. To highlight the sensitivity of the revised interest rate swap
agreement to changes in interest rates, the following summary shows the effect
of an instantaneous change of 100 basis points (BPS) in interest rates as of
August 10, 1999:
MARKET VALUE TO THE COMPANY
REFLECTING CHANGE IN INTEREST RATES
MARKET VALUE TO THE COMPANY ------------------------------------
NOTIONAL AMOUNT AT AUGUST 10, 1999 -100 BPS +100 BPS
--------------- --------------------------- ------------------ -----------------
$900,000,000 $19,551,899 $(7,553,761) $45,550,122
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth in Note 5 to the condensed consolidated financial
statements of the Company as of June 30, 1999 (which is incorporated into this
Item 1 by reference), 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 and Form 10-Q for the three months ended March 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since April 1, 1999, the Company has issued the following equity securities
in transactions that were not registered under the Securities Act of 1933, as
amended.
On July 20, 1999, the Board of Directors granted the members of the
Independent Committee of the Board of Directors options to purchase an
aggregate of 400,000 shares of Common Stock of the Company at an exercise
price of $5.063 per share of Common Stock, the closing price of the Common
Stock on the date of grant of the options. The options may be exercised for
cash or by surrendering options or common stock with a value equal to the
exercise price at any time prior to the tenth anniversary of the grant. There
were no proceeds to the Company from the issuance of the options. The options
were issued without registration under the Securities Act of 1933, as amended,
in reliance on an exemption contained in Section 4 (2) of the Securities Act
of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of the stockholders of the Company was held on May 18,
1999.
b. Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There were no
solicitations in opposition to management's nominees listed in the
Company's proxy statement. All nominees listed in the proxy statement were
elected.
c. The election of six directors was voted upon at the Annual Meeting. The
number of votes cast for and withheld for each nominee for director was as
set forth below:
NOMINEE: FOR: WITHHELD:
- -------- ---------- ---------
Walter F. Beran............................................ 50,127,760 4,262,598
Debra A. Cafaro............................................ 53,947,924 442,434
Douglas Crocker II......................................... 49,894,978 4,495,380
Ronald G. Geary............................................ 53,934,471 455,887
W. Bruce Lunsford.......................................... 50,101,804 4,288,554
R. Gene Smith.............................................. 50,031,925 4,358,433
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A)EXHIBITS:
10.1 Amendment Number 4 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 3 to the Tolling Agreement dated April 12,
1999, dated June 6, 1999 between the Company and Vencor, Inc. Exhibit
10.1 to the Company's Form 8-K, filed on June 10, 1999, is incorporated
herein by reference.
10.2 Amendment Number 5 to the Second Standstill Agreement dated April 12,
1999 and Amendment Number 4 to the Tolling Agreement dated April 12,
1999, dated July 6, 1999 between the Company and Vencor, Inc. Exhibit
10.1 to the Company's Form 8-K, filed on July 13, 1999, is incorporated
herein by reference.
22
10.3 Amendment No. 6 to the Second Standstill Agreement dated April 12, 1999
and Amendment No. 5 to the Tolling Agreement dated April 12, 1999, dated
August 5, 1999. Exhibit 10.1 to the Company's Form 8-K, filed on August
12, 1999, is incorporated herein by reference.
27 Financial Data Schedule.
(B)REPORTS ON FORM 8-K:
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 and Vencor agreed, among other things, not to pursue certain claims
against the other or any third party so long as Vencor made the full lease
payments for April 1999 and May 1999 under a specified schedule. These
arrangements have been subsequently modified. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
On June 10, 1999, the Company filed a Current Report on Form 8-K announcing
certain agreements with Vencor, Inc., its principal tenant. The Company and
Vencor extended the term of the Second Standstill Agreement and the Tolling
Agreement until July 6, 1999 or until the Second Standstill Agreement
terminated due to Vencor's failure to make the contemplated lease payments.
Vencor subsequently made all of the rent payments for May as required by the
specified schedule. These arrangements have been subsequently modified. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On July 13, 1999, the Company filed a Current Report on Form 8-K announcing
certain agreements with Vencor, Inc., its principal tenant. The Company and
Vencor extended the term of the Second Standstill Agreement and the Tolling
Agreement until August 5, 1999 or until the Second Standstill Agreement
terminates due to Vencor's failure to make the contemplated lease payments.
Vencor subsequently made all of the rent payments for June as required by the
specified schedule. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On August 12, 1999, the Company filed a Current Report on Form 8-K
announcing certain agreements with Vencor, Inc., its principal tenant. The
Company and Vencor extended the term of the Second Standstill Agreement and
the Tolling Agreement until September 3, 1999 or until the Second Standstill
Agreement terminates due to Vencor's failure to make the contemplated lease
payments. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
23
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: August 16, 1999
/s/ Debra A. Cafaro
Debra A. Cafaro
President and Chief Executive Officer
Date: August 16, 1999
/s/ Steven T. Downey
Steven T. Downey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
24