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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
4360 Brownsboro Road
Suite 115
Louisville, Kentucky 40207-1642
(Address of principal executive (Zip Code)
offices)
(502) 357-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
-------------------- -----------------------
Common Stock, par value $.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. _____
As of March 30, 2001, there were 68,698,807 shares of the Registrant's
common stock, $.25 par value ("Common Stock"), outstanding. The aggregate
market value of the shares of Common Stock of the Registrant held by non-
affiliates of the Registrant, based on the closing price of such stock on the
New York Stock Exchange on March 30, 2001, was approximately $564.5 million.
For purposes of the foregoing calculation only, all directors and executive
officers of the Registrant have been deemed affiliates.
Part III of this Annual Report on Form 10-K is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 15, 2001 to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K.
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CAUTIONARY STATEMENTS
Forward-looking Statements
This Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding Ventas, Inc.'s ("Ventas" or the
"Company") and its subsidiaries' expected future financial position, results
of operations, cash flows, funds from operations, dividends and dividend
plans, financing plans, business strategy, budgets, projected costs, capital
expenditures, competitive positions, growth opportunities, expected lease
income, continued qualification as a real estate investment trust ("REIT"),
plans and objectives of management for future operations and statements that
include words such as "if," "anticipate," "believe," "plan," "estimate,"
"expect," "intend," "may," "could," and other similar expressions are forward-
looking statements. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ from the
Company's expectations. The Company does not undertake a duty to update such
forward-looking statements.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this Form 10-K and elsewhere in
the Company's filings with the Securities and Exchange Commission (the
"Commission"). Factors that may affect the plans or results of the Company
include, without limitation, (a) the treatment of the Company's claims in the
chapter 11 cases of its primary tenant, Vencor, Inc. and certain of its
affiliates (collectively, "Vencor"), as well as certain of its other tenants,
(b) the ability and willingness of Vencor to consummate its plan of
reorganization, and to continue to meet and/or honor its obligations under its
contractual arrangements with the Company and the Company's wholly owned
operating partnership, Ventas Realty, Limited Partnership ("Ventas Realty"),
including without limitation the various agreements (the "Spin Agreements")
entered into by the Company and Vencor at the time of the corporate
reorganization on May 1, 1998 (the "1998 Spin Off") pursuant to which the
Company was separated into two publicly held corporations, (c) the ability and
willingness of Vencor to continue to meet and/or honor its obligation to
indemnify and defend the Company for all litigation and other claims relating
to the health care operations and other assets and liabilities transferred to
Vencor in the 1998 Spin Off, (d) the ability of Vencor and the Company's other
operators to maintain the financial strength and liquidity necessary to
satisfy their respective obligations and duties under the leases and other
agreements with the Company, and their existing credit agreements, (e) the
Company's success in implementing its business strategy, (f) the nature and
extent of future competition, (g) the extent of future health care reform and
regulation, including cost containment measures and changes in reimbursement
policies and procedures, (h) increases in the cost of borrowing for the
Company, (i) the ability of the Company's operators to deliver high quality
care and to attract patients, (j) the results of litigation affecting the
Company, (k) changes in general economic conditions and/or economic conditions
in the markets in which the Company may, from time to time, compete, (l) the
ability of the Company to pay down, refinance, restructure, and/or extend its
indebtedness as it becomes due and to amend certain provisions in the Amended
Credit Agreement (as defined below) that could require the Company to repay
all of its indebtedness under the Amended Credit Agreement if Vencor does not
emerge from bankruptcy by June 30, 2001, (m) the movement of interest rates
and the resulting impact on the value of the Company's interest rate swap
agreement and the ability of the Company to satisfy its obligation to post
cash collateral if required to do so under such interest rate swap agreement,
(n) the ability and willingness of Atria, Inc. ("Atria") to continue to meet
and honor its contractual arrangements with the Company and Ventas Realty
entered into connection with the Company's spin off of its assisted living
operations and related assets and liabilities to Atria in August 1996 (the
"Atria Spin Off"), (o) the ability and willingness of the Company to maintain
its qualification as a REIT due to economic, market, legal, tax or other
considerations, (p) the outcome of the audit being conducted by the Internal
Revenue Service for the Company's tax years ended December 31, 1997 and 1998,
(q) final determination of the Company's net taxable income for the tax year
ended December 31, 2000, and (r) the results of the settlement among the
Company, Vencor and the federal government concerning federal civil and
administrative claims against the Company and Vencor arising from the
participation of Vencor facilities in various federal health benefit programs.
Many of such factors are beyond the control of the Company and its management.
2
Vencor Information
Vencor is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Vencor provided in this Form 10-K is
derived from filings made with the Commission or other publicly available
information, or has been provided by Vencor. The Company has not verified this
information either through an independent investigation or by reviewing
Vencor's public filings. The Company has no reason to believe that such
information is inaccurate in any material respect, but there can be no
assurance that all such information is accurate. The Company is providing this
data for informational purposes only, and the reader of this Form 10-K is
encouraged to obtain Vencor's publicly available filings from the Commission.
3
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 5
Item 2. Properties.................................................. 62
Item 3. Legal Proceedings........................................... 69
Item 4. Submission of Matters to a Vote of Security Holders......... 69
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 70
Item 6. Selected Financial Data..................................... 72
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 73
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 84
Item 8. Financial Statements and Supplementary Data................. 84
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 84
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 85
Item 11. Executive Compensation...................................... 85
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 85
Item 13. Certain Relationships and Related Transactions.............. 85
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 85
Item 14(c). Financial Statements and Supplemental Data.................. F-1
4
PART I
Item 1. Business
General
The Company is a Delaware corporation that elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"), beginning
with the tax year ended December 31, 1999. Although the Company believes that
it has satisfied the requirements to continue to qualify as a REIT for the
year ended December 31, 2000 and although the Company intends to continue to
qualify as a REIT for the year ending December 31, 2001 and subsequent tax
years, it is possible that economic, market, legal, tax or other
considerations may cause the Company to fail or elect not to qualify as a REIT
in any such tax year. The Company owned or leased 45 hospitals, 216 nursing
facilities and eight personal care facilities in 36 states as of December 31,
2000. The Company conducts substantially all of its business through a wholly
owned operating partnership, Ventas Realty. The Company operates in one
segment which consists of owning and leasing health care facilities and
leasing or subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health
care services.
On May 1, 1998, the Company effected the 1998 Spin Off pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently named Vencor, Inc., was formed to operate the
hospital, nursing facility and ancillary services businesses. Pursuant to the
terms of the 1998 Spin Off, the Company distributed the common stock of Vencor
to stockholders of record of the Company as of April 27, 1998. The Company,
through its subsidiaries, continued to hold title to substantially all of the
real property and to lease such real property to Vencor. At such time, the
Company also changed its name to Ventas, Inc. and refinanced substantially all
of its long-term debt. For financial reporting periods subsequent to and
including the 1998 Spin Off, the historical financial statements of the
Company were assumed by Vencor, and the Company is deemed to have commenced
operations on May 1, 1998. In addition, for certain reporting purposes under
this Form 10-K and other filings, the Commission treats the Company as having
commenced operations on May 1, 1998.
The Company owns and leases a geographically diverse portfolio of health
care related facilities, including hospitals, nursing facilities and personal
care facilities whose principal tenants are health care related companies. As
a result of announcements during 1999 by Vencor, the subsequent bankruptcy
filing by Vencor and industry-wide factors, the Company suspended the
implementation of its original business strategy in 1999. The Company
continued the suspension of the implementation of its original business
strategy during 2000 due to the ongoing Vencor bankruptcy proceedings. See "--
Recent Developments Regarding Vencor." The Company's current principal
objectives are preserving and maximizing stockholders' capital by seeking to
achieve the maximum possible recovery in the Vencor bankruptcy proceeding and
by means that include the identification and evaluation of opportunities to
reduce (a) the Company's average all-in cost of indebtedness and (b) the
Company's dependence on Vencor. The ability of the Company to pursue certain
of these objectives may be restricted by the terms of the Company's Amended
and Restated Credit, Security, Guaranty and Pledge Agreement dated January 31,
2000 between the Company and all of its lenders (the "Amended Credit
Agreement").
Dependence on Vencor
The Company leases all of its hospitals and 210 of its nursing facilities
to Vencor under four master lease agreements entered into at the time of the
1998 Spin Off among the Company, Ventas Realty, Vencor and certain other
entities and the single facility lease between Ventas Realty and Vencor
Nursing Centers Limited Partnership dated August 7, 1999 (each, a "Master
Lease" and collectively, the "Master Leases"). For the years
5
ended December 31, 2000 and 1999 and the period from May 1, 1998 to December
31, 1998, Vencor accounted for approximately 98.6% (98.4%, net of write-offs),
98.5% (98.3%, net of write-offs) and 98.7% of the Company's rental revenues,
respectively. See "--Risk Factors--Dependence of the Company on Vencor" and
"Note 3--Concentration of Credit Risk" to the Consolidated Financial
Statements.
The operations of Vencor have been negatively impacted by changes in
governmental reimbursement rates, by its current level of indebtedness and by
certain other factors. On September 13, 1999 (the "Petition Date"), Vencor
filed for protection under chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On December 14, 2000, Vencor
filed its fourth amended plan of reorganization (the "Fourth Amended Plan")
with the Bankruptcy Court, incorporating the final terms of the restructuring
of Vencor's debt and lease obligations into the third amended plan which had
previously been filed with the Bankruptcy Court. The Fourth Amended Plan,
which was modified on the record of the Confirmation Hearing, was confirmed
(as confirmed, the "Final Plan") by an order of the Bankruptcy Court, which
order was signed on March 16, 2001 and entered on the docket on March 19, 2001
(the "Vencor Confirmation Date"). See "--Recent Developments Regarding
Vencor--Vencor Bankruptcy."
The 1998 Spin Off
In order to govern certain of the relationships between the Company and
Vencor after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the 1998 Spin Off, including the Master Leases (collectively, the "Spin
Agreements").
Certain material terms of the Master Leases and certain of the other Spin
Agreements are described below. The reader is also strongly encouraged to
review and consider the factors described in "--Recent Developments Regarding
Vencor" and "--Risk Factors--Effects of Bankruptcy Proceedings."
Summary of the Terms of Current Agreements with Vencor
Master Lease Agreements
In the 1998 Spin Off, the Company and Ventas Realty (collectively, the
"Landlord") and Vencor, Inc. and Vencor Operating, Inc. (collectively, the
"Tenant") entered into the four Master Leases governing the lease of
substantially all of the Company's real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing
facilities). The leased properties under the four Master Leases were divided
into groups of properties and a Master Lease was entered into with respect to
each such group of properties. In August 1998, Ventas Realty and Vencor
Nursing Centers Limited Partnership entered into a fifth Master Lease for a
single nursing facility in Corydon, Indiana.
The Company's ability to exercise certain rights and remedies under the
Master Leases described below has been stayed as a result of Vencor's filing
for protection under the Bankruptcy Code. The Bankruptcy Code, however,
generally provides that a landlord is entitled to receive rent during the
pendency of a tenant's bankruptcy proceeding, subject to such tenant's rights
to reject the lease and its other legal defenses and rights. Vencor has
disputed that it is required to pay rent at the rate set forth in the Master
Leases and in the Stipulation entered into by the Company and Vencor in
connection with Vencor's bankruptcy filing (the "Stipulation") has reserved
the right during its chapter 11 bankruptcy case to challenge such payments in
the event the Stipulation is terminated. The Stipulation, discussed below,
provides for Vencor to pay $15.1 million per month in minimum base rent under
the Master Leases while the Stipulation is in effect. Various provisions of
the Master Leases may ultimately be challenged in Vencor's chapter 11
bankruptcy case, and certain provisions regarding payment of rent have been
modified by the Stipulation in anticipation of the contemplated restructuring.
The terms of the Master Leases would be substantially amended and restated in
the terms of the Amended Master Leases (as defined below) that would be
implemented under the Final Plan, if the Final Plan is consummated. See "--
Recent Developments Regarding Vencor--Amended Master Leases." Consummation of
the Final Plan is subject to the satisfaction of numerous conditions, many of
which are outside the control of the Company and Vencor. See "--Risk Factors--
Conditions to the Consummation of the Final Plan."
6
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all or substantially all insurance, taxes, utilities
and maintenance related to the properties. The base annual contract rent was
approximately $231.2 million, $226.6 million and $222.2 million at December
31, 2000, 1999 and 1998, respectively. Base annual rent increases 2% per
annum, effective May 1 of each year, provided Vencor achieves net patient
service revenue for the applicable year in excess of 75% of net patient
service revenue for the base year of 1997. The initial terms of the Master
Leases were for periods ranging from 10 to 15 years.
Under the terms of each Master Lease, except as noted below, upon the
occurrence of an Event of Default thereunder, the Company may, at its option,
exercise the remedies under a Master Lease on all properties included within
that particular Master Lease. The remedies which may be exercised under a
Master Lease by the Company, at its option, include the following: (i) after
not less than 10 days' notice to Vencor, terminate the Master Lease, repossess
the leased property and relet the leased property to a third party and require
that Vencor pay to the Company, as liquidated damages, the net present value
of the rent for the balance of the term, discounted at the prime rate; (ii)
without terminating the Master Lease, repossess the leased property and relet
the leased property with Vencor remaining liable under the Master Lease for
all obligations to be performed by Vencor thereunder, including the
difference, if any, between the rent under the Master Lease and the rent
payable as a result of the reletting of the leased property and (iii) any and
all other rights and remedies available at law or in equity. The Master Leases
require Vencor to cooperate with the Company in connection with license
transfers and certain other regulatory matters arising from a lease
termination.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the property that is the subject of the default
upon the occurrence of any one of the following events of default: (i) the
occurrence of a final non-appealable revocation of Vencor's license to operate
a facility; (ii) the reduction in the number of licensed beds at a facility in
excess of 10% or the revocation of certification of a facility for
reimbursement under Medicare; or (iii) Vencor becomes subject to regulatory
sanctions at a facility and fails to cure the regulatory sanctions within the
applicable cure period. Upon the occurrence of the fifth such event of default
under a Master Lease with respect to any one or more properties, the Master
Lease permits the Company, at its option, to exercise the rights and remedies
under the Master Lease on all properties included within that Master Lease.
The occurrence of any one of the following Events of Default constitutes an
event of default under all Master Leases, permitting the Company, at its
option, to exercise the rights and remedies under all of the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the federal
bankruptcy laws, and (iv) a petition is filed against Vencor under federal
bankruptcy laws and the same is not dismissed within 90 days of its
institution.
Any notice of the occurrence of an Event of Default under a Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the "Leasehold Mortgagee"). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee prior written notice and the
opportunity to cure any such event of default within the cure period for
Leasehold Mortgagees set forth in the Master Leases. Following the expiration
of such cure period, the Company may then terminate a Master Lease by giving
at least 10 days prior written notice of such termination.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee
7
assumes the Master Lease in writing, (v) the sublease is subject and
subordinate to the terms of the Master Lease, and (vi) Vencor and any
guarantor remains primarily liable under the Master Lease.
Each Master Lease requires Vencor to maintain specified levels of
liability, all risk property and workers' compensation insurance for the
properties.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires,
will complete the construction of certain development properties substantially
in accordance with the existing plans and specifications for each such
property. Upon completion of each such development property, the Company has
the option to purchase the development property from Vencor at a purchase
price equal to the amount of Vencor's actual costs in acquiring and developing
such development property prior to the purchase date. If the Company purchases
the development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be 10% of the
actual costs incurred by Vencor in acquiring and developing the development
property. The other terms of the lease for the development property will be
substantially similar to those set forth in the Master Leases. During the
years ended December 31, 2000 and 1999, the Company did not acquire any
facilities under the Development Agreement. During the period from May 1, 1998
to December 31, 1998, the Company acquired one skilled nursing facility under
the Development Agreement for $6.2 million and has entered into a separate
Master Lease with Vencor with respect to such facility. The Development
Agreement has a five year term, and the Company and Vencor each has the right
to terminate the Development Agreement in the event of a change of control.
The ability of the Company to purchase properties pursuant to the terms of the
Development Agreement is restricted by the terms of the Amended Credit
Agreement. Any such future purchases would likely require the consent of the
"Required Lenders" under the Amended Credit Agreement, and there can be no
assurance that such consent would be obtained. The Development Agreement would
be terminated under the Final Plan, if the Final Plan is consummated. See--
"Recent Developments Regarding Vencor--Vencor Bankruptcy" and "--Risk
Factors--Conditions to Consummation of the Final Plan."
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing
facility or other health care facility, provided that Vencor and the Company
can negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility. The Participation Agreement also provides, subject to certain terms,
that the Company has a right of first offer to purchase or finance any health
care related real property that Vencor determines to sell or mortgage to a
third party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term, and the Company and Vencor each has the right to
terminate the Participation Agreement in the event of a change of control. The
ability of the Company to purchase or finance properties pursuant to the terms
of the Participation Agreement is restricted by the terms of the Company's
Amended Credit Agreement. Any such future purchases or financings would likely
require the consent of the "Required Lenders" under the Amended Credit
Agreement, and there can be no assurance that such consent would be obtained.
The Participation Agreement would be terminated under the Final Plan, if the
Final Plan is consummated. See "--Recent Developments Regarding Vencor--Vencor
Bankruptcy" and "--Risk Factors--Conditions to Consummation of the Final
Plan."
Tax Allocation Agreement and Tax Stipulation
The Tax Allocation Agreement, entered into at the time of the Spin Off,
provides that Vencor will be liable for, and will hold the Company harmless
from and against, (i) any taxes of Vencor and its then subsidiaries (the
"Vencor Group") for periods after the 1998 Spin Off, (ii) any taxes of the
Company and its then subsidiaries (the "Company Group") or the Vencor Group
for periods prior to the 1998 Spin Off (other than taxes associated with the
Spin Off) with respect to the portion of such taxes attributable to assets
owned by the Vencor Group
8
immediately after completion of the 1998 Spin Off and (iii) any taxes
attributable to the 1998 Spin Off to the extent that Vencor derives certain
tax benefits as a result of the payment of such taxes. Vencor will be entitled
to any refund or credit in respect of taxes owed or paid by Vencor under (i),
(ii) or (iii) above. Vencor's liability for taxes for purposes of the Tax
Allocation Agreement will be measured by the Company's actual liability for
taxes after applying certain tax benefits otherwise available to the Company
other than tax benefits that the Company in good faith determines would
actually offset tax liabilities of the Company in other taxable years or
periods. Any right to a refund for purposes of the Tax Allocation Agreement
will be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Company.
The Company will be liable for, and will hold Vencor harmless against, any
taxes imposed on the Company Group or the Vencor Group other than taxes for
which the Vencor Group is liable as described in the above paragraph. The
Company will be entitled to any refund or credit for taxes owed or paid by the
Company as described in this paragraph. The Company's liability for taxes for
purposes of the Tax Allocation Agreement will be measured by the Vencor
Group's actual liability for taxes after applying certain tax benefits
otherwise available to the Vencor Group other than tax benefits that the
Vencor Group in good faith determines would actually offset tax liabilities of
the Vencor Group in other taxable years or periods. Any right to a refund will
be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Vencor Group. See "Note 7--
Income Taxes" to the Consolidated Financial Statements.
On February 3, 2000, the Company received a refund (the "February 2000
Refund") of approximately $26.6 million from the Internal Revenue Service
representing the refund of income taxes paid by it from 1996 and 1997 and
accrued interest thereon arising out of the Company's 1998 federal income tax
return. The Company asserted that it was entitled to the February 2000 Refund
pursuant to the terms of the Tax Allocation Agreement and on other legal
grounds. Vencor also asserted that it was entitled to the February 2000 Refund
pursuant to the terms of the Tax Allocation Agreement and on other legal
grounds.
The Company and Vencor are also engaged in a dispute regarding the
entitlement to additional federal, state and local tax refunds for the Subject
Periods which have been received or which may be received by either company.
The Company, Ventas Realty, and Vencor entered into a stipulation relating to
certain of these federal, state and local tax refunds (including the February
2000 Refund) on or about May 23, 2000 (the "Tax Stipulation"). Under the terms
of the Tax Stipulation, which was approved by the Vencor Bankruptcy Court on
May 31, 2000, proceeds of certain federal, state and local tax refunds for the
tax periods prior to and including the 1998 Spin Off (the "Subject Periods"),
received by either company on or after September 13, 1999, with interest
thereon from the date of deposit at the lesser of the actual interest earned
and 3% per annum, are to be held by the recipient of such refunds in
segregated interest bearing accounts. The Tax Stipulation contains notice
provisions relating to the withdrawal of funds by either company from the
segregated accounts for the payment of certain federal, state and local taxes
for the Subject Periods and related fees and expenses.
Under the Final Plan, if consummated, the Tax Allocation Agreement would be
amended and the Tax Stipulation would be superseded by a Tax Refund Escrow
Agreement (as defined below), which would be entered into by Vencor and the
Company on the date the Final Plan is consummated (the "Vencor Effective
Date"). See "--Recent Developments Regarding Vencor--Vencor Bankruptcy."
The Stipulation
In connection with the bankruptcy filing by Vencor, the Company and Vencor
entered into the Stipulation for the payment by Vencor to the Company of
approximately $15.1 million per month starting in September 1999, to be
applied against the total amount of minimum monthly base rent that is due and
payable under the Master Leases. The Stipulation was approved by the
Bankruptcy Court. During the period in which the Stipulation is in effect,
Vencor has agreed to fulfill all of its obligations under the Spin Agreements
as such obligations become due, including its obligation to indemnify and
defend Ventas from and against all claims arising out of the Company's former
health care operations or assets or liabilities transferred to Vencor in the
1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to
9
seek to reject such agreements pursuant and subject to the applicable
provisions of the Bankruptcy Code. A termination of the Stipulation and/or
rejection by Vencor of the Spin Agreements could have a material adverse
effect on the business, financial condition, results of operations and
liquidity of the Company, on the Company's ability to service its indebtedness
and on the Company's ability to make distributions to its stockholders as
required to continue to qualify as a REIT (a "Material Adverse Effect"). See
"--Risk Factors--Effects of Bankruptcy Proceedings." Under the Final Plan, if
consummated, Vencor would assume and agree to fulfill its obligations under
all Spin Agreements other than the Development Agreement and the Participation
Agreement. See "--Recent Developments Regarding Vencor" and "--Risk Factors--
Conditions to Consummation of the Final Plan."
The payments under the Stipulation are required to be made by the fifth day
of each month, or on the first business day thereafter. Starting in September
1999, the difference between the amount of minimum monthly base rent due under
the Company's Master Leases with Vencor and the monthly payment of
approximately $15.1 million accrues as a superpriority administrative expense
in Vencor's bankruptcy, junior in right only to the following: (i) any liens
or superpriority claims provided to lenders under Vencor's debtor-in-
possession credit agreement (the "DIP facility"); (ii) any fees due to the
Office of the United States Trustee; (iii) certain fees of Vencor's
professionals; (iv) any liens or superpriority claims granted to pre-petition
secured creditors as adequate protection for their claims under the interim
DIP order issued by the bankruptcy court and the final DIP order; and (v) pre-
petition liens granted to the lenders under Vencor's credit agreement, as
amended, and related agreements, to the extent such pre-petition claims are
allowed as secured, subject to challenge in the Vencor bankruptcy proceeding.
The monthly payment of approximately $15.1 million under the Stipulation is
not subject to offset, recoupment or challenge. August 1999 Rent, in the
amount of approximately $18.9 million, remains unpaid and was asserted as a
claim in Vencor's chapter 11 case.
The Stipulation by its terms initially would have expired on October 31,
1999, but automatically renews for one-month periods unless either party
provides a fourteen-day notice of its election to terminate the Stipulation.
To date, no such notice of termination has been given. The Stipulation may
also be terminated prior to its expiration upon a payment default by Vencor,
the consummation of a plan of reorganization for Vencor, or the occurrence of
certain events under the DIP facility. There can be no assurance as to how
long the Stipulation will remain in effect or that Vencor will continue to
perform under the terms of the Stipulation. If the Final Plan is consummated,
the Stipulation would be terminated on the Vencor Effective Date. See "--
Recent Developments Regarding Vencor" and "--Risk Factors--Conditions to
Consummation of the Final Plan."
The Stipulation also addresses an agreement by Ventas and Vencor concerning
any statutes of limitations and other time constraints. See "--The Tolling
Agreement" below.
The Tolling Agreement
The Company and Vencor also entered into an agreement (the "Tolling
Agreement") pursuant to which they have agreed that any statutes of
limitations or other time constraints in a bankruptcy proceeding, including
the assertion of certain "bankruptcy avoidance provisions" that might be
asserted by one party against the other, are extended or tolled for a
specified period. That period currently terminates on the termination date of
the Stipulation. Pursuant to the Stipulation, the Tolling Agreement does not
shorten any time period otherwise provided under the Bankruptcy Code. If the
Final Plan is consummated, the Tolling Agreement would be terminated on the
Vencor Effective Date. See "--Recent Developments Regarding Vencor" and "--
Risk Factors--Conditions to Consummation of the Final Plan."
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to Vencor
(the "Third Party Leases"). The lessors of these properties may claim that the
Company remains liable on the Third Party Leases assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Leases, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against
10
all claims against the Company arising out of the Third Party Leases assigned
by the Company to Vencor. Either prior to or following the 1998 Spin Off, the
tenant's rights under a subset of the Third Party Leases were assigned or
sublet to unrelated third parties (the "Subleased Third Party Leases"). If
Vencor or such third party subtenants are unable to or do not satisfy the
obligations under any Third Party Lease assigned by the Company to Vencor, and
if the lessors prevail in a claim against the Company under the Third Party
Leases, then the Company may be liable for the payment and performance of the
obligations under any such Third Party Lease. The Company believes it may have
valid legal defenses to any such claim by certain lessors under the Third
Party Leases. However, there can be no assurance the Company would prevail in
a claim brought by a lessor under a Third Party Lease. In the event that a
lessor should prevail in a claim against the Company, the Company may be
entitled to receive revenues from those properties that would mitigate the
costs incurred in connection with the satisfaction of such obligations. The
annual minimum rental payments under the Third Party Leases equals
approximately $15.7 million, $6.5 million and $5.9 million for 2001, 2002 and
2003, respectively. The Third Party Leases relating to nursing facilities,
hospitals, offices and warehouses have remaining terms (excluding renewal
periods) of 1 to 10 years and total aggregate remaining minimum rental
payments under those leases amount to $42.6 million. The Third Party Leases
relating to ground leases have remaining terms from 1 to 80 years and total
aggregate remaining minimum rental payments under those leases amount to $31.8
million.
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Leases during the period in
which the Stipulation is in effect and, except for disputes with Health Care
Property Investors discussed in "Note 9--Commitments and Contingencies" to the
Consolidated Financial Statements, has to date performed its obligations. See
"--Risk Factors--Dependence of the Company on Vencor." There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the Agreement of
Indemnity--Third Party Leases or that Vencor will continue to honor its
obligations under the Agreement of Indemnity--Third Party Leases. If Vencor
does not satisfy or otherwise honor the obligations under the Agreement of
Indemnity--Third Party Leases, then the Company may be liable for the payment
and performance of such obligations. See "--Risk Factors--Dependence of the
Company on Vencor" and "Note 8--Transactions with Vencor" and "Note 9--
Commitments and Contingencies" to the Consolidated Financial Statements. Under
the Final Plan, if consummated, Vencor would assume and agree to fulfill its
obligations under the Agreement of Indemnity--Third Party Leases. See "--
Recent Developments Regarding Vencor" and "--Risk Factors--Conditions to
Consummation of the Final Plan."
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Vencor (the "Third Party Guarantees"). The
Company may remain liable on the Third Party Guarantees assigned to Vencor.
Under the terms of the Agreement of Indemnity--Third Party Contracts, Vencor
and its subsidiaries have agreed to indemnify and hold the Company harmless
from and against all claims against the Company arising out of the Third Party
Guarantees assigned by the Company to Vencor. If Vencor is unable to or does
not satisfy the obligations under any Third Party Guarantee assigned by the
Company to Vencor, then the Company may be liable for the payment and
performance of the obligations under any such agreement. The Third Party
Guarantees were entered into in connection with certain acquisitions and
financing transactions. The aggregate exposure under these guarantees is
approximately $9.2 million.
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Contracts during the period in
which the Stipulation is in effect. There can be no assurance that Vencor will
have sufficient assets, income and access to financing to enable it to satisfy
its obligations incurred in connection with the Agreement of Indemnity--Third
Party Contracts or that Vencor will continue to honor its obligations under
the Agreement of Indemnity--Third Party Contracts. If Vencor does not satisfy
or otherwise honor the obligations under the Agreement of Indemnity--Third
Party Contracts, then the Company may be liable for the payment and
performance of such obligations. See "--Risk Factors--Dependence of the
Company on Vencor." Under the Final Plan, if consummated, Vencor would assume
and agree to fulfill its obligations under the Agreement of Indemnity--Third
Party Contracts. See "--Recent Developments Regarding Vencor"and "--Risk
Factors--Conditions to Consummation of the Final Plan."
11
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Vencor agreed in various Spin
Agreements to assume and to indemnify the Company for any and all liabilities
that may arise out of the ownership or operation of the health care operations
either before or after the date of the 1998 Spin Off. The indemnification
provided by Vencor also covers losses, including costs and expenses, which may
arise from any future claims asserted against the Company based on these
health care operations. In addition, at the time of the 1998 Spin Off, Vencor
agreed to assume the defense, on behalf of the Company, of any claims that
were pending at the time of the 1998 Spin Off, and which arose out of the
ownership or operation of the health care operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the 1998 Spin Off
which arise out of the ownership and operation of the health care operations.
Vencor has not agreed to assume the Spin Agreements and has reserved its right
to seek to reject such agreements pursuant and subject to the applicable
provisions of the Bankruptcy Code. Under the Stipulation, Vencor has agreed to
fulfill its obligations incurred in connection with the 1998 Spin Off during
the period in which the Stipulation remains in effect. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. If Vencor does not satisfy or
otherwise honor the obligations, the Company may have to assume the defense of
such claims. In addition, if the Final Plan is consummated, it is likely that
the Company will be required to make payments to settle certain government
claims which will not be subject to recovery from or indemnification by
Vencor. See "--Risk Factors--Dependence of the Company on Vencor" and "--Risk
Factors--Conditions to Consummation of the Final Plan." Under the Final Plan,
if consummated, Vencor would assume and agree to fulfill its obligations
incurred in connection with the 1998 Spin Off. See "--Recent Developments
Regarding Vencor" and "--Risk Factors--Conditions to Consummation of the Final
Plan."
Recent Developments Regarding Vencor
Vencor Bankruptcy
On the Petition Date, Vencor filed for protection under the Bankruptcy Code
with the Bankruptcy Court. At that time, the Company, Vencor and Vencor's
major creditors were engaged in negotiations to restructure Vencor's debt and
lease obligations. Although the parties had not reached an agreement on the
restructuring of Vencor's debt and lease obligations, Vencor, with the
apparent support of its major creditors, filed a plan of reorganization (the
"Preliminary Plan") on September 29, 2000. At that time, the Company informed
Vencor and Vencor's major creditors that the Company would not vote for the
Preliminary Plan or any other plan of reorganization which was not acceptable
to the Company, taking into consideration all facts and circumstances at the
time. After the filing of Vencor's Preliminary Plan, the Company, Vencor and
Vencor's major creditors continued the discussions to reach a consensual
global restructuring of Vencor's debt and lease obligations.
On November 6, 2000, Vencor filed its first Amended Plan of Reorganization
(the "First Amended Plan") with the Bankruptcy Court incorporating into the
Preliminary Plan certain terms relating to the comprehensive settlement of the
claims by the United States against the Company and Vencor arising from the
Company's prior health care operations and Vencor's health care operations.
The Company reached agreement with Vencor and Vencor's major creditors on the
material economic terms of a plan of reorganization for Vencor in November
2000. On December 1, 2000, Vencor filed a second amended plan of
reorganization with the Bankruptcy Court (the "Second Amended Plan")
incorporating into the First Amended Plan the material economic terms for the
restructuring of Vencor agreed upon by the Company, Vencor and Vencor's major
creditors. On December 6, 2000, Vencor filed its third amended plan (the
"Third Amended Plan") of reorganization with the Bankruptcy Court making
certain additional changes to the Second Amended Plan.
On December 14, 2000, Vencor filed the Fourth Amended Plan with the
Bankruptcy Court, incorporating the final terms of the restructuring of
Vencor's debt and lease obligations into the Third Amended Plan. On December
15, 2000, the Bankruptcy Court entered an order approving the disclosure and
solicitation materials for distribution to creditors for approval of the
Fourth Amended Plan. The Company voted to accept the Fourth Amended Plan on
March 1, 2001. The Fourth Amended Plan was overwhelmingly accepted by those
voting on the Fourth Amended Plan.
12
A hearing on the confirmation of the Fourth Amended Plan was held before
the Bankruptcy Court on March 1, 2001 (the "Confirmation Hearing"). The Fourth
Amended Plan, which was modified on the record of the Confirmation Hearing,
was confirmed as the Final Plan by an order of the Bankruptcy Court, which
order was signed on March 16, 2001 and entered on the docket on March 19,
2001. Consummation of the Final Plan is subject to the satisfaction of
numerous conditions, many of which are outside of the control of the Company
and Vencor. There can be no assurance (a) that the Final Plan will be
consummated, (b) if the conditions to consummation of the Final Plan are
satisfied, of the date that the Final Plan would be consummated, or (c) that,
if the Final Plan is not amended to provide for a later effective date and the
Final Plan is not consummated, (i) Vencor will pursue or be successful in
obtaining the approval of its creditors or the Company for a plan of
reorganization on the same terms as the Final Plan or on alternate terms, (ii)
that the terms of any alternate plan of reorganization will be acceptable to
the Company, or (iii) the final terms of any alternate plan of reorganization
will not have a Material Adverse Effect on the Company. The Final Plan
provides that the effective date of the Final Plan (the "Vencor Effective
Date") shall occur no later than May 1, 2001, but the Final Plan does not
address the consequences if the Vencor Effective Date does not occur on or
before May 1, 2001. It could have a Material Adverse Effect on the Company if
the Final Plan is not consummated. The Company believes that the Final Plan
will likely become effective.
Summary of Economic Terms of the Final Plan
Under the Final Plan, if consummated, the Company would, among other
things, (i) retain all rent paid by Vencor through the Vencor Effective Date,
(ii) amend and restate its Master Leases with Vencor in the form of four
amended and restated master leases (collectively, the "Amended Master Leases")
and (iii) receive 1,498,500 shares of the New Vencor Common Stock, as defined
below, together with certain registration rights. Consummation of the Final
Plan is subject to the satisfaction of numerous conditions, many of which are
outside the control of the Company and Vencor. See "--Risk Factors--Conditions
to Consummation of the Final Plan." The Company believes that the Final Plan
will likely become effective.
The annual base rent under the Amended Master Leases would be $180.7
million from the first day of the first month following the Vencor Effective
Date to April 30, 2002. For the period from the first day of the first month
following the Vencor Effective Date through April 30, 2004, annual base rent,
payable in all cash, would escalate 3.5% on May 1 of each year, commencing May
1, 2002, if certain tenant revenue parameters have been achieved. Assuming
such tenant revenue parameters have been achieved, annual base rent under the
Amended Master Leases would be $187.0 million from May 1, 2002 to April 30,
2003 and $193.6 million from May 1, 2003 to April 30, 2004. All of the annual
base rent would be paid in cash through April 30, 2004. Commencing May 1,
2004, if a Vencor Bank Refinancing Transaction (as defined below) has
occurred, the 3.5% annual escalator would be paid in cash and the full amount
of the annual base rent would be paid in cash. If a Vencor Bank Refinancing
Transaction has not occurred, then on May 1, 2004 the 3.5% annual escalator
under the Amended Master Leases would be comprised of (a) an annual cash
escalator of approximately 2% on the rent payable in cash during the prior
lease year, and (b) a 1.5% annual non-cash rent escalator that would accrue at
the annual rate of LIBOR plus 450 basis points until the occurrence of a
"Vencor Bank Refinancing Transaction", at which time the accrual with interest
would be due and payable and thereafter the 1.5% non-cash rent escalator would
convert to a cash escalator so that the total cash escalator thereafter would
equal 3.5% per year. Under the terms of the Final Plan, Vencor would be
required to pay $15.1 million in base rent for the month in which the Vencor
Effective Date occurs, which is the monthly base rent amount under the
Stipulation. The Company would also have the one time right to reset the rents
under the Amended Master Leases, exercisable 5 1/4 years after the Vencor
Effective Date on an Amended Master Lease by Amended Master Lease basis, to a
then fair market rental rate, for a total fee of $5.0 million payable on a
pro-rata basis at the time of exercise under the applicable Amended Master
Lease. See "--Amended Master Leases."
Under the Final Plan, if consummated, Ventas Realty would receive 1,498,500
shares of the common stock in Vencor, Inc. as restructured, representing 9.99%
of the issued and outstanding common stock in Vencor, Inc. as of the Vencor
Effective Date (the "New Vencor Common Stock"). The New Vencor Common Stock
issued
13
to Ventas Realty would be subject to dilution from stock issuances occurring
after the Vencor Effective Date. The New Vencor Common Stock would be issued
to Ventas Realty as additional future rent in consideration of the Company's
and Ventas Realty's agreement to charge the base rent which would be provided
in the Amended Master Leases.
Except as explained below, under the Final Plan, if consummated, Vencor
would assume and agree to continue to perform its obligations under the Spin
Agreements including, without limitation, its obligation to indemnify and
defend the Company for all litigation and other claims relating to the health
care operations and other assets and liabilities transferred to Vencor in the
1998 Spin Off. See "--Spin Agreements and Other Arrangements under Final
Plan."
Under the Final Plan, if consummated, certain federal, state and local tax
refund proceeds received on or after the Petition Date by Vencor or the
Company for the Subject Periods would be placed into an escrow account to be
used to satisfy any potential tax liabilities for the Subject Periods. When
audits of the relevant tax periods have been concluded, any residual amount
remaining in escrow would be shared equally by the Company and Vencor. All
interest accruing on the escrowed amounts would be distributed annually
equally between the Company and Vencor. See "--Tax Allocation Agreement, Tax
Stipulation and Tax Refund Escrow Agreement."
Under the Final Plan, if consummated, the Company would waive the right to
the payment of (a) $18.9 million for the August 1999 unpaid monthly base rent
under the Master Leases and (b) the difference between the rent required to be
paid under the terms of the Master Leases and the rent paid to the Company
after the Petition Date and prior to the first calendar month following the
Vencor Effective Date pursuant to the terms of the Stipulation.
Under the Final Plan, if consummated, the Vencor Senior Bank Debt would be
restructured as follows: (i) the principal and accrued interest amount of the
Vencor Senior Bank Debt would be reduced from approximately $578.0 million to
$300.0 million, (ii) the restructured debt would have a maturity date on the
seventh anniversary of the Vencor Effective Date and bear interest at LIBOR
plus 450 basis points, (iii) interest would not accrue on the restructured
debt until the amount of foregone interest equaled $15.9 million, (iv) the
restructured debt would be secured by a second lien on substantially all of
the assets of Vencor, and (v) the holders of the Vencor Senior Bank Debt would
receive 9,826,092 shares of the New Vencor Common Stock representing
approximately 65.5% of the issued and outstanding New Vencor Common Stock as
of the Vencor Effective Date, subject to dilution from stock issuances by
Vencor after the Vencor Effective Date.
Under the Final Plan, if consummated, the holders of the Vencor Senior
Subordinated Notes would convert their claim of approximately $374.0 million
of principal and accrued interest as of the Petition Date into (i) 3,675,408
shares of New Vencor Common Stock, representing approximately 24.5% of the
issued and outstanding New Vencor Common Stock as of the Vencor Effective
Date, subject to dilution from stock issuances by Vencor after the Vencor
Effective Date and (ii) warrants to purchase in the aggregate 7 million shares
of New Vencor Common Stock divided into two series, one of which would
represent the right to purchase 2 million shares at an exercise price of
$30.00 per share and the second of which would represent the right to purchase
5 million shares at an exercise price of $33.33 per share. These warrants, if
exercised, would result in the issuance of New Vencor Common Stock
representing approximately 30% of the fully diluted equity of Vencor assuming
the warrants were exercised on the Vencor Effective Date.
Under the Final Plan, if consummated, stock incentive plans would be
adopted and implemented by Vencor (the "Stock Incentive Plans") for the
benefit of the senior management of Vencor. Options to purchase 0.6 million
shares of New Vencor Common Stock and 0.6 million restricted shares of New
Vencor Common Stock would be available for grant under the Stock Incentive
Plans.
14
Spin Agreements and Other Arrangements Under the Final Plan
Set forth below is a description of the material terms of (a) certain of
the Spin Agreements which would be assumed by Vencor under the Final Plan, if
consummated, including the terms of amendments or restatements of such Spin
Agreements, where applicable, (b) those Spin Agreements and other agreements
that would be terminated on the Vencor Effective Date pursuant to the Final
Plan, if consummated, and (c) new agreements that would be entered into
between the Company and Vencor on the Vencor Effective Date in accordance with
the Final Plan, if consummated.
Amended Master Leases
Under the Final Plan, if consummated, on the Vencor Effective Date the
Tenant would assume the Master Leases and the Tenant and the Landlord would
simultaneously amend and restate the Master Leases in the form of four Amended
Master Leases setting forth the material terms governing the properties
covered by the Amended Master Leases. The Corydon, Indiana facility would be
incorporated into Amended Master Lease #4. The following description of the
Amended Master Leases is a summary of the form of amended lease filed with the
Bankruptcy Court in connection with the confirmation of the Final Plan and
does not purport to be a complete description of the Amended Master Leases,
the terms of which could change.
Each Amended Master Lease would include land, buildings, structures and
other improvements on the land, easements and similar appurtenances to the
land and improvements, and permanently affixed equipment, machinery and other
fixtures relating to the operation of the properties covered by the Amended
Master Leases.
Each Amended Master Lease would cover between 47 and 100 leased properties
and would be a "triple-net lease" or an "absolute-net lease" pursuant to which
Tenant would be required to pay all insurance, property taxes, utilities,
maintenance and repairs related to the properties. Under each Amended Master
Lease, the aggregate annual rent would be referred to as Base Rent (as defined
in each Amended Master Lease). Base Rent would equal the sum of Current Rent
(as defined in each Amended Master Lease) and Accrued Rent (as defined in each
Amended Master Lease). The Tenant would be obligated to pay the portion of
Base Rent that is Current Rent, and unpaid Accrued Rent would be paid as set
forth below. From the first day of the first month after the Vencor Effective
Date through April 30, 2004, Base Rent would equal Current Rent. Under the
Amended Master Leases, the initial annual aggregate Base Rent would be $180.7
million from the first day of the first month after the Vencor Effective Date
to April 30, 2002. For the period from May 1, 2002 through April 30, 2004,
annual aggregate Base Rent, payable in all cash, would escalate at an annual
rate of 3.5% over the Prior Period Base Rent (as defined in the Amended Master
Leases) on May 1 of each year, if certain Tenant revenue parameters have been
achieved. Assuming such Tenant revenue parameters have been achieved, Annual
Base Rent under the Amended Master Leases would be $187.0 million from May 1,
2002 to April 30, 2003 and $193.6 million from May 1, 2003 to April 30, 2004.
Base Rent for the month in which the Vencor Effective Date occurs would be
$15.1 million, which equals the monthly rent to be paid under the Stipulation.
If the Final Plan is consummated, of the $180.7 million of Base Rent under
the Amended Master Leases to be paid for the period commencing on the first
day of the first month after the Vencor Effective Date, 67.1% is attributable
to nursing facilities and 32.9% is attributable to hospitals.
Each Amended Master Lease would provide that beginning May 1, 2004, if a
Vencor Bank Refinancing Transaction has occurred, the 3.5% annual escalator
would be paid in cash and the Base Rent would continue to equal Current Rent.
If a Vencor Bank Refinancing Transaction has not occurred, then on May 1, 2004
the annual aggregate Base Rent would be comprised of (a) Current Rent payable
in cash which would escalate annually by an amount equal to 2% of prior period
Base Rent and (b) an additional annual non-cash accrued escalator amount of
1.5% of the Prior Period Base Rent which would accrete from year to year
including an interest accrual at LIBOR (as defined in the Amended Master
Leases) plus 450 basis points (compounded annually) to be added to the annual
accreted amount (but such interest would not be added to the aggregate Base
Rent in subsequent years). The Unpaid Accrued Rent would become payable, and
all future Base Rent escalators would be payable
15
in cash, upon the occurrence of any one of the following (a "Vencor Bank
Refinancing Transaction"): (a) any transaction pursuant to which all or
substantially all of the indebtedness of the Tenant under the Tenant's new
senior secured credit agreement is purchased by the Tenant or another party at
the Tenant's direction or is repaid; (b) any amendment of the new senior
secured notes or new senior secured credit agreement pursuant to which either
(i) the principal amount of the Tenant's indebtedness thereunder (as such
indebtedness is in effect immediately prior to such amendment) is increased
(excepting therefrom increases attributable to the capitalization of accrued
interest or protective advances by the lenders under the new senior secured
notes), or (ii) the loan amount, maturity or other material terms and
conditions thereof (as such terms and conditions are in effect immediately
prior to such amendment), are modified to match, better or otherwise respond
to the terms and conditions of alternative financing which has been offered to
the Tenant; (c) any bona fide, binding offer is made to the Tenant to provide
financing on terms better than those of the new senior secured credit
agreement, sufficient to (i) pay in full, or purchase at or above par, all of
the indebtedness of the Tenant under the new senior secured credit agreement
and (ii) pay in full all Unpaid Accrued Rent owing as of such date, whether or
not such offer is accepted or consummated; and (d) the termination or
expiration of the applicable Amended Master Lease as to all properties under
such lease. However, with respect to subsection (d) above, the Landlord's
right to receive payment of the Unpaid Accrued Rent is subordinate to the
receipt of payment of the indebtedness of the Tenant by the lenders under the
new senior secured notes issued pursuant to the new senior secured credit
agreement. Upon the occurrence of any of the events referenced in subsections
(a) through (d) above, the annual aggregate Base Rent payable in cash would
thereafter escalate at the annual rate of 3.5% and there would be no further
accrual feature for rents arising after the occurrence of such events.
There would be several renewal bundles of properties under each Amended
Master Lease, with each bundle containing approximately 7 to 12 properties.
All properties within a bundle would have primary terms ranging from 10 to 15
years from May 1, 1998, subject to certain exceptions. Subject to the
Landlord's rental reset right described below, the Tenant would have the
option to renew the term of all, but not less than all, of the properties in a
bundle, for one five-year renewal term beyond the initial term at the then
existing rental rate plus the then existing escalation amount per annum, and
further renew for two additional five-year renewal terms beyond the first
renewal term at the greater of the then existing rental rate plus the then
existing escalation amount per annum or the then fair market value rental
rate. The rental rate during the first renewal term and any additional renewal
term in which rent due is based on the then existing rental rate would
escalate each year during such term(s) at the applicable initial escalation
rate. The term of each Amended Master Lease would generally be subject to
termination upon the occurrence of an Event of Default and certain other
conditions described in the Amended Master Leases.
During the one-year period commencing on the date which is 5 1/4 years
after the Vencor Effective Date, the Landlord would have a one-time option
(the "Reset Right") to reset the Base Rent, Current Rent and Accrued Rent (as
defined in each Amended Master Lease) under any one or more Amended Master
Leases to the then fair market rental. Upon exercising this reset right, the
Landlord would be required to pay the Tenant a fee equal to a prorated portion
of $5.0 million based upon the proportion of Base Rent payable under the
Amended Master Lease(s) with respect to which rent is reset to the total Base
Rent payable under all of the Amended Master Leases. The fair market rental
would be determined through the appraisal procedures in the Amended Master
Leases. Once the fair market rental is so determined, the Landlord, in its
sole discretion, could determine whether to exercise the Reset Right. If the
Landlord elects to exercise the Reset Right, the new fair market rental would
be effective retroactive on the later of (a) the date the Landlord notifies
the Tenant of its interest in exercising the Reset Right, and (b) the date
which is 5 1/4 years after the Vencor Effective Date. The rental rate for any
renewal term would also be reset in connection with a Reset Right.
The Amended Master Leases would require that the Tenant utilize the leased
properties solely for the provision of health care services and related uses
and as the Landlord may otherwise consent (such consent not to be unreasonably
withheld). The Tenant would be responsible for maintaining or causing to be
maintained all licenses, certificates and permits necessary for it to comply
with various health care regulations. The Tenant would be obligated to operate
continuously each leased property as a provider of health care services.
16
The Tenant would be required to maintain the leased properties in good
repair and condition, making all repairs, modifications and additions required
by law, including any Capital Addition (as defined in each of the Amended
Master Leases). The Tenant would be required to pay for all capital
expenditures and other expenses for the maintenance, repair, restoration or
refurbishment of a leased property (and any Capital Addition). The Tenant
would also be required to maintain all personal property at each of the leased
properties in good order, condition and repair, as is necessary to operate the
leased property in compliance with all applicable licensure, certification,
legal and insurance requirements and otherwise in accordance with customary
practice in the industry.
The Tenant would be required to maintain liability, all risk property and
workers' compensation insurance for the leased properties at a level at least
comparable to those in place with respect to the leased properties prior to
the 1998 Spin Off.
Subject to certain restrictions, each Amended Master Lease would permit the
Landlord, as determined in its sole discretion and for a legitimate business
purpose, to remove properties from the Amended Master Leases and place such
properties in newly created separate lease(s), which newly created lease(s)
would be on the same terms as the original Amended Master Leases. Any such new
lease would not be cross-defaulted with the original Amended Master Leases or
with any other new leases. The Tenant would not be permitted to remove
properties from an Amended Master Lease without the consent of the Landlord.
An "Event of Default" would be deemed to have occurred under an Amended
Master Lease if, among other things, (i) the Tenant failed to pay rent or
other amounts when due and failed to cure such default within five days after
notice; (ii) the Tenant failed to comply with covenants, which failure
continued for 30 days after notice or, so long as diligent efforts to cure
such failure were being made, such longer period (not over 180 days) as would
be necessary to cure such failure; (iii) certain bankruptcy or insolvency
events occurred, including the filing of a petition of bankruptcy or a
petition for reorganization under the Bankruptcy Code; (iv) the Tenant ceased
to operate any property as a provider of health care services for the
particular required use (e.g., hospital or nursing center); (v) a default
occurred under any guaranty of the lease or the Indemnity Agreement (as
defined in the Amended Master Leases) and was not cured within the cure period
specified in the Amended Master Leases; (vi) the Tenant or its applicable
subtenant lost any required health care license, permit or approval or failed
to comply with any legal requirements in each case by a final unappealable
determination; (vii) the Tenant failed to maintain required insurance; (viii)
the Tenant created or suffered to exist certain liens and did not cure the
same within the cure period specified in the Amended Master Leases; (ix) the
Tenant failed to perform any covenant with respect to complying with or
contesting any legal requirements, impositions or insurance requirements and
did not cure the same within the cure period specified in the Amended Master
Leases; (x) Tenant breached any of its material representations or warranties;
(xi) a reduction occurred in the number of licensed beds in excess of 10% (or
5% in certain cases), or less than 10% if the Tenant voluntarily banked more
than 15% (or, in certain cases, a percentage less than 5% if the Tenant
voluntarily banked more than 20%) of licensed beds, of the number of licensed
beds in, or deemed to be in, the applicable facility on the Commencement Date
(as defined in the Amended Master Leases) (subject to certain exceptions for
involuntary reductions in excess of 10%) (a "Licensed Bed Event of Default");
(xii) certification for reimbursement under Medicare or Medicaid with respect
to a participating facility was revoked and re-certification did not occur for
120 days (plus an additional 60 days in certain circumstances) (a
"Medicare/Medicaid Event of Default"); (xiii) the appointment of a receiver or
custodian by any federal, state or local government pursuant to a final
unappealable determination; (xiv) the Tenant became subject to regulatory
sanctions and failed to cure such regulatory sanctions within its specified
cure period in any material respect with respect to any facility; (xv) the
Tenant failed to cure its breach of any Permitted Encumbrance (as defined in
the Amended Master Leases) within the applicable cure period and, as a result,
a real property interest or other beneficial property right of the Lessor was
terminated or at material risk of being terminated; (xvi) the Tenant failed to
cure its breach of any of the obligations of the Landlord as lessee under an
Existing Ground Lease (as defined in the Amended Master Leases) within the
applicable cure period and, if such breach was a non-monetary, non-material
breach, such Existing Ground Lease was terminated or at material risk of being
terminated; (xvii) the Tenant failed to pay principal or
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interest with respect to the new senior secured notes that would be issued by
Tenant on the Vencor Effective Date or otherwise failed to pay principal or
interest when due (including applicable notice and cure periods) with respect
to any indebtedness for borrowed money of Tenant with an aggregate outstanding
principal balance equal to or exceeding $50.0 million; or (xviii) the maturity
of the new senior secured notes that would be issued by Tenant on the Vencor
Effective Date or any other indebtedness owing under the Tenant's new senior
secured credit agreement or any other indebtedness for borrowed money of
Tenant with an aggregate outstanding principal balance equal to or exceeding
$50.0 million has been accelerated. The Amended Master Leases would not be
cross-defaulted with each other.
Except as noted below, upon an Event of Default under one of the Amended
Master Leases, the Landlord could, at its option, be able to exercise the
following remedies: (i) after not less than 10 days notice to the Tenant (less
in certain circumstances), terminate that particular entire Amended Master
Lease, repossess all leased properties under such Amended Master Lease and
require that the Tenant pay to the Landlord, as liquidated damages, the net
present value of the rent for the balance of the term; (ii) without
terminating the particular Amended Master Lease agreement, repossess all
leased properties under such Amended Master Lease and relet the leased
properties with the Tenant remaining liable under the particular Amended
Master Lease for all obligations to be performed by the Tenant thereunder,
including the difference, if any, between the rent under the particular
Amended Master Lease and the rent payable as a result of the reletting of the
leased property; and (iii) seek any and all other rights and remedies
available under law or in equity. In the case of an Event of Default that
relates specifically to a particular leased property, in lieu of terminating
the Amended Master Lease and/or dispossessing the Tenant as to all leased
properties under such Amended Master Lease and subject to the special rules
noted below relative to Licensed Bed Events of Default and Medicare/Medicaid
Events of Default, the Landlord could terminate the Amended Master Lease
and/or dispossess Tenant as to the aforesaid leased property. Each of the
Amended Master Leases would include special rules relative to
Medicare/Medicaid Events of Default and Licensed Bed Events of Default. In the
event Medicare/Medicaid Events of Default and/or Licensed Bed Events of
Default shall occur and be continuing (i) with respect to not more than two
properties at the same time under an Amended Master Lease that covers 41 or
more properties, and (ii) with respect to not more than one property at the
same time under an Amended Master Lease that covers 21 to and including 40
properties, the Lessor would not be able to exercise termination/dispossession
remedies against any property other than the property(ies) to which the Events
of Default described above relate.
Except as noted below, Events of Default existing under the Master Leases
as of the Vencor Effective Date would not be waived by the Company and would
be governed by and treated in accordance with the terms of the Amended Master
Leases. Any Event of Default relating to a third party claim under the Master
Leases (with certain exceptions) would be considered waived if any member of
senior management of the Landlord was aware of the Event of Default and Vencor
was not aware of the Event of Default and the Landlord failed to inform Vencor
of such Event of Default. In addition, any Events of Default existing under
the Master Leases as of the Vencor Effective Date and that are identified in
Schedule 1.3 of the Amended Master Leases would be waived by the Landlord.
The Amended Master Leases would provide that the Tenant may not partially
assign any Amended Master Lease and could not assign in whole or sublease or
otherwise transfer any leased property or any portion of a leased property as
a whole (or in substantial part), including by virtue of a change of control
(as defined in the Amended Master Leases), without the consent of Ventas,
which could not be unreasonably withheld if the proposed assignee is a
creditworthy entity with sufficient financial stability to satisfy its
obligations under the particular Amended Master Lease, has not less than four
years experience in operating health care facilities, has a favorable business
and operational reputation and character and agrees to comply with the use
restrictions in the particular Amended Master Lease. The obligation of the
Landlord to consent to subletting or assignment would be subject to the
reasonable approval rights of any mortgagee and/or the lenders under its
credit agreement. The Tenant could sublease up to 20% of each leased property
for restaurants, gift shops and other stores or services customarily found in
hospitals or nursing centers without the consent of the Landlord, subject,
however, to the sublessee's possession of necessary licenses and governmental
authorizations.
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Upon any assignment or subletting, the Tenant would not be released from
its obligations under the applicable Amended Master Lease. Subject to certain
exclusions, the Tenant would have to pay to the Landlord 80% of any excess
consideration received by it on account of an assignment and 80% (50% in the
case of existing subleases) of Sublease Rent Payments (roughly equal to the
excess of all consideration payable to Tenant under a sublease net of certain
transaction costs, over the sum of the Rent under the Amended Master Lease
(including all taxes, insurance, maintenance and other impositions) allocable
to the subleased premises plus specified costs attributable to the subleased
premises), provided that the Landlord's right to such payments would be
subordinate to that of the Tenant's lenders.
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
Under the Final Plan, if consummated, Vencor and the Company would enter
into the Tax Refund Escrow Agreement and First Amendment of the Tax Allocation
Agreement (the "Tax Refund Escrow Agreement"), which would govern their
relative entitlement to certain tax refunds for the Subject Periods that each
received or may receive in the future. The Tax Refund Escrow Agreement would
amend and supplement the Tax Allocation Agreement and supersede the Tax
Stipulation. The following summary of the Tax Refund Escrow Agreement is a
summary of the form of such agreement filed with the Bankruptcy Court in
connection with the confirmation of the Final Plan and does not purport to be
a complete description of the Tax Refund Escrow Agreement, the terms of which
could change.
Under the terms of the Tax Refund Escrow Agreement, refunds ("Subject
Refunds") received on or after the Petition Date by either Vencor or the
Company with respect to federal, state or local income, gross receipts,
windfall profits, transfer, duty, value-added, property, franchise, license,
excise, sales and use, capital, employment, withholding, payroll, occupational
or similar business taxes (including interest, penalties and additions to tax,
but excluding certain refunds), for the Subject Periods ("Subject Taxes")
would be deposited into an escrow account with a third-party escrow agent on
the Vencor Effective Date.
The Tax Refund Escrow Agreement would provide that each party must notify
the other of any asserted Subject Tax liability of which it becomes aware,
that either party could request that asserted liabilities for Subject Taxes be
contested, that neither party would be allowed to settle such a contest
without the consent of the other, that each party would have a right to
participate in any such contest, and that the parties generally must cooperate
with regard to Subject Taxes and Subject Refunds and mutually and jointly
control any audit or review process related thereto.
The funds in the escrow account (the "Escrow Funds") could be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The Tax Refund Escrow Agreement would provide generally that Vencor and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow
Funds, notwithstanding the indemnification provisions of the Tax Allocation
Agreement. To the extent that the Escrow Funds would be insufficient to
satisfy all liabilities for Subject Taxes that are finally determined to be
due (such excess amount, "Excess Taxes"), the relative liability of Vencor and
the Company to pay such Excess Taxes would be determined as provided in the
Tax Refund Escrow Agreement. Disputes under the Tax Refund Escrow Agreement,
and the determination of the relative liability of Vencor and the Company to
pay Excess Taxes, if any, would be governed by the arbitration provision of
the Tax Allocation Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities would be distributed equally to each of Vencor
and the Company on an annual basis. Any Escrow Funds remaining in the escrow
account after no further claims may be made by governmental authorities with
respect to Subject Taxes or Subject Refunds (because of the expiration of
statutes of limitation or otherwise) would be distributed equally to Vencor
and the Company.
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Agreement of Indemnity--Third Party Leases
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party Leases.
There can be no assurance that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy its obligations under the
Agreement of Indemnity--Third Party Leases or that Vencor will continue to
honor its obligations under the Agreement of Indemnity--Third Party Leases. If
Vencor does not satisfy or otherwise honor the obligations under the Agreement
of Indemnity--Third Party Leases, then the Company may be liable for the
payment and performance of such obligations. See "--Risk Factors--Dependence
of the Company on Vencor," and "Note 9--Commitments and Contingencies" to the
Consolidated Financial Statements. It is a condition to the consummation of
the Final Plan that Vencor shall not have renewed or extended any Third Party
Lease on or after December 10, 2000 unless it first obtained a release of the
Company from liability under such Third Party Lease.
Agreement of Indemnity--Third Party Contracts
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party
Contracts. See "--Risk Factors--Dependence of the Company on Vencor" and "Note
8--Transactions With Vencor--The 1998 Spin Off" to the Consolidated Financial
Statements. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations
incurred in connection with the Agreement of Indemnity--Third Party Contracts
or that Vencor will continue to honor its obligations under the Agreement of
Indemnity--Third Party Contracts. If Vencor does not satisfy or otherwise
honor the obligations under the Agreement of Indemnity--Third Party Contracts,
then the Company may be liable for the payment and performance of such
obligations. See "--Risk Factors--Dependence of the Company on Vencor."
Assumption of Certain Operating Liabilities and Litigation
Under the Final Plan, if consummated, Vencor would assume and agree to
perform its indemnification obligations under the Spin Agreements. There can
be no assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. If Vencor does not satisfy or
otherwise honor the obligations under these arrangements, then the Company may
be liable for the payment and performance of such obligations and may have to
assume the defense of such claims. See "--Risk Factors--Dependence of the
Company on Vencor."
Registration Rights Agreement
Under the Final Plan, if consummated, 1,498,500 shares of New Vencor Common
Stock would be distributed to Ventas Realty on the Vencor Effective Date. On
the Vencor Effective Date, if it occurs, Vencor would execute and deliver to
Ventas Realty, certain other initial holders of New Vencor Common Stock and
other signatories, a Registration Rights Agreement. The following description
of the Registration Rights Agreement is a summary of the form of such
agreement filed with the Bankruptcy Court in connection with the confirmation
of the Final Plan and does not purport to be a complete description of the
Registration Rights Agreement, the terms of which could change.
The Registration Rights Agreement would, among other things, provide that
(a) Vencor file a shelf registration statement with respect to the securities
subject thereto, including the New Vencor Common Stock as soon as practicable
after the Vencor Effective Date, but in no event later than 120 days following
the Vencor Effective Date and (b) Vencor use its reasonable best efforts to
cause such registration statement to be declared effective as soon as
practicable and to keep such registration statement continuously effective for
a period of two years with respect to such securities (subject to customary
exceptions). Under the Registration Rights Agreement, Ventas Realty would be
entitled to exercise certain demand and "piggyback" registration rights with
respect to the New Vencor Common Stock, subject to customary exceptions and
black-out and suspension periods. In
20
addition, until such time as the New Vencor Common Stock would be listed on a
national securities exchange, Vencor would covenant to comply with certain of
the corporate governance requirements in the rules of the National Association
of Securities Dealers, Inc. as if it were subject to such rules. In the event
Vencor failed to comply with its obligations under the Registration Rights
Agreement, the other parties to the Registration Rights Agreement would be
entitled to seek specific performance in addition to other remedies that might
be available.
Agreements That Would be Terminated Under the Final Plan
Under the Final Plan, if consummated, the Participation Agreement and the
Development Agreement would be terminated on the Vencor Effective Date and the
Company and Vencor would be deemed to have waived any and all damages, claims,
liabilities, obligations, and causes of action related to or arising out of
these agreements. Under the Final Plan, if consummated, the Tolling Agreement,
the Tax Stipulation and the Stipulation would also terminate on the Vencor
Effective Date.
Settlement of United States Claims
Vencor and the Company have been the subject of investigations by the
United States Department of Justice into various aspects of claims for
reimbursement from government payers, billing practices and various quality of
care issues in the hospitals and nursing facilities formerly operated by the
Company and presently operated by Vencor. These investigations cover the
Company's former health care operations prior to the date of the 1998 Spin
Off, and include matters arising from lawsuits filed under the qui tam, or
whistleblower, provision of the Federal Civil False Claims Act, which allows
private citizens to bring a suit in the name of the United States. See "Note
11--Litigation" to the Consolidated Financial Statements. The United States
Department of Justice, Civil Division filed two proofs of claim in the
Bankruptcy Court covering the United States' claims and the qui tam suits. The
United States asserted claims of approximately $1.3 billion, including treble
damages, against Vencor in these proofs of claim.
The Final Plan contains a comprehensive settlement of all of the foregoing
United States claims (the "United States Settlement"). The provisions of the
United States Settlement are documented in the Final Plan.
Under the United States Settlement, the Company will pay $103.6 million to
the United States, of which $34.0 million will be paid on the Vencor Effective
Date. The balance of $69.6 million will bear interest at 6% per annum and will
be payable in equal quarterly installments over a five-year term commencing on
the last day of the first full quarter following the quarter in which the
Vencor Effective Date occurs. Vencor will pay the United States a total of
$25.9 million, $10.0 million of which will be paid on the Vencor Effective
Date and the balance (with interest at 6% per annum) of which will be paid
during the first two quarters following the Vencor Effective Date. The Company
will pay $0.4 million to legal counsel for the relators in the qui tam
actions.
If the Company fails to make any payment under the United States Settlement
within five business days of receipt of written notice from the United States
that such payment was delinquent, then the United States could, in its
discretion, by written notice to the Company, declare all unpaid principal and
accrued and unpaid interest payable by the Company under the United States
Settlement to be immediately due and payable.
Under the United States Settlement, the Company agreed with the United
States, that if, from and after the Vencor Effective Date either:
(a) the loans under the Company's Amended Credit Agreement (the "Ventas
Senior Bank Debt") are amended and, as a result of such amendment, (i) the
final maturity date of the Ventas Senior Bank Debt is scheduled to occur
prior to the final maturity date of the payments due from the Company under
the United States Settlement, or (ii) less than $100.0 million of the
outstanding principal under the Ventas Senior Bank Debt is scheduled to be
paid after the final maturity date of the obligations due from the Company
under the United States Settlement, or
21
(b) the Ventas Senior Bank Debt is replaced in whole by new debt (the
"Refinancing Debt"), and (i) the final maturity date of the Refinancing
Debt is scheduled to occur prior to the final maturity date of the payments
due from the Company under the United States Settlement, or (ii) less than
$100.0 million of the outstanding principal of the Refinancing Debt are
scheduled to be paid after the final maturity date of the obligations due
from the Company under the United States Settlement,
then in either case, the final maturity date of the obligations payable by the
Company under the United States Settlement and the remaining payments
thereunder shall be proportionately and equitably adjusted in time and amount
so that the final maturity date and the scheduled principal payments of the
Ventas Senior Bank Debt or the Refinancing Debt, as the case may be, and the
remaining obligations of the Company under the United States Settlement shall
have the same proportionate relationship as before such amendment or
replacement, and in any such event, at least $100.0 million of the outstanding
principal balance of the Ventas Senior Bank Debt or the Refinancing Debt, as
applicable, shall be scheduled to be paid after the due date of the final
payment under the United States Settlement.
The United States Settlement provides that if the Company fails to make any
payment required to be paid by the Company under the United States Settlement
as and when due, then, during the period commencing on the due date of the
delinquent payment and continuing to and until such time as the delinquent
payment shall be paid to the United States (such period being referred to as a
"Delinquency Period"), the Company shall suspend the payment of dividends on
account of shares of any class of stock of the Company, provided, however,
during any Delinquency Period, the Company may declare and pay an amount equal
to the minimum REIT dividend for the applicable taxable year (or the unpaid
portion of the minimum REIT dividend for the applicable taxable year) as
necessary for the Company to maintain its status as a REIT under the Code for
the applicable tax year.
The United States Settlement provides that the Company will not be
responsible in any manner for the payments owed by Vencor under the United
States Settlement, and any failure of Vencor to make such payments will not
affect the Company's rights, duties, benefits, and/or obligations under the
United States Settlement.
Under the terms of the United States Settlement, as to the Company and
Vencor and their officers, directors and employees, solely in their capacity
as such, the United States agreed to: (a) move to dismiss all of the qui tam
cases with prejudice as to the qui tam relators; (b) move to dismiss all of
the qui tam cases with prejudice as to the United States for all claims which
have been investigated by the Department of Justice; and (c) move to dismiss
all of the qui tam cases without prejudice as to the United States for all
claims which were not investigated by the Department of Justice. See "Note
11--Litigation" to the Consolidated Financial Statements.
Under the terms of the United States Settlement, the United States releases
the Company from all civil or administrative monetary claims or causes of
actions the United States or others authorized to bring suits in its name and
on its behalf including third party claimants under 31 U.S.C. Section 3730(b)
or (d), had or may have against the Company under the False Claims Act, 31
U.S.C. Section 3729-3733 (the "False Claims Act"), the Civil Monetary
Penalties Law, 42 U.S.C. Section 1320a-7a (the "Civil Monetary Penalties
Law"), the Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-3812 (the
"Program Fraud Civil Remedies Act"), and/or common law doctrines of payment by
mistake, unjust enrichment, breach of contract or fraud, for certain conduct
of the Company and/or Vencor alleged to have occurred under the qui tam
actions and certain other conduct investigated by the United States. Such
conduct includes, without limitation, overbilling in connection with the
provision of mobile radiology and diagnostic services, improper pharmacy
charges, improper billing for respiratory therapy services and associated
supplies, certain quality of care issues and certain other facility specific
conduct (collectively, the "Covered Conduct"). With respect to the Covered
Conduct, the United States also releases the Company for administrative
overpayments under the Medicare Program ("Medicare"), Title XVIII of the
Social Security Act, 42 U.S.C. Sections 1395-1395ggg (the "Social Security
Act") under the TRICARE Program, 10 U.S.C. Sections 1071-1106 (the "TRICARE
Program"), civil monetary penalties imposed under 42 U.S.C. (S) 1395i--
3(h)(2)(B)(ii) and 42 U.S.C. Section 1396r(h)(2)(A)(ii) and actions for
permissive exclusion from Medicare, Medicaid and other federal health
programs. The Company also receives a release from the United States and
others authorized to bring suits in its name and on its behalf including third
22
party claims under 31 U.S.C. Section 3730(b) or (d) for all known or unknown,
asserted or unasserted, civil and administrative monetary claims, actions and
causes of actions arising on or before the Vencor Effective Date for (a)
administrative overpayments under Medicare, the Social Security Act, and the
TRICARE Program, (b) claims relating to any of the federal health care
programs under the False Claims Act, Civil Monetary Penalties Law, the Program
Fraud Civil Remedies Act, Medicare and the regulations thereunder, and other
federal statutes, (c) claims for money arising out of quality of care issues,
(d) claims based on submission of Medicare cost reports, or payments made with
respect thereto or otherwise relating to participation in the Medicare program
for periods prior to September 1999, (e) common law claims relating to any of
the federal health care programs, (f) all claims asserted by the United States
in its proof of claims filed in the Vencor Bankruptcy and (g) all claims
alleged in the qui tam cases.
Except as set forth below, the current and former directors, officers and
employees of the Company generally receive a release from the United States
coextensive with the United States' release of the Company but only to the
extent a current or former director, officer or employee of the Company is
entitled to indemnification, contribution and/or similar relief from the
Company or Vencor. However, if the United States were to bring a claim against
a current or former officer, director or employee of either Vencor or the
Company, even though such claim would otherwise have been released as provided
above, the United States could collect for any such claim the lesser of (i)
$13.0 million in the aggregate for all such claims against all directors,
officers and employees of the Company and Vencor, and (ii) the amount of any
insurance proceeds actually available to satisfy such claims. Any and all such
claims by the United States against the directors, officers and employees of
the Company or Vencor over and above this specified amount are released. Under
the Final Plan, if consummated, Vencor and the Company would covenant not to
materially alter the coverage as it existed as of September 1, 2000 under such
corporate liability policy.
The following claims are specifically excluded from the releases provided
by the United States under the United States Settlement: (a) claims under the
Code, (b) claims for criminal liability, (c) claims brought by the Securities
and Exchange Commission or other governmental or regulatory agency related to
securities laws violations, including but not limited to, claims based on the
Securities Act, the Exchange Act, the Investment Advisors Act of 1940, the
Investment Company Act, the Commodity Exchange Act and the rules and
regulations under such statutes, (d) claims under state health care
reimbursement programs, and (e) claims for mandatory exclusion from federal
health care benefit programs.
Releases under the Final Plan
In consideration for the Company and Ventas Realty entering into the
Amended Master Leases and agreeing to their treatment under the Final Plan,
Vencor would directly release the Company and Ventas Realty and their current
and former directors, officers and employees, in their capacities as such,
from all claims, whether reduced to judgment or not, liquidated or
unliquidated, contingent or noncontingent, asserted or unasserted, fixed or
not, matured or unmatured, disputed or undisputed, legal or equitable, known
or unknown, that arose before the Vencor Confirmation Date and including,
without limitation, any claim, demand, debt, right, cause of action or
liability for an avoidance or a recovery on account of or due to fraudulent
conveyance, preferential payment, fraudulent transfer and fraudulent
obligations and all other claims relating to or arising out of the 1998 Spin
Off. However, the Company would not be released from, and the Company would
remain liable for, the performance of its obligations under the Final Plan,
the Spin Agreements, the Amended Master Leases and all other agreements
between the Company or Ventas Realty and Vencor which were assumed by or
entered into by Vencor under the Final Plan.
In further consideration for the Company and Ventas Realty entering into
the Amended Master Leases and agreeing to their treatment under the Final
Plan, the Final Plan would generally provide that the Company and Ventas
Realty and their current and former directors, officers and employees, solely
in their capacity as such, would be released by the holders of certain claims
against Vencor (including the holders of general unsecured claims, senior bank
debt claims, subordinated noteholder claims and certain preferred equity put
right claims), of all claims, whether reduced to judgment or not, liquidated
or unliquidated, contingent or noncontingent, asserted
23
or unasserted, fixed or not, matured or unmatured, disputed or undisputed,
legal or equitable, known or unknown that arose before the Vencor Confirmation
Date and including, without limitation, any claim, demand, debt, right, cause
of action or liability for an avoidance or a recovery on account of or due to
fraudulent conveyance, preferential payment, fraudulent transfer and
fraudulent obligations and all other claims relating to or arising out of the
1998 Spin Off. The following claims would be specifically excluded from these
releases: (a) obligations of the Company and Ventas Realty under the Final
Plan and all of the documents related thereto; and (b) direct claims against
the Company or Ventas Realty which (i) are unrelated to the 1998 Spin Off,
(ii) are unrelated to Vencor (including Vencor's operations prior to the 1998
Spin Off), and (iii) were not asserted and could not have been asserted
against Vencor in the Vencor bankruptcy proceedings. At the Confirmation
Hearing, the Bankruptcy Court judge approved these releases. The Company
believes that these releases would generally meet the requirements to be
enforceable against non-debtor parties. However, there exists a complex and
evolving body of case law governing the enforceability of releases in
bankruptcy by non-debtor parties and there can be no assurance that such a
releasing party would not seek to challenge such releases or what the outcome
would be if the enforceability of the releases was so challenged.
The releases in favor of the Company's officers, directors or employees
would be limited to claims that arose out of the officer/director/employee
relationship. The Company would not be released from any indemnification
claims of any current and former officers, directors and employees of the
Company.
The Company would directly release Vencor and its officers, directors and
employees, solely in their capacity as such, from all claims, whether reduced
to judgment or not, liquidated or unliquidated, contingent or noncontingent,
asserted or unasserted, fixed or not, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown that arose before the Vencor
Confirmation Date. However, Vencor would not be released from, and Vencor
would remain liable for, the performance of all obligations under the Final
Plan and the Spin Agreements, the Amended Master Leases and all other
agreements between Vencor and the Company or Ventas Realty which would be
assumed or entered into by Vencor under the Final Plan. The releases by the
Company of the officers, directors and employees of Vencor would be limited to
those claims against an officer, director or employee that arose out of the
officer/director/employee relationship.
The Company would release the holders of the Vencor senior bank debt and
the Vencor subordinated noteholders, and their respective officers, directors,
employees, members, principals, attorneys advisors, agents, professionals,
representatives, benefit plan administrators or trustees (each of the
foregoing, solely in their capacity as such) from all claims, whether reduced
to judgment or not, liquidated or unliquidated, contingent or noncontingent,
asserted or unasserted, fixed or not, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown, that arose before the Vencor
Effective Date and are related to the 1998 Spin Off. The Company would not
release any claims under the Company's Amended Credit Agreement or any
document or instrument related thereto or any direct claims unrelated to the
1998 Spin Off.
Recent Developments Regarding Liquidity
On January 31, 2000, the Company and all of its lenders entered into the
Amended Credit Agreement, which amended and restated the $1.2 billion credit
agreement (the "Bank Credit Agreement") the Company entered into at the time
of the 1998 Spin Off. Under the Amended Credit Agreement, borrowings bear
interest at an applicable margin over an interest rate selected by the
Company. Such interest rate may be either (a) the Base Rate, which is the
greater of (i) the prime rate or (ii) the federal funds rate plus 50 basis
points or (b) the London Interbank Offered Rate ("LIBOR"). Borrowings under
the Amended Credit Agreement are comprised of: (1) a $25.0 million revolving
credit line (the "Revolving Credit Line") that expires on December 31, 2002,
which bears interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%;
(2) a $200.0 million term loan due December 31, 2002 (the "Tranche A Loan"),
which bears interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%;
(3) a $300.0 million term loan due December 31, 2005 (the "Tranche B Loan"),
which bears interest at either LIBOR plus 3.75% or the Base Rate plus 2.75%;
and (4) a $473.4 million term loan due December 31, 2007 (the "Tranche C
Loan"), which bears interest at either LIBOR plus 4.25% or the Base Rate plus
3.25%. The interest rate on the Tranche B Loan will be reduced by .50% (50
basis points) once $150.0
24
million of the Tranche B Loan has been repaid. In addition, in connection with
the consummation of the Amended Credit Agreement on January 31, 2000, the
Company paid a $7.3 million loan-restructuring fee. This fee is being
amortized proportionately over the terms of the related loans and agreements.
Under the terms of the Amended Credit Agreement, it would have been an
Event of Default if the Vencor Effective Date did not occur on or before
December 31, 2000 (the "Vencor Effective Date Deadline"). When it became
apparent that the Vencor Effective Date would not occur by December 31, 2000,
the Company initiated discussions with the administrative agent for the
lenders under the Amended Credit Agreement in an effort to obtain a waiver or
amendment of this covenant. The Company and substantially all of its lenders
entered into an Amendment and Waiver dated as of December 20, 2000 (the
"Amendment and Waiver") to the Amended Credit Agreement, whereby the Vencor
Effective Date Deadline was extended from December 31, 2000 to March 31, 2001.
In consideration for this extension, the Company paid a fee of $0.2 million to
the lenders executing the Amendment and Waiver and agreed to amend the
principal amortization schedules of certain of the loans under the Amended
Credit Agreement. The Company exercised its option under the Amendment and
Waiver to extend the Vencor Effective Date Deadline from March 31, 2001 to
April 30, 2001. In consideration of this extension, the Company paid a fee of
approximately $0.1 million to the lenders that executed the Amendment and
Waiver. Under the Amendment and Waiver, the Company has the further option to
extend the Vencor Effective Date Deadline through (a) May 31, 2001 in exchange
for the payment on or before April 30, 2001 of a fee equal to 0.20% per annum
on the outstanding principal balance of the loans under the Amended Credit
Agreement, and (b) June 30, 2001 in exchange for the payment on or before May
31, 2001 of a fee of 0.25% per annum on the outstanding principal balance of
the loans under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, an Event of Default will
be deemed to have occurred if the Vencor Effective Date does not occur on or
before the Vencor Effective Date Deadline, as same may be extended. Subject to
any defenses available to the Company, if such an Event of Default were to
occur, the Company could be required to immediately repay all the indebtedness
under the Amended Credit Agreement upon the demand of the "Required Lenders,"
as defined in the Amended Credit Agreement. If it appears that the Vencor
Effective Date will not occur by the Vencor Effective Date Deadline, as
extended, the Company intends to initiate discussions with the administrative
agent for its lenders under the Amended Credit Agreement to obtain a waiver or
amendment of this covenant. Under the Amended Credit Agreement, a waiver or
amendment of this covenant must be approved by lenders holding (in the
aggregate) greater than 50% of the total credit exposure under the Amended
Credit Agreement. There can be no assurance (i) that the Final Plan or an
alternate plan of reorganization for Vencor will become effective on or before
the Vencor Effective Date Deadline, as same may be extended, (ii) that the
Company will obtain a waiver or amendment of the covenant if the Final Plan or
an alternate plan of reorganization for Vencor does not become effective on or
before the Vencor Effective Date Deadline, as same may be extended, (iii) that
the terms of such a waiver or amendment would not have a Material Adverse
Effect on the Company, or (iv) that the failure to obtain such a waiver or
amendment would not have a Material Adverse Effect on the Company.
The Amended Credit Agreement, as revised by the Amendment and Waiver,
provides for the following amortization schedule: (a) with respect to the
Tranche A Loan, (i) $50.0 million was paid at closing on January 31, 2000,
(ii) $35.0 million was paid on December 20, 2000, (iii) $15.0 million was paid
on March 30, 2001, and (iv) after the Vencor Effective Date, all Excess Cash
Flow pursuant to a monthly sweep as more fully described below (the "Monthly
Sweep") will be applied to the Tranche A Loan until $200.0 million in total
has been paid down on the Amended Credit Agreement, with the remaining
principal balance of the Tranche A Loan due December 31, 2002; (b) with
respect to the Tranche B Loan, (i) $20.0 million was paid on March 30, 2001,
(ii) a one-time paydown of Excess Cash (as defined in the Amended Credit
Agreement) is scheduled to be made on or before the thirtieth day after the
Vencor Effective Date as more fully described below (the "B Sweep"), (iii)
$30.0 million is scheduled to be paid on December 30, 2003 and $50.0 million
is scheduled to be paid on December 30, 2004, and (iv) the remaining principal
balance is due December 31, 2005; and (c) with respect to the Tranche C Loan,
there are no scheduled paydowns of principal and the final maturity is
scheduled for December 31, 2007. The facilities under the Amended Credit
Agreement are pre-payable without premium or
25
penalty. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The B Sweep, if any, is scheduled to be made on the thirtieth day after the
Vencor Effective Date (the "B Sweep Payment Date"). The B Sweep is a one-time
payment equal to the Company's cash and cash equivalents on hand on the B
Sweep Payment Date minus the sum of (to the extent not then paid) (i) amounts
payable under the United States Settlement during the succeeding three months,
(ii) a reasonable reserve to pay the applicable portion of the Company's
minimum REIT dividend for quarters prior to and including the Vencor Effective
Date, (iii) $1.0 million and (iv) other specified amounts. Currently, the
Company believes that it will not be required to pay any amounts under the B
Sweep.
The first Monthly Sweep is scheduled to be made on the last day of the
month following the first full calendar month after the date that is thirty
days after the Vencor Effective Date and will cover the period from 30 days
after the Vencor Effective Date to the end of the last day of the month
preceding the payment date. Thereafter, the Monthly Sweep will be made on the
last business day of each month for the preceding month. The Monthly Sweep
will be in an amount equal to the Company's total cash receipts for the
applicable period, minus the sum of (i) cash disbursements by the Company
during the applicable period, (ii) up to $1.0 million for a working capital
reserve, (iii) a reserve in an amount equal to the unpaid minimum REIT
dividend for all prior periods and for the current calendar quarter, (iv) the
obligations due under the United States Settlement during the next three
months, (v) taxes and (vi) other specified amounts.
The Amended Credit Agreement is secured by liens on substantially all of
the Company's real property and any related leases, rents and personal
property. Certain properties are being held in escrow by counsel for the
agents under the Amended Credit Agreement pending the receipt of third party
consents and/or resolution of certain other matters. In addition, the Amended
Credit Agreement contains certain restrictive covenants, including, but not
limited to, the following: (a) until such time that $200.0 million in
principal amount has been paid down, the Company can only pay dividends based
on a certain minimum percentage of its taxable income (equal to 95% of its
taxable income for the year ending December 31, 2000 and 90% of its taxable
income for years ending on or after December 31, 2001); however, after $200.0
million in total principal paydowns, the Company will be allowed to pay
dividends for any year in amounts up to 80% of funds from operations ("FFO"),
as defined in the Amended Credit Agreement; (b) limitations on additional
indebtedness, acquisitions of assets, liens guarantees, investments,
restricted payments, leases, affiliate transactions and capital expenditures;
and (c) certain financial covenants, including requiring that the Company have
(i) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (ii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month after the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a "Material Adverse Effect," as defined in the
Amended Credit Agreement. In addition, the Amended Credit Agreement provides
that if the Company is in compliance with its financial covenants and the
covenant relating to releases in the Vencor bankruptcy on the Vencor Effective
Date, no event or condition arising primarily from the Final Plan shall be
deemed to have caused a "Material Adverse Effect," as defined in the Amended
Credit Agreement, to have occurred.
If the Vencor Effective Date occurs, the Company thereafter would be
subject to certain financial covenants under the Amended Credit Agreement,
including those requiring the Company to have (i) Consolidated EBITDA (as
defined in the Amended Credit Agreement) on the last day of each fiscal
quarter after the Vencor Effective Date at least equal to 80% of the Company's
Projected Consolidated EBITDA (as defined in the Amended Credit Agreement) on
the Vencor Effective Date; and (ii) a ratio of Consolidated EBITDA to
Consolidated Interest Expense (as defined in the Amended Credit Agreement) on
a trailing four quarter basis, of at least 1.20 to 1.00.
26
Certain of these covenants may be waived by holders of more than 50% of the
principal indebtedness under the Amended Credit Agreement.
Other Recent Developments
Certain of the Company's other operators have experienced financial
difficulties that have impacted their ability to perform their obligations
under agreements with the Company. See "--Risk Factors--Effects of Bankruptcy
Proceedings" and "Note 9--Commitments and Contingencies" to the Consolidated
Financial Statements.
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 2000.
Percentage
of Number of Number of Number of
Type of Facility Portfolio(1) Facilities Beds/Units States(2)
---------------- ------------ ---------- ---------- ---------
Hospitals......................... 40.1% 45 4,093 21
SkilledNursingFacilities.......... 59.6% 216 27,952 31
PersonalCareFacilities............ 0.3% 8 136 1
----- --- ------ ---
Total............................. 100.0% 269 32,181 36
===== === ====== ===
- --------
(1) Based on the percentage of gross rent earned before write-offs by the
Company for the year ended December 31, 2000.
(2) The Company has properties located in 36 states operated by six different
operators.
Hospital Facilities
The Company's hospitals generally are long-term acute care hospitals that
serve medically complex, chronically ill patients. The operator of these
hospitals has the capability to treat patients who suffer from multiple
systemic failures or conditions such as neurological disorders, head injuries,
brain stem and spinal cord trauma, cerebral vascular accidents, chemical brain
injuries, central nervous system disorders, developmental anomalies and
cardiopulmonary disorders. Chronic patients are often dependent on technology
for continued life support, such as mechanical ventilators, total parenteral
nutrition, respiration or cardiac monitors and dialysis machines. While these
patients suffer from conditions which require a high level of monitoring and
specialized care, they may not necessitate the continued services of an
intensive care unit. Due to their severe medical conditions, these patients
generally are not clinically appropriate for admission to a nursing facility
or rehabilitation hospital.
Nursing Facilities
The Company's nursing facilities generally are skilled nursing facilities.
In addition to the customary services provided by skilled nursing facilities,
the operators of the Company's nursing facilities typically provide
rehabilitation services, including physical, occupational and speech
therapies.
Personal Care Facilities
The Company's personal care facilities serve persons with acquired or
traumatic brain injury. The operator of the personal care facilities provides
services including supported living services, neurorehabilitation,
neurobehavioral management and vocational programs.
27
Competition
The Company competes for real property investments with health care
providers, other health care related REITs, real estate partnerships, banks,
insurance companies and other investors. Many of the Company's competitors are
significantly larger and have greater financial resources and lower cost of
capital than the Company. If the Vencor Effective Date occurs and when the
Company is permitted under the terms of the Amended Credit Facility to
reinstate its original business strategy, the Company's ability to compete
successfully for real property investments will be determined by numerous
factors, including the ability of the Company to identify suitable acquisition
targets, the ability of the Company to negotiate acceptable terms for any such
acquisition, the availability and cost of capital, and the restrictions
contained in the Amended Credit Agreement. See "Risk Factors--Implementation
of Original Business Strategy" and "Note 4--Borrowing Arrangements" to the
Consolidated Financial Statements.
The operators of the Company's properties compete on a local and regional
basis with other health care operators. The ability of the Company's operators
to compete successfully for patients at the Company's facilities depends upon
several factors, including the quality of care at the facility, the
operational reputation of the operator, physician referral patterns, physical
appearance of the facilities, other competitive systems of health care
delivery within the community, population and demographics, and the financial
condition of the operator. Private, federal and state reimbursement programs
and the effect of other laws and regulations also may have a significant
effect on the Company's operators to compete successfully for patients for the
properties.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property from
which there is a release or threatened release of hazardous or toxic
substances or an entity that arranges for the disposal or treatment of
hazardous or toxic substances at a disposal site may be held jointly and
severally liable for the cost of removal or remediation of certain hazardous
or toxic substances that could be located on, in or under such property or
other affected property. Such laws and regulations often impose liability
whether or not the owner, operator or otherwise responsible party knew of, or
caused the presence of the hazardous or toxic substances. The costs of any
required remediation or removal of these substances could be substantial, and
the liability of a responsible party as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the liable party. The presence of these substances
or failure to remediate such substances properly also may adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing of the Company's
properties, the Company could be liable for these costs as well as certain
other costs, including governmental fines and injuries to person or properties
or natural resources. In addition, owners and operators of real property are
liable for the costs of complying with environmental, health, and safety laws,
ordinances and regulations and can be subjected to penalties for failure to
comply. Such ongoing compliance costs and penalties for non-compliance can be
substantial. Changes to existing or the adoption of new environmental, health,
and safety laws, ordinances, and regulations could substantially increase an
owner's or operator's environmental, health, and safety compliance costs
and/or associated liabilities. Environmental, health, and safety laws,
ordinances, and regulations potentially affecting the Company address a wide
variety of topics, including, but not limited to, asbestos, polychlorinated
biphenyls ("PCBs"), fuel oil management, wastewater discharges, air emissions,
radioactive materials, medical wastes, and hazardous wastes. Under the Master
Leases, Vencor has agreed to indemnify the Company against any environmental
claims (including penalties and clean-up costs) resulting from any condition
arising in, on or under, or relating to, the leased properties at any time on
or after the commencement date of the lease term for the applicable leased
property. Vencor also has agreed to indemnify the Company against any
environmental claim (including penalties and clean up costs) resulting from
any condition permitted to deteriorate, on or after the commencement date of
the lease term for the applicable leased property (including as a result of
migration from adjacent properties not owned or operated by the Company or any
of its affiliates other than Vencor and its direct affiliates). There can be
no assurance that Vencor will have the financial capability to satisfy any
such environmental claims. See "Risk Factors--Dependence of the Company on
Vencor." If Vencor is unable to satisfy such claims, the
28
Company will be required to satisfy the claims. The Company has agreed to
indemnify Vencor against any environmental claims (including penalties and
clean-up costs) resulting from any condition arising on or under, or relating
to, the leased properties at any time before the commencement date of the
lease term for the applicable leased property.
The Company did not make any material capital expenditures in connection
with such environmental, health, and safety laws, ordinances, and regulations
in 2000 and does not expect that it will have to make any such material
capital expenditures during 2001.
Governmental Regulation
General
The operators of the Company's properties derive a substantial portion of
their revenues from third party payors, including the Medicare and Medicaid
programs. Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons age 65 and over, certain disabled
persons and persons with end-stage renal disease. Medicaid is a medical
assistance program jointly funded by federal and state governments and
administered by each state pursuant to which benefits are available to certain
indigent patients. Within the Medicare and Medicaid statutory framework, there
are substantial areas subject to administrative rulings, interpretations and
discretion that may affect payments made under Medicare and Medicaid. The
amounts of program payments received by the operators can be changed by
legislative or regulatory actions and by determinations by agents for the
programs. The Balanced Budget Act of 1997 (the "Budget Act") was intended to
reduce the increase in Medicare payments by $115.0 billion and reduce the
increase in Medicaid payments by $13.0 billion between 1998 through 2002 and
made extensive changes in the Medicare and Medicaid programs. The impact of
these changes and reductions has been only partially ameliorated by subsequent
legislation. See "--Recent Developments Regarding Government Regulation"
below. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures and the assumption by
health care providers of all or a portion of the financial risk. Efforts to
impose greater discounts and more stringent cost controls upon operators by
private payors are expected to continue. Further, on March 25, 1999, President
Clinton signed legislation preventing nursing facility operators that decide
to withdraw from the Medicaid program from evicting or transferring patients
who are residents as of the effective date of withdrawal, and who rely on
Medicaid to cover their long-term care expenses. There can be no assurance
that adequate reimbursement levels will continue to be available for services
to be provided by the operators of the Company's properties, which currently
are being reimbursed by Medicare, Medicaid or private payors. Significant
limits on the scope of services reimbursed and on reimbursement rates and fees
could have a material adverse effect on these operators' liquidity, financial
condition and results of operations, which could affect adversely their
ability to make rental payments to the Company.
The operators of the Company's properties are subject to extensive federal,
state and local laws and regulations including, but not limited to, laws and
regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities, services, prices for services and billing
for services. These laws authorize periodic inspections and investigations,
and identified deficiencies that, if not corrected, can result in sanctions
that include loss of licensure to operate and loss of rights to participate in
the Medicare and Medicaid programs. Regulatory agencies have substantial
powers to affect the actions of operators of the Company's properties if the
agencies believe that there is an imminent threat to patient welfare, and in
some states these powers can include assumption of interim control over
facilities through receiverships. Extensive legislation and regulations also
pertain to health care fraud and abuse, including kickbacks, physician self-
referrals and false claims.
Federal anti-kickback laws codified under Section 1128B(b) of the Social
Security Act (the "Anti-kickback Laws") prohibit certain business practices
and relationships that might affect the provision and cost of health care
services reimbursable under Medicare, Medicaid and other federal health care
programs, including the payment or receipt of remuneration for the referral of
patients whose care will be paid by Medicare or other
29
governmental programs. Sanctions for violating the Anti-kickback Laws include
criminal penalties and civil sanctions, including fines and possible exclusion
from government programs such as the Medicare and Medicaid programs. In the
ordinary course of its business, the operators of the Company's properties are
subject regularly to inquiries, investigations and audits by federal and state
agencies that oversee these laws and regulations.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the Department of Health and Human Services ("HHS") periodically has
issued regulations that describe some of the conduct and business
relationships permissible under the Anti-kickback Laws ("Safe Harbors"). The
fact that a given business arrangement does not fall within a Safe Harbor does
not render the arrangement per se illegal. Business arrangements of health
care service providers that fail to satisfy the applicable Safe Harbor's
criteria, however, risk increased scrutiny and possible sanctions by
enforcement authorities.
The operators of the Company's properties also are subject to Sections 1877
and 1903(s) of the Social Security Act, which, in the absence of an applicable
exception, restrict referrals by physicians of Medicare and other government-
program patients to providers of a broad range of designated health services
with which they have ownership interests or certain other financial
arrangements. The federal government has published regulations related to this
self-referral prohibition, the latest of which were promulgated in January of
2001. Many states have adopted or are considering legislative proposals
similar to the federal referral prohibition, some of which extend beyond the
Medicare and Medicaid programs to prohibit the payment or receipt of
remuneration for the referral of patients and physician self-referrals
regardless of the source of reimbursement. These laws and regulations are
extremely complex, and little judicial or regulatory interpretation exists. A
violation of such laws and regulations could have a material adverse effect on
these operators' liquidity, financial condition and results of operations,
which could affect adversely their ability to make rental payments to the
Company.
Government investigations and enforcement of health care laws has increased
dramatically over the past several years and is expected to continue. The
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191)
("HIPAA"), which became effective January 1, 1997, greatly expanded the
definition of health care fraud and related offenses and broadened the scope
to include private health care plans in addition to government payors. HIPAA
also greatly increased funding for the Department of Justice, Federal Bureau
of Investigation and the Office of the Inspector General to audit, investigate
and prosecute suspected health care fraud. Private enforcement of health care
fraud also has increased due in large part to amendments to the civil False
Claims Act in 1986 that were designed to encourage private individuals to sue
on behalf of the government. These whistleblower suits by private individuals,
known as qui tam relators, may be filed by almost anyone, including present
and former patients and nurses and other employees. These actions could have a
material adverse effect on these operators' liquidity, financial condition and
results of operations which could affect adversely their ability to make
rental payments to the Company.
The Budget Act also provides a number of additional anti-fraud and abuse
provisions. The Budget Act contains new civil monetary penalties for an
operator's violation of the Anti-kickback Laws and imposes an affirmative duty
on operators to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs. The Budget Act also
provides a minimum ten-year period for exclusion from participation in federal
health care programs for operators convicted of a prior health care offense.
Some states require state approval for development and expansion of health
care facilities and services, including findings of need for additional or
expanded health care facilities or services. A certificate of need ("CON"),
which is issued by governmental agencies with jurisdiction over health care
facilities, is at times required for expansion of existing facilities,
construction of new facilities, addition of beds, acquisition of major items
of equipment or introduction of new services. The CON rules and regulations
may restrict an operator's ability to expand the Company's properties in
certain circumstances.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable health care
regulations, and, in either case, such operators or their lenders fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that
30
operator and substitute another operator or operators may be materially
delayed or limited by various state licensing, receivership, CON or other
laws, as well as by Medicare and Medicaid change-of-ownership rules. Such
delays and limitations could have a material adverse effect on the Company's
ability to collect rent, to obtain possession of leased properties, or
otherwise to exercise remedies for tenant default. In addition, the Company
may also incur substantial additional expenses in connection with any such
licensing, receivership or change-of-ownership proceedings.
Long-Term Acute Care Hospitals
Substantially all of the Company's hospitals are operated as long-term
acute care hospitals ("LTACs"). In order to receive Medicare and Medicaid
reimbursement, each hospital must meet the applicable conditions of
participation set forth by HHS relating to the type of hospital, its
equipment, personnel and standard of medical care, as well as comply with
state and local laws and regulations. Hospitals undergo periodic on-site
certification surveys, which generally are limited if the hospital is
accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). A loss of certification could adversely affect a
hospital's ability to receive payments from Medicare and Medicaid programs,
which could in turn adversely impact Vencor's ability to make rental payments
under the Master Leases.
An LTAC has an average length of stay greater than 25 days. Hospitals that
are certified by Medicare as LTACs are currently excluded from the prospective
payment system that applies to acute care hospitals ("PPS"). However, a PPS
system for LTACs is scheduled to be in place by October 1, 2002. See "--Recent
Developments Regarding Government Regulation" below. Inpatient operating costs
for LTACs are reimbursed under the cost-based reimbursement system, subject to
a computed target rate per discharge for inpatient operating costs established
by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), and as
amended by the Budget Act and the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 ("BIPA"). Medicare and Medicaid
reimbursements generally are determined from annual cost reports filed by
Vencor and other operators which are subject to audit by the respective agency
administering the program. Under such programs of cost-based reimbursement,
costs which will be accepted for reimbursement are limited by statutes,
regulations and program policies relating to numerous factors, including
necessity, reasonableness, related-party principles and relatedness to patient
care.
Nursing Facilities
The operators of the Company's nursing facilities generally are licensed on
an annual or bi-annual basis and certified annually for participation in the
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided,
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing facilities.
The Budget Act established a prospective payment system for Medicare
skilled nursing facilities ("SNF") for cost reporting periods beginning on or
after July 1, 1998 ("SNF PPS"). The payments received under the new SNF PPS
cover all services for Medicare patients, including all ancillary services,
such as respiratory therapy, physical therapy, occupational therapy, speech
therapy and certain covered drugs. The rates for such services were first
published in the Federal Register on May 12, 1998, after the consummation of
the 1998 Spin Off. Although there has been some payment relief under the
Refinement Act and BIPA, the new SNF PPS has resulted, and will likely
continue to result in, reduced reimbursement for the operators of the
Company's properties relative to the period prior to the effective date of the
SNF PPS, thereby adversely impacting the operators' ability to satisfy their
obligations, including payment of rent, under the leases with the Company. See
"--Recent Developments Regarding Government Regulation" below.
31
Health Care Reform
Health care is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contained extensive changes to the
Medicare and Medicaid programs intended to reduce the projected amount of
increase in payments under those programs by $115.0 billion and $13.0 billion,
respectively, between 1998 and 2002. Under the Budget Act, annual growth rates
for Medicare were to be reduced from over 10% to approximately 7.5% for the
period between 1998 and 2002 based on specific program baseline projections
from 1993 to 1997. Virtually all spending reductions have and will come from
health care operators and changes in program components. For certain health
care providers, including hospitals, home health agencies, SNFs and hospices,
implementation of the Budget Act has resulted in more drastic reimbursement
reductions than had been anticipated. In an effort to provide some relief for
those health care providers, Congress enacted the Refinement Act which
provides for an additional $16.0 billion in funding over 5 years and BIPA
which provides for an additional $35.0 billion in funding over 5 years. BIPA
took effect on April 1, 2001. See "--Recent Developments Regarding Government
Regulation" below.
The Budget Act reduced payments made to the hospitals operated by Vencor
and others by reducing incentive payments pursuant to TEFRA, allowable costs
for capital expenditures and bad debts, and payments for services to patients
transferred from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1, 1998. In addition, the Budget Act for the
first time imposed a ceiling limitation or "national cap" on the payments that
may be made in each category of hospitals exempt from PPS, set at the wage-
adjusted 75th percentile of the aggregate per-facility target amounts for each
such category.
The Budget Act also established SNF PPS for cost reporting periods
beginning on or after July 1, 1998. During a SNF's first three cost reporting
periods under SNF PPS, the per diem payment rates are based on a blend of
facility-specific rates and federal rates. Thereafter, the per diem payment
rates are based solely on federal rates. (The Refinement Act permits an
operator to waive the three-year transition of a SNF to the federal per diem
rate.) BIPA authorizes additional temporary increases and modifications to the
published SNF payment rates. The rates for such services were published by the
Health Care Financing Administration ("HCFA") in the Federal Register on May
12, 1998 and updated most recently in a July 31, 2000 final rule to reflect
certain temporary payment increases authorized by the Refinement Act. The
payments received under PPS cover all services for Medicare patients in a Part
A stay, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs. The payments that Vencor and others are receiving under SNF PPS are
substantially less than before enactment of the Budget Act, even with
increases under the Refinement Act and BIPA. Vencor has been subject to SNF
PPS since July 1, 1998.
Pursuant to the Budget Act, a prospective payment system ("LTAC PPS") will
also be established for long-term care hospitals. BIPA provides that LTAC PPS
must be implemented by October 1, 2002. Unless the Secretary of Health and
Human Services develops a system of diagnosis-related groups ("DRGs")
specifically refined for long-term care hospitals before that date, LTAC PPS
will be implemented using the DRGs currently used for inpatient stays in acute
care hospitals (modified, if feasible, to account for the resource usage of
long-term care patients, as well as the most recently available hospital
discharge data). Supplemental payments for long-term care hospitals services
authorized by the Refinement Act and BIPA for fiscal year 2001 may not be
taken into account in the implementation of LTAC PPS.
In addition to its impact on Medicare, the Budget Act also afforded states
more flexibility in administering their Medicaid plans, including the ability
to shift most Medicaid enrollees into managed care plans without first
obtaining a federal waiver. Accordingly, the Medicare and Medicaid programs,
including payment levels and methods, are in a state of change and are less
predictable than before enactment of the Budget Act. Further Medicare reform
legislation is currently under consideration by Congress.
32
In response to widespread health care industry concern about the effects of
the Budget Act, Congress passed the Refinement Act, which the President signed
into law on November 29, 1999. The Refinement Act did not enact any
fundamental changes in the Medicare system, but rather reversed or delayed
some of the reductions in Medicare payment increases mandated by the Budget
Act. It is estimated that in the next five fiscal years this "givebacks" law
will return to health care providers about $16.0 billion of the $115.0 billion
the Budget Act was expected to cut from increases to the Medicare program.
Specific providers who received relief under the Refinement Act included
skilled nursing facilities, which received temporary (effective April 1, 2000
to October 1, 2000) per diem payment increases for certain high cost patients,
and outpatient rehabilitation therapy providers, which are no longer subject
to a $1,500 annual cap on the amount of physical, occupational and speech
therapy provided to a patient. The Refinement Act required HHS to recommend a
new payment policy for outpatient therapy by January 2001. The Refinement Act
also specified that the temporary per diem payment increase would be replaced
by specific administrative rate increases. As such administrative rate
increases were not final by October 1, 2000, the temporary per diem increases
will remain in place. In addition, PPS rates are subject to a 4% inflationary
adjustment effective October 1, 2000. On July 25, 2000, HCFA announced that it
would delay the proposed technical refinements under the Refinement Act to the
SNF PPS until October 1, 2001, at the earliest. As a result, temporary per
diem payment increases for specified Resource Utilization Groups ("RUGs") have
been retained for an unspecified period of time, with certain budget-neutral
changes to the size and allocation of such increases among different RUGs.
HCFA also confirmed that the 4% increase in per diem reimbursement rate for
all RUGs would be implemented on October 1, 2000 as scheduled.
BIPA, like the Refinement Act, provides a certain degree of relief from the
projected impact of the Budget Act. Among other provisions, BIPA authorizes
various temporary increases and modifications to published SNF payment rates,
raises the applicable "national cap" for LTACs by 2% during fiscal year 2001,
and raises the facility-specific target amounts for LTACs by 25% during fiscal
year 2001 (subject to the revised national cap). However, it also requires
implementation of LTAC PPS by October 1, 2002, without taking such
supplemental payments into account. There can be no assurance that the Budget
Act, the Refinement Act, BIPA and future health care legislation, or other
changes in the administration or interpretation of governmental health care
programs will not have a material adverse effect on the liquidity, financial
condition or results of operations of the Company's operators which could have
a material adverse effect on their ability to make rental payments to the
Company.
Recent Developments Regarding Government Regulation
Recent legislation and implementing regulations set forth revised payment
mechanisms for skilled nursing facility and long-term care hospital services.
The precise overall economic impact of such legislation and regulations is
under review by the long-term care industry and by the Company and Vencor.
In its July 31, 2000 final rule ("Final BBRA Rule") refining the SNF PPS,
HCFA, which is responsible for implementing the Medicare and Medicaid
provisions of the Refinement Act, announced increases in payment rates for
fiscal year 2001. In its earlier proposed rule, issued on April 10, 2000, HCFA
had detailed proposed refinements to be made to the SNF PPS case-mix
classification system that would more adequately account for high cost cases.
Specifically, the agency developed new categories of service classifications
for payment purposes and proposed to increase reimbursement rates for higher
cost cases using a new index system based on patient clinical variables. The
Final BBRA Rule postpones any such refinements to the SNF PPS case-mix
classification system, while retaining two temporary remedies set forth in the
Refinement Act: (a) a 4% increase in the per diem reimbursement rates for all
Resource Utilization Groups ("RUGs") in both fiscal years 2001 and 2002; and
(2) an additional 20% increase in the per diem reimbursement for fifteen RUGs
falling under the Extensive Services, Special Care, Clinically Complex, High
Rehabilitation and Medium Rehabilitation categories, applicable to services
furnished on or after April 1, 2000, until such time as case-mix refinements
are finally implemented.
The recently passed BIPA modifies the impact of the Refinement Act on SNF
PPS payment rates, as implemented by the Final BBRA Rule, in several important
ways. First, BIPA revises the annual market basket
33
update factor upward from "market basket--1%" to (a) "market basket" in fiscal
year 2001, and (b) "market basket--0.5%" in fiscal years 2002 and 2003.
Second, BIPA temporarily increases the nursing component of the federal SNF
PPS rate by 16.6%, from April 1, 2001 through September 30, 2002. Finally,
BIPA increases the per diem reimbursement rates for fourteen rehabilitation-
related RUGs by 6.7%, from April 1, 2001 until such time as case-mix
refinements are implemented pursuant to the Refinement Act. (Three of the
fourteen RUGs in question had qualified for the 20% add-on authorized by the
Refinement Act. BIPA eliminates the 20% add-on for these three RUGs, in order
to accommodate the 6.7% increase for all fourteen rehabilitation-related
RUGs.)
Long-term care hospitals ("LTACs"), currently excluded from a prospective
payment system, are scheduled to transition to such a payment system ("LTAC
PPS") by October 1, 2002. LTAC PPS was mandated under the Balanced Budget Act
of 1997. BIPA directs the Secretary of Health and Human Services to study the
question of whether to base the eventual LTAC PPS on existing DRGs, which are
now used for inpatient stays in acute care hospitals, or on refined DRGs. In
addition, BIPA requires the Secretary to take into account where feasible the
resource usage of long-term care patients and the most recently available
hospital discharge data. If the Secretary is unable to implement LTAC PPS by
October 1, 2002, LTAC PPS must be implemented using existing DRGs.
In the interim, LTACs continue to be reimbursed on a reasonable cost basis,
subject to a facility-specific target amount, and subject also to a "national
cap." The national cap is the wage-adjusted 75th percentile cap that was
established by the Balanced Budget Act of 1997 for classes of hospitals exempt
from the prospective payment system. For cost reporting periods during fiscal
year 2001, BIPA raises the applicable national cap for LTACs by 2%. BIPA also
raises the target amount for such hospitals by 25%, though this revised target
amount cannot exceed the wage-adjusted national cap. These supplemental
payments may not be taken into account in the implementation of LTAC PPS.
Federal Income Tax Considerations
The Company elected to be taxed as a REIT, commencing with its taxable year
that ended December 31, 1999. The Company believes that it has satisfied the
requirements under the Code to qualify as a REIT for tax year ended December
31, 2000. The Company intends to continue to qualify as a REIT for the tax
year ended December 31, 2001 and subsequent tax years subject to its ability
to meet the minimum distribution requirements as discussed below. The
Company's actual continued qualification and taxation as a REIT, however, will
depend upon its ability to meet on a continuing basis, through actual annual
operating results, distribution levels, and stock ownership, the various
qualification tests imposed under the Code. These tests are discussed below.
No assurance can be given that the actual results of the Company's operations
for any particular taxable year will satisfy such requirements. Although the
Company believes it has satisfied the requirements to continue to qualify as a
REIT for the tax year ended December 31, 2000 and although the Company
currently intends to continue to qualify as a REIT for the year ended December
31, 2001 and subsequent tax years, it is possible that economic, market,
legal, tax or other considerations may cause the Company to fail or elect not
to continue to qualify as a REIT for any such tax year. For a discussion of
the tax consequences of failing to continue to qualify as a REIT, see "--
Failure to Continue to Qualify," below.
The discussion of "Federal Income Tax Considerations" set forth herein is
not exhaustive of all possible tax considerations and is not tax advice.
Moreover, this summary does not deal with all tax aspects that might be
relevant to a particular stockholder in light of such stockholder's
circumstances, nor does it deal with particular types of stockholders that are
subject to special treatment under the Code, such as insurance companies,
financial institutions and broker-dealers. The Code provisions governing the
federal income tax treatment of REITs are highly technical and complex, and
this summary is qualified in its entirety by the applicable Code provisions,
rules and Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof. The following discussion is based on current
law, which could be changed at any time, possibly retroactively.
34
Federal Income Taxation of the Company
The Company believes it has distributed 95% of its estimated 2000 taxable
income as a dividend and otherwise believes that it has satisfied the
requirements to be taxed as a REIT under the Code for the tax year ended
December 31, 2000. The Company intends to be taxed as a REIT for the tax year
ending December 31, 2001 and subsequent tax years and to distribute 90% of its
taxable income as a dividend for 2001 and subsequent tax years. See "--Annual
Distribution Requirements." If the Company continues to qualify for taxation
as a REIT, it generally will not be subject to federal corporate income tax on
net income that it currently distributes to stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from investment in a
corporation. Notwithstanding its qualification as a REIT, the Company will be
subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" (which is,
in general, property acquired by foreclosure or otherwise on default of a loan
secured by the property or property repossessed by the Company upon
dispossessing a tenant after a lease default) that is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
"prohibited transactions" (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the product of
(a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, and (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year (other than retained long-term capital gain the Company elects
to treat as having been distributed to stockholders), and (iii) any
undistributed taxable income from prior years, the Company would be subject to
a non-deductible 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company should receive
rents from a tenant deemed not to be fair market value rents, or if the
Company values its assets incorrectly, the Company may be liable for valuation
penalties. Finally, if the Company acquires any asset from a C corporation
(i.e., a corporation generally subject to full corporate level tax) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation, and the Company recognizes gain on the disposition
of such asset during the 10-year period (the "Recognition Period") beginning
on the date on which such asset was acquired by the Company, then, to the
extent of such asset's "Built-in Gain" (i.e., the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis of such asset at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in regulations
that have been announced but not yet promulgated (the "Built-in Gain Rules")).
The Company owns appreciated assets that it held on January 1, 1999, the
effective date of its REIT election. These assets are subject to the Built-in
Gain Rules discussed above because the Company was a taxable C corporation
prior to January 1, 1999. If the Company recognizes taxable gain upon the
disposition of any of these assets within the ten-year Recognition Period, the
Company generally will be subject to regular corporate income tax on that gain
to the extent of the Built-in Gain in that asset as of January 1, 1999. The
total amount of gain on which the Company can be taxed under the Built-in Gain
Rules is limited to its net built-in gain at the time it became a REIT, i.e.,
the excess of the aggregate fair market value of its assets at the time it
became a REIT over the adjusted tax bases of those assets at that time. The
amount of any such capital gain realized would be offset by the amount of any
available capital loss carryforwards. In connection with the sale of any
assets, all or a portion of such gain could be treated as ordinary income
instead of capital gain and be subject to taxation and/or the minimum REIT
distribution requirements. See "--Annual Distribution Requirements" below.
35
Requirements for Qualification
To continue to qualify as a REIT, the Company must continue to meet the
requirements discussed below, relating to the Company's organization, sources
of income, nature of assets and distributions of income to stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a shorter taxable year (the "100 Shareholder Rule");
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the IRS that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The 5/50 Rule
and the 100 Shareholder Rule do not apply to the first taxable year for which
an election is made to be taxed as a REIT; thus, these two rules began to
apply to the Company for the year 2000 (since 1999 was the Company's first
taxable year as a REIT).
For purposes of the 5/50 Rule, an unemployment compensation benefits plan,
a private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. Certain entities,
including entities that file Schedules 13 D, F or G with the Commission, are
not treated as a single owner under the 5/50 Rule. For purposes of the 5/50
Rule, the beneficial owners of such entities are deemed to be the owners of
the Company's Common Stock. A REIT will be treated as having satisfied the
5/50 Rule if it complies with certain regulations for ascertaining the
ownership of its stock and if it did not know (or after the exercise of
reasonable diligence would not have known) that its stock was sufficiently
closely held to cause it to violate the 5/50 Rule. See "--Annual Record
Keeping Requirements" below.
In order to prevent a concentration of ownership of the Company's stock
that would cause the Company to fail the 5/50 Rule or the 100 Shareholder
Rule, the Company amended its Certificate of Incorporation on April 30, 1998
to provide that, except with the consent of the Company's Board of Directors,
no holder (with certain exceptions) is permitted to own, either actually or
constructively under the applicable attribution rules of the Code, more than
9.0% of the Common Stock or 9.9% of any class of preferred stock issued by the
Company. Certain persons (an "Existing Holder") who owned stock in the Company
in excess of the foregoing limits on April 30, 1998 (the date that the
Certificate of Incorporation was amended) are not subject to the general
ownership limits applicable to other stockholders; rather, Existing Holders
generally are permitted to own up to the same percentage of the Company's
outstanding stock that they owned on April 30, 1998. No holder, however, is
permitted to own, either actually or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's stock
if such ownership would cause more than 50% in value of the Company's
outstanding stock to be owned by five or fewer individuals or would result in
the Company's stock being beneficially owned by fewer than 100 persons
(determined without reference to any rule of attribution).
Tenet Healthcare Corporation ("Tenet") owned in excess of 10% of the
Company's issued and outstanding Common Stock on April 30, 1998 and,
therefore, is treated as an Existing Holder under the Company's
36
Certificate of Incorporation. Except as explained below, as an Existing
Holder, Tenet is generally permitted to own in excess of the ownership limits
in the Company's Certificate of Incorporation.
As permitted by its certificate of incorporation, the Company previously
granted waivers of the ownership limitations to certain stockholders of the
Company. These waivers initially permitted such stockholders to own over 10%
of the Common Stock of the Company but in no event more than 15% of the Common
Stock. These waivers have either been terminated in their entirety or have
been subsequently revised to restrict the ownership of Common Stock by any
such stockholder to less than 10% of the Company's issued and outstanding
Common Stock. The Company believes that no stockholder, other than Tenet, owns
10% or more of the Company's issued and outstanding Common Stock.
To qualify as a REIT, a corporation may not have (as of the end of the
taxable year) any earnings and profits that were accumulated in periods before
it elected REIT status. The Company believes that at December 31, 1999 it did
not have any accumulated earnings and profits that are attributable to periods
during which the Company was not a REIT, although the IRS would be entitled to
challenge that determination. For taxable years beginning after 2000 (and the
Company believes for the taxable year 2000), a distribution made to meet the
requirement that a REIT may not have non-REIT earnings and profits will be
treated, on a first-in, first-out basis, as made from earnings and profits.
Thus, such earnings and profits are deemed distributed first from earnings and
profits that would cause such a failure, starting with the earliest Company
year for which such failure would occur.
Section 856(i) of the Code provides that a corporation that is a "qualified
REIT subsidiary" will not be treated as a separate corporation for federal
income tax purposes, and all assets, liabilities, and items of income,
deduction and credit of a qualified REIT subsidiary will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. A
"qualified subsidiary" is defined as any wholly owned corporate subsidiary of
a REIT. The Company does not currently have any qualified REIT subsidiaries.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. The Company directly owns a 99% general partnership interest in
Ventas Realty and indirectly owns the remaining 1% limited partnership
interest in Ventas Realty through a wholly owned limited liability company.
Under the Check-the-Box Regulations, the limited liability company, and
therefore Ventas Realty, is disregarded as an entity separate from the Company
for federal income tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the income and asset
tests described below. If and when Ventas Realty were to admit a partner other
than the Company, a qualified REIT subsidiary of the Company, or an entity
that is disregarded under the Check-the-Box Regulations as an entity separate
from the Company, the Company's proportionate share of the assets and gross
income of Ventas Realty would be treated as the assets and gross income of the
Company for purposes of applying the requirements described herein.
Income Tests
To continue to qualify as a REIT, the Company must satisfy certain annual
gross income requirements. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" (defined below)) and, in certain circumstances,
interest on certain types of temporary investment income. Second, at least 95%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from
37
such real property or temporary investments, dividends, interest and gain from
the sale or disposition of stock or securities, or from any combination of the
foregoing.
Substantially all of the Company's gross income is derived from leasing its
properties to Vencor under the Master Leases. Rents received or deemed
received by the Company under its leases (including the Master Leases) will
qualify as "rents from real property" in satisfying the gross income
requirements described above only if the Company's leases are respected as
"true" leases for federal income tax purposes and are not treated as service
contracts, joint ventures, or some other type of arrangement. The
determination of whether the Company's leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property) or the potential for economic gains (e.g.,
appreciation) with respect to the property. Based upon advice of counsel at
the time the Master Leases were negotiated, the Company believes that its
leases should be treated as "true" leases for federal income tax purposes.
Investors should be aware, however, that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Company's leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the leases
are recharacterized as service contracts or partnership agreements, rather
than true leases, part or all of the payments that the Company receives from
its tenants would not be considered rent or would not otherwise satisfy the
various requirements for qualification as "rents from real property." In that
case, the Company likely would not be able to satisfy either the 75% or the
95% gross income tests, and, as a result, would lose its REIT status.
Assuming that the Company's leases are "true" leases for tax purposes,
rents received by the Company will qualify as "rents from real property" for
purposes of the REIT gross income tests only if several additional conditions
are satisfied. First, the amount of rent generally must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales.
Second, amounts received from a tenant will not qualify as "rents from real
property" if the Company, or an owner of 10% or more of the Company, directly
or constructively is deemed to own 10% or more of the ownership interests in
the tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with
a lease of real property, is greater than 15% of the total rent received under
the lease (based on the fair market values after 2000), then the portion of
rent attributable to such personal property will not qualify as "rents from
real property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
income. The "independent contractor" requirement, however, does not apply to
the extent that the services provided by the Company are "usually or
customarily rendered in connection with the rental of space for occupancy
only," which are services of a type that a tax-exempt organization can provide
to its tenants without causing its rental income to be unrelated business
taxable income ("UBTI"). In addition, the "independent contractor" requirement
does not apply to noncustomary services provided by the Company, the annual
value of which does not exceed 1% of the gross income derived from the
property with respect to which the services are provided (the "1% de minimis
exception"). For this purpose, such services may not be valued at less than
150% of the Company's direct cost of providing the services. An "independent
contractor" is defined as an entity that does not own (directly or indirectly)
more than 35% of the Company's stock or an entity not more than 35% owned
(directly or indirectly) by persons who own more than 35% of the Company's
stock. If any class of stock of the
38
Company or the person being tested as an independent contractor is regularly
traded on an established securities market, only persons who directly or
indirectly own 5% or more of such class of stock shall be counted in
determining whether the 35% ownership limitations have been exceeded. Certain
of the foregoing rules are modified if the Company forms a taxable REIT
Subsidiary. See "--Taxable REIT Subsidiary."
The Company does not believe that it has, and does not anticipate that it
will in the future, (i) charged/charge rent that is based in whole or in part
on the income or profits of any person (except by reason of being based on a
fixed percentage or percentages of receipts or sales consistent with the rule
described above), (ii) derived/derive rent attributable to personal property
leased in connection with real property that exceeds 15% of the total rents,
(iii) derived/derive rent attributable to a Related Party Tenant, or (iv)
provided/provide any noncustomary services to tenants other than through
qualifying independent contractors, except as permitted by the 1% de minimis
exception or to the extent that the amount of resulting nonqualifying income
would not cause the Company to fail to satisfy the 95% and 75% gross income
tests.
Related Party Tenant
The Company leases substantially all of its properties to Vencor and Vencor
is the primary source of the Company's rental revenues. Under the Final Plan,
if consummated, Ventas Realty would receive 1,498,500 shares of the New Vencor
Common Stock on the Vencor Effective Date as future rent. Under the Code, if
the Company owns 10% or more of any class of Vencor's issued and outstanding
voting securities or 10% or more of the value of any class of Vencor's issued
and outstanding securities (the "10% securities test"), Vencor would be a
Related Party Tenant. As a Related Party Tenant, the Company's rental revenue
from Vencor would not qualify as "rents from real property" and the Company
would lose its REIT status because it likely would not be able to satisfy
either the 75% or the 95% gross income test. The Company's loss of REIT status
would have a Material Adverse Effect on the Company.
The Company believes that, based upon applicable tax authorities and
decisions and advice from the Internal Revenue Service, all common stock
underlying warrants and options that may be issued by Vencor on or after the
Vencor Effective Date and performance shares that may be issued by Vencor on
or after the Vencor Effective Date would be deemed outstanding for purposes of
calculating the Company's ownership percentage under the 10% securities test.
Accordingly, if the Final Plan is consummated and the New Vencor Common Stock
is issued to the Company on the Vencor Effective Date, the Company believes
that for purposes of the 10% securities test, its ownership percentage in
Vencor on and after the Vencor Effective Date would be materially less than
9.99%.
In addition, the Company has taken a number of steps to reduce the risk of
the Company's loss of REIT status due to any potential violation of the 10%
securities test if the Final Plan is consummated and the New Vencor Common
Stock is issued to the Company on the Vencor Effective Date.
First, under Article Twelfth of the Vencor Amended and Restated Certificate
of Incorporation (the "Vencor Corporate Charter"), which would become
effective on the Vencor Effective Date, if Vencor were to propose to enter
into a transaction which would cause the Company to violate the 10% securities
test, Vencor would have to give the Company fifteen days prior written notice
of such transaction, which notice would constitute an offer by Vencor to
purchase from the Company immediately prior to the consummation of such
transaction a number of shares of the New Vencor Common Stock such that after
the consummation of the proposed transaction the Company's ownership interest
in Vencor would not exceed 9.99%. The Company would not be required to accept
such offer but could in its discretion do so. Vencor would agree not to close
the transaction until it purchased the appropriate amount of the New Vencor
Common Stock from the Company if the Company were to accept the Vencor offer.
Second, the Company would be able to sell the New Vencor Common Stock to a
third party or distribute the New Vencor Common Stock to its stockholders,
subject to compliance with the registration requirements of the Securities
Act. Under the Registration Rights Agreement, Vencor would agree to file a
registration statement
39
within 120 days after the Vencor Effective Date to register the New Vencor
Common Stock under the Securities Act. See "--Recent Developments Regarding
Vencor--Spin Agreements and Other Arrangements Under the Final Plan--
Registration Rights Agreement." The New Vencor Common Stock could be sold in
the public trading markets, in a private sale or distributed by the Company to
its stockholders as a dividend upon compliance with the rules and regulations
of the New York Stock Exchange and the Commission and all other applicable
laws, rules and regulations. However, if the Company were required to dispose
of all or a portion of the New Vencor Common Stock, there could be no
assurance that a public market would exist for the New Vencor Common Stock,
that a private buyer could be found for the New Vencor Common Stock, the price
at which a sale could be effected, or whether a registration statement
relating to the proposed transaction would be declared effective in time to
effectuate such sale in order for the Company to avoid the loss of its REIT
status.
Third, if the Final Plan is consummated, the Company intends to establish a
trust into which Ventas Realty would transfer a nominal amount of cash on the
Vencor Effective Date. The Company believes that, subject to compliance with
applicable securities law, it could, for any reason, transfer to the trust all
or a portion of the Company's New Vencor Common Stock. Upon any such transfer
of the New Vencor Common Stock to the trust, the trust would convert to
separate trusts for the benefit of each stockholder of the Company determined
as of the record date set by the Company. There can be no assurance, however,
that applicable law would permit the Company to distribute the New Vencor
Common Stock to the trust as a dividend to its stockholders or that the
Company would elect to do so.
The Company has also taken or, would take if the Final Plan is consummated,
steps to prevent the attribution to the Company of the New Vencor Common Stock
which would be issued by Vencor if the Final Plan is consummated and which may
be owned by stockholders of the Company. The Company has amended the waivers
of the ownership limits in its charter such that the only greater than 10%
stockholder of the Company's stock is Tenet. Tenet owns approximately 12% of
the Company's issued and outstanding Common Stock. Certain provisions under
the Code provide that any ownership interest in Vencor that Tenet may purchase
may be attributed to the Company. If any such attribution should occur at a
time when the Company owns 9.99% of the issued and outstanding New Vencor
Common Stock, the Company could violate the 10% securities test and lose its
REIT status unless under applicable laws, rules and regulations or
interpretations, the Company is otherwise deemed not to have violated the 10%
securities test. There can be no assurance that relief for a violation of the
10% securities test would be available in all circumstances. If the Company
should lose its REIT status, it would have a Material Adverse Effect on the
Company. To reduce the likelihood of such an occurrence, the Company has
sought certain protective measures. As part of the Final Plan, the Company
negotiated for the inclusion of Article Tenth of the Vencor Corporate Charter.
Article Tenth of the Vencor Corporate Charter, which would become effective if
the Vencor Effective Date occurs, would, by design, prohibit Tenet from
gaining beneficial ownership of any New Vencor Common Stock if such ownership
when combined with the Company's ownership would exceed 9.9% of any class of
stock or all stock in the aggregate. If Tenet should nevertheless violate this
provision, either directly or as a result of the attribution rules under the
Code, any shares of the New Vencor Common Stock so purchased by or attributed
to Tenet would automatically, without any action by any party, become "Excess
Stock" in Vencor and would be deemed to be owned by a trust for the benefit of
a third party and Tenet would have no legal title to such "Excess Stock" in
Vencor. Tenet would have the limited right to receive certain distributions on
and a certain portion of the proceeds of a sale of such "Excess Stock" in
Vencor.
In addition, under the Company's Certificate of Incorporation, under a
formal interpretation by the Board of Directors, if Tenet should purchase any
New Vencor Common Stock while Tenet owns in excess of 10% of the Company's
Common Stock, then all of Tenet's holdings of the Company's Common Stock in
excess of 9.9% would automatically become "Excess Shares" in the Company and
would be deemed to be owned by a trust for the benefit of a third party and
Tenet would have no legal title to such "Excess Shares" in the Company. Tenet
would have the limited right to receive certain distributions on and a certain
portion of the proceeds of a sale of such Excess Shares in the Company.
40
While the Company believes that these and other safeguards which have been
instituted by the Company are adequate, there can be no assurances that such
safeguards will be adequate to prevent the Company from violating the 10%
securities test if the Final Plan is consummated and the New Vencor Common
Stock is issued to the Company on the Vencor Effective Date. It would have a
Material Adverse Effect on the Company if the Company should ever violate the
10% securities test because the Company would lose its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless continue to qualify as a REIT
for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions generally will be available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return and any incorrect information on the schedules was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions were to apply, a tax would be
imposed with respect to the excess net income.
Foreclosure Property
General
The foreclosure property rules permit the Company (by the Company's
election) to foreclose or repossess properties without being disqualified as a
result of receiving income that does not qualify under the gross income tests;
however, a corporate tax is imposed upon net income from "foreclosure
property" that is not otherwise "good REIT" income. Detailed rules specify the
calculation of the tax. The after tax amount increases the amount the REIT
must distribute each year.
"Foreclosure property" includes any real property and any personal property
incident to such real property acquired by bid at foreclosure or by agreement
or process of law after there was a default or a default was imminent on the
leased property. During a 90-day grace period, the Company may operate the
foreclosed property without an "independent contractor" or qualifying lessee.
The 90-day grace period will begin on the date the Company acquires possession
of the property.
To maintain foreclosure property treatment after the 90 day grace period,
the Company must cause the property to be managed by an "independent
contractor" (from whom the Company derives or receives no income) or lease the
property pursuant to a lease qualifying as a true lease for income tax
purposes to an unrelated third party. Ownership of the tenant must not be
attributed to the Company in violation of the related tenant rule of Section
856(d)(2)(B) (relating to 10% or more owned tenants). If the property is
leased to a third party under a true lease, the foreclosure property rules are
not then relevant.
Foreclosure property treatment will end on the first day on which the REIT
enters into a lease of the property that will give rise to income that is not
good rental income under Section 856(c)(3). In addition, foreclosure property
treatment will end if any construction takes place on the property (other than
completion of a building, or other improvement more than 10 percent complete
before default became imminent). Foreclosure property treatment is available
for an initial period of three years, provided that such treatment may be
extended up to six years.
Health Care Properties
The Company is permitted to terminate leases of "qualified health care
properties" other than by reason of default or imminent default. In addition,
the Company may treat "qualified health care properties" as foreclosure
property at the time a lease comes to an end. Except as noted below, health
care foreclosure properties are subject to the foreclosure property tax and
other rules under the general foreclosure property rules.
The differences between this special health care rule and the general
foreclosure rule are that (i) the initial foreclosure property period is for
two rather than three years, although it may be extended for the same
aggregate
41
six years, (ii) the lease may be terminated without requirement of default,
and (iii) income from the independent contract is disregarded to the extent
such income is attributable to any lease of property in effect on the date of
acquisition or any lease of property entered into after such date if on such
date a lease of the new property from the REIT was in effect, and under the
terms of the new lease, the REIT receives no more than substantially the same
benefit in comparison to the lease previously in effect.
A "qualified health care property" includes any real property and any
personal property incident to such real property which is a "health care
facility" or is necessary or incidental to the use of a health care facility.
The qualified health care facility may be operated by an independent
contractor from whom the REIT does not derive or receive any income other than
certain qualifying lease income from an independent contractor.
Asset Tests
At the close of each quarter of its taxable year, the Company must satisfy
two tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets"
or, in cases where the Company raises new capital through stock or long-term
(at least five years) debt offerings, temporary investments in stock or debt
instruments during the one-year period following the Company's receipt of such
capital (the "75% asset test"). The term "real estate asset" includes
interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the
75% asset class, the value of any one issuer's debt and equity securities
owned by the Company (other than the Company's interest in any entity
classified as a partnership for federal income tax purposes, or the stock of a
qualified REIT subsidiary) may not exceed 5% of the value of the Company's
total assets (the "5% asset test"), and the Company may not own more than 10%
of any one issuer's outstanding voting securities or 10% of the value of any
one issuer's outstanding securities, subject to limited "safe harbor"
exceptions for certain straight debt obligations (except for the Company's
ownership interest in an entity that is disregarded for federal income tax
purposes, that is classified as a partnership for federal income tax purposes
or that is the stock of a qualified REIT subsidiary) (previously defined as
the "10% securities test"). In addition, no more than 20% of the value of the
Company's assets can be represented by securities of taxable REIT subsidiaries
(as defined below).
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter except for its first calendar quarter, such a failure would
not cause it to fail to qualify as a REIT or to lose its REIT status if (i) it
satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence
were not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which it arose. The Company intends to maintain adequate records of
the value of its assets to ensure compliance with the asset tests and to take
such other actions as may be required to comply with those tests.
Receipt of New Vencor Common Stock
If the Final Plan is consummated and the New Vencor Common Stock is issued
to the Company on the Vencor Effective Date, the Company believes it would
continue to be in compliance with the 10% securities test and the 5% asset
test. However, the Company believes that the value of the New Vencor Common
Stock would be highly speculative and there could be differing opinions as to
the methods of calculating compliance with these tests and as to the value of
the Company's assets (including the valuation of the New Vencor Common Stock)
for purposes of these tests. Therefore, there can be no assurance the Company
would continue to be in
42
compliance with either of these tests. The Company would lose its REIT status
if it failed to satisfy either of these tests, after giving effect to (a) any
applicable cure period, which applies only to the 5% asset test and (b) all
applicable laws, rules and regulations and interpretations. If the Company
lost its status as a REIT, it would have a Material Adverse Effect on the
Company.
Taxable REIT Subsidiaries
The Company is permitted to own up to 100% of a "taxable REIT subsidiary."
To qualify as a taxable REIT subsidiary, both the Company and the subsidiary
corporation must join in an election to treat the subsidiary corporation as a
taxable REIT subsidiary. In addition, any corporation (other than a REIT or a
qualified REIT subsidiary) of which a taxable REIT subsidiary owns, directly
or indirectly, more than 35 percent of the vote or value is automatically
treated as a taxable REIT subsidiary.
A taxable REIT subsidiary can provide services to tenants of the Company's
properties (even if such services were not considered services customarily
furnished in connection with the rental of real property), and can manage or
operate properties, generally for third parties, without causing amounts
received or accrued directly or indirectly by the Company for such activities
to fail to be treated as rents from real property. However, rents paid to the
Company generally are not qualified rents if the Company owns more than 10%
(by vote or value) of the corporation paying the rents. Nevertheless,
qualified rents do include rents that are paid by taxable REIT subsidiaries
and that also meet a limited rental exception (where 90% of space is leased to
third parties at comparable rents) and an exception for rents from certain
lodging facilities (operated by an independent contractor).
Moreover, the taxable REIT subsidiary cannot directly or indirectly operate
or manage a lodging or health care facility, subject to special rules for
certain lodging facilities.
Also, the taxable REIT subsidiary generally cannot provide to any person
rights to any brand name under which hotels or health care facilities are
operated, unless the rights are provided to an independent contractor to
operate or manage a lodging facility, if the rights are held by the taxable
REIT subsidiary as licensee or franchisee and the lodging facility is owned by
the taxable REIT subsidiary or leased to it by the Company.
The taxable REIT subsidiary cannot deduct interest in any years that would
exceed 50% of the taxable REIT subsidiary's adjusted gross income. If any
amount of interest, rent, or other deductions of the taxable REIT subsidiary
for amounts paid to the Company is determined to be other than at arm's length
("redetermined" items pursuant to Section 482), an excise tax of 100% is
imposed on the portion that was excessive, with limited "safe harbor"
exceptions.
A 100% excise tax would be imposed on the Company for: (i) redetermined
rents, (ii) redetermined deductions, and (iii) excess interest. Redetermined
rents include "rents from real property" that would have been adjusted under
Section 482 (but for the imposition of the 100% tax) in an IRS audit to
clearly reflect income as a result of services furnished by a taxable REIT
subsidiary to the tenants of a REIT. Redetermined rents, however, would only
include rents attributable to "impermissible" services that exceed 1% of the
total rents from the property. In addition, redetermined rents would not
include rents which qualify for the following safe harbors: (i) the taxable
REIT subsidiary charges the same amounts for its services to the REIT and its
tenants similar to other third parties; (ii) the rents paid to the REIT by
tenants (leasing at least 25% of the net leasable space in the property) who
are not receiving a service from the taxable REIT subsidiary are substantially
comparable to the rents paid by tenants leasing comparable space and receiving
such service from the taxable REIT subsidiary, and the charge for such service
is separately stated; and (iii) the Taxable REIT Subsidiary recognizes income
for its services at least equal to 150% of its direct costs in furnishing or
rendering the service.
Redetermined deductions include deductions (other than redetermined rents)
of a Taxable REIT Subsidiary that would have been adjusted under Section 482
(but for the imposition of the 100% tax) in an IRS audit to clearly reflect
income between the taxable REIT subsidiary and REIT.
43
Excess interest would include any deduction for interest payments by a
taxable REIT subsidiary to the REIT to the extent such interest payments are
in excess of a rate that is "commercially reasonable." Loans from the REIT to
a taxable REIT subsidiary would be made subject to the Section 163(j)
"earnings stripping" rules in full (i.e., the rules would apply to the taxable
REIT subsidiary regardless of the underlying ownership of the REIT).
Annual Distribution Requirements
In order to be taxed as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% (90% for taxable years beginning
after December 31, 2000) of the Company's "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and
(B) 95% (90% for taxable years beginning after December 31, 2000) of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95% (90% for taxable years beginning after December
31, 2000), but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax on the undistributed amount at regular capital gains
and ordinary corporate tax rates except to the extent of net operating loss or
capital loss carryforwards. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year (other than long-term capital gain the Company elects to retain
and treat as having been distributed to stockholders), and (iii) any
undistributed taxable income from prior periods, the Company will be subject
to a 4% nondeductible excise tax on the excess of such required distribution
over the amounts actually distributed. In addition, during its Recognition
Period, if the Company disposes of any assets subject to the Built-in Gain
Rules, the Company will be required, pursuant to guidance issued by the IRS,
to distribute at least 95% of the capital gain income from Built-in Gain
(after tax), and 90% of the ordinary income from Built-in Gain (after tax), if
any, recognized on the disposition of the asset.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions
in computing REIT taxable income. However, this would be partially offset by
the value of the New Vencor Common Stock that would be received by the Company
on the Vencor Effective Date if the Final Plan is consummated and which would
be included in taxable income in the year received by the Company. The Company
anticipates that it generally will have sufficient cash or liquid assets to
enable it to satisfy the 95% (90% for taxable years beginning after December
31, 2000) distribution requirement. It is possible, however, that the Company,
from time to time, may not have sufficient cash or other liquid assets to meet
the 95% (90% for taxable years beginning after December 31, 2000) distribution
requirement or to distribute such greater amount as may be necessary to avoid
income and excise taxation, as a result of timing differences between (i) the
actual receipt of income (including the value of the New Vencor Common Stock
in the year received if the Final Plan is consummated and the New Vencor
Common Stock is issued to the Company) and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at the Company's taxable income, or as a result of nondeductible
expenses such as principal amortization or repayments, or capital expenditures
in excess of noncash deductions. In the event that such timing differences or
other cash needs occur, the Company may find it necessary to borrow funds or
to issue equity securities (there being no assurance that it will be able to
do so) or, if possible, to pay taxable stock dividends, distribute other
property or securities (including the New Vencor Common Stock if the Final
Plan is consummated and the New Vencor Common Stock is issued to the Company)
or engage in a transaction intended to enable it to meet the REIT distribution
requirements. The Company's ability to engage in certain of these transactions
is restricted by the terms of the Amended Credit Agreement. Any such
transaction would likely require the consent of the "Required Lenders" under
the Amended Credit Agreement, and there can be no assurance that such consent
would be obtained. The Company's ability to engage in certain of these
transactions is also restricted by the registration requirements under the
Securities Act, the rules and regulations of the New
44
York Stock Exchange and the Commission and by other applicable laws, rules and
regulations. In addition, the failure of Vencor to make rental payments under
the Master Leases would impair materially the ability of the Company to make
required distributions. Consequently, there can be no assurance that the
Company will be able to make distributions at the required distribution rate
or any other rate.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay a 4% excise tax and interest to the IRS
based upon the amount of any deduction taken for deficiency dividends.
The Company qualified as a REIT for the tax year ended December 31, 1999.
The Company believes that it has met all of the tests required to be met as of
December 31, 2000 in order to qualify as a REIT for the 2000 tax year.
Although the Company currently expects to continue to qualify as a REIT for
the year ended December 31, 2001, it is possible that economic, market, legal,
tax or other considerations may cause the Company to fail or elect not to
continue to qualify as a REIT in any such tax year.
Annual Record Keeping Requirements
In its first taxable year in which it qualifies as a REIT and thereafter,
the Company is required to maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding shares. The Company believes that it has
complied with these requirements for the 1999 and 2000 tax years. The Company
will be subject to a penalty of $25,000 ($50,000 for intentional violations)
for any year in which it does not comply with the rules.
Failure to Continue to Qualify
If the Company's election to be taxed as a REIT is revoked or terminated
(e.g., due to a failure to meet the REIT qualification tests), the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates except to the extent of net
operating loss and capital loss carryforwards. Distributions to stockholders
will not be deductible by the Company, nor will they be required to be made.
To the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate stockholders may be eligible for
the dividends received deduction. In addition, the Company would be prohibited
from re-electing REIT status for the four taxable years following the year
during which the Company ceased to qualify as a REIT, unless certain relief
provisions of the Code applied. It is impossible to predict whether the
Company would be entitled to such statutory relief.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of the Company's
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources
without the United States is includible in gross income for U.S. federal
income tax purposes regardless of its connection with the conduct of a trade
or business within the United States or (iv) any trust with respect to which
(A) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons have the
authority to control all substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations.
Distributions that are designated as capital gain dividends
45
will be taxed as a capital gain (to the extent such distributions do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held its shares. The tax
rates applicable to such capital gains are discussed below. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a stockholder's shares, such distributions will be
included in income as capital gains assuming the shares are capital assets in
the hands of the stockholder. The tax rate applicable to such capital gain
will depend on the stockholder's holding period for the shares. In addition,
any distribution declared by the Company in October, November or December of
any year and payable to a stockholder of record on a specified date in any
such month shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
If the Company should become a closely held REIT, any person owning at
least 10% (by vote or value) of the Company is required to accelerate the
recognition of year-end dividends attributable to the Company, for purposes of
such person's estimated tax payments. A closely held REIT is defined as one in
which at least 50% (by vote or value) is owned by five or fewer persons.
Attribution rules apply to determine ownership.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to its stockholders (including for
purposes of the 4% excise tax discussed above under "Requirements for
Qualification--Annual Distribution Requirements"). If the Company should make
such an election, the Company's stockholders would be required to include in
their income as long-term capital gain their proportionate share of the
Company's undistributed net capital gain, as designated by the Company. Each
such stockholder would be deemed to have paid its proportionate share of the
income tax imposed on the Company with respect to such undistributed net
capital gain, and this amount would be credited or refunded to the
stockholder. In addition, the tax basis of the stockholder's shares would be
increased by its proportionate share of undistributed net capital gains
included in its income, less its proportionate share of the income tax imposed
on the Company with respect to such gains.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the stockholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of the shares (or
distributions treated as such) will be treated as investment income only if
the stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify stockholders after the close of
the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital
and capital gain.
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be
treated as capital gain or loss. Lower marginal tax rates for individuals may
apply in the case of capital gains, depending on the holding period of the
shares that are sold. However, any loss upon a sale or exchange of shares by a
stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to
the extent of distributions from the Company required to be treated by such
stockholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of shares may be disallowed if other shares are
purchased within 30 days before or after the disposition.
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal individual income
tax rate applicable to ordinary income is 39.6%. Any capital
46
gain generally will be taxed to a non-corporate taxpayer at a maximum rate of
20% with respect to capital assets held for more than one year. The tax rates
applicable to ordinary income apply to gain attributable to the sale or
exchange of capital assets held for one year or less. In the case of capital
gain attributable to the sale or exchange of certain real property held for
more than one year, an amount of such gain equal to the amount of all prior
depreciation deductions not otherwise required to be taxed as ordinary
depreciation recapture income will be taxed at a maximum rate of 25%. With
respect to distributions designated by a REIT as capital gain dividends
(including deemed distributions of retained capital gains), the REIT also may
designate (subject to certain limits) whether the dividend is taxable to non-
corporate stockholders as a 20% rate gain distribution or an unrecaptured
depreciation distribution taxed at a 25% rate.
The characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains
may be deducted against a non-corporate taxpayer's ordinary income only up to
a maximum annual amount of $3,000. Non-corporate taxpayers may carry forward
their unused capital losses. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Treatment of Tax-Exempt Stockholders
Tax-exempt organizations, including qualified employee pension and profit
sharing trusts and individual retirement accounts (collectively, "Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their UBTI. While many investments in real
estate generate UBTI, the IRS has issued a published ruling that dividend
distributions by a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on
that ruling, and subject to the exceptions discussed below, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition
of the Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17) and (20), respectively,
of Section 501(c) of the Code are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. In addition, in certain circumstances, a pension trust that owns more
than 10% of the Company's stock is required to treat a percentage of the
dividends from the Company as UBTI (the "UBTI Percentage"). The UBTI
Percentage is the gross income, less related direct expenses, derived by the
Company from an unrelated trade or business (determined as if the Company were
a pension trust) divided by the gross income, less related direct expenses, of
the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only
if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively own more than 50% of
the value of the Company's stock.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no
attempt will be made herein to provide more than a summary of such rules. Non-
U.S. stockholders should consult with their own tax advisors to determine the
impact of federal, state and local income tax laws with regard to their
ownership of the Common Stock, including any reporting requirements.
For purposes of this discussion, the term "Non-U.S. Stockholder" does not
include any foreign stockholder whose investment in the Company's stock is
"effectively connected" with the conduct of a trade or business in
47
the United States. Such a foreign stockholder, in general, will be subject to
United States federal income tax with respect to its investment in the
Company's stock in the same manner as a U.S. Stockholder is taxed (subject to
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). In addition, a foreign corporation
receiving income that is treated as effectively connected with a U.S. trade or
business also may be subject to an additional 30% "branch profits tax," unless
an applicable tax treaty provides a lower rate or an exemption. Certain
certification requirements must be satisfied in order for effectively
connected income to be exempt from withholding.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gain dividends (or deemed
distributions of retained capital gains) will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Stockholder's shares, such distributions will
give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of its shares, as
described below.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Stockholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to 30% branch profits tax
in the hands of a foreign corporate stockholder not entitled to treaty relief
or exemption.
Unless a reduced rate of withholding applies under an applicable tax
treaty, the Company generally will withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, 30% of all distributions out of current or
accumulated earnings and profits, subject to the application of FIRPTA
withholding rules discussed below. In addition, the Company is required to
withhold 10% of any distribution in excess of its current and accumulated
earnings and profits. Because the Company generally cannot determine at the
time a distribution is made whether or not it will be in excess of earnings
and profits, the Company intends to withhold 30% of the entire amount of any
distribution (other than distributions subject to the 35% withholding
discussed below). Generally, however, a Non-U.S. Stockholder will be entitled
to a refund from the IRS to the extent an amount is withheld from a
distribution that exceeds the amount of U.S. tax owed by such Non-U.S.
Stockholder.
Under FIRPTA, the Company is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as
a capital gain dividend. Thus, if the Company designates previously made
distributions as capital gain dividends, subsequent distributions (up to the
amount of such prior distributions) will be treated as capital gain dividends
for purposes of FIRPTA withholding.
Under Regulations that are currently in effect, dividends paid to an
address in a country outside the United States generally are presumed to be
paid to a resident of such country for purposes of determining the
applicability of withholding discussed above and the applicability of a tax
treaty rate. Regulations issued in October 1997, however, provide that a Non-
U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate
must satisfy certain certification and other requirements. Such Regulations
generally will be effective for distributions made after December 31, 2000.
48
For so long as the Common Stock continues to be regularly traded on an
established securities market, the sale of such stock by any Non-U.S.
Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below)
generally will not be subject to United States federal income tax (unless the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for more than 182 days during the taxable year of the sale and
certain other conditions apply, in which case such gain will be subject to a
30% tax on a gross basis). A "Five Percent Non-U.S. Stockholder" is a Non-U.S.
Stockholder who, at some time during the five-year period preceding such sale
or disposition, beneficially owned (including under certain attribution rules)
more than 5% of the total fair market value of the Common Stock (as
outstanding from time to time) or owned shares of another class of stock of
the Company that represented value greater than 5% of the Common Stock
(measured at the time such shares were acquired).
In general, the sale or other taxable disposition of the Common Stock by a
Five Percent Non-U.S. Stockholder (as defined below) also will not be subject
to United States federal income tax if the Company is a "domestically
controlled REIT." A REIT is a "domestically controlled REIT" if, at all times
during the five-year period preceding the relevant testing date, less than 50%
in value of its shares is held directly or indirectly by Non-U.S. Stockholders
(taking into account those persons required to include the Company's dividends
in income for United States federal income tax purposes). Although the Company
believes that it currently qualifies as a "domestically controlled REIT,"
because the Common Stock is publicly traded, no assurance can be given that
the Company will qualify as a domestically controlled REIT at any time in the
future. If the Company does not constitute a domestically controlled REIT, a
Five Percent Non-U.S. Stockholder will be taxable in the same manner as a U.S.
Stockholder with respect to gain on the sale of the Common Stock (subject to
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals).
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. Stockholders and to the IRS the amount
of distributions paid during each calendar year and distributions required to
be treated as so paid during a calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide the Company
with its correct taxpayer identification number also may be subject to
penalties imposed by the IRS. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail
to certify their non-foreign status to the Company.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for an exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. Stockholder will be allowed as a credit against the U.S. Stockholder's
United States federal income tax liability and may entitle the U.S.
Stockholder to a refund, provided that the required information is furnished
to the IRS.
Backup withholding tax and information reporting generally will not apply
to distributions paid to Non-U.S. Stockholders outside the United States that
are treated as (i) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, (ii) capital gain dividends or (iii)
distributions attributable to gain from the sale or exchange by the Company of
U.S. real property interests. As a general matter, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
the Common Stock by or through a foreign office of a foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of the Common Stock by a foreign office of a
broker that (i) is a United States person, (ii) derives 50% or more of its
gross income for certain periods from the conduct of a trade or business in
the United States, or (iii) is a "controlled foreign corporation" for United
States tax purposes, unless the broker has documentary evidence in its records
that the holder is a Non-U.S. Stockholder and certain other conditions are
satisfied, or the stockholder otherwise establishes an exemption. Payment to
or through a United
49
States office of a broker of the proceeds of a sale of the Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a
Non-U.S. Stockholder or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund with the IRS.
The Treasury Department issued final Regulations in October 1997 concerning
the withholding of tax and information reporting for certain amounts paid to
non-resident alien individuals and foreign corporations. These new withholding
rules alter the current withholding regime, and generally are effective for
distributions made after December 31, 2000. Stockholders should consult their
tax advisors concerning the impact, if any, of these new Regulations on their
ownership of shares of the Common Stock.
Other Tax Considerations
The Company and its stockholders may be subject to state and local tax in
states and localities in which they do business or own property. The tax
treatment of the Company and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of
state and local tax laws on their ownership of shares of the Common Stock.
Employees
As of December 31, 2000, the Company had nine full-time employees and two
part-time employees. The Company considers its relationship with its employees
to be good.
Insurance
The Company maintains and/or requires in its leases that its tenants
maintain appropriate liability and casualty insurance on its assets and
operations. Under the Master Leases, Vencor is required to maintain, at its
expense, certain insurance coverages related to the properties under the
Master Leases and Vencor's operations at the related facilities. See "--
Summary of the Terms of Current Agreements with Vencor." There can be no
assurance that Vencor and the Company's other tenants will maintain such
insurance and any failure by Vencor or the Company's other tenants to do so
could have a Material Adverse Effect on the Company. The Company believes that
Vencor and its other tenants are in substantial compliance with the insurance
requirements contained in their respective leases with the Company.
The Company believes that the amount and coverage of its insurance
protection is customary for similarly situated companies in its industry.
There can be no assurance that in the future such insurance will be available
at a reasonable price or that the Company will be able to maintain adequate
levels of insurance coverage.
RISK FACTORS
Dependence of the Company on Vencor
The Company leases substantially all its properties to Vencor and,
therefore, Vencor is the primary source of the Company's rental revenues,
accounting for approximately 98.6% (98.4%, net of write-offs) of the Company's
rental revenues in 2000.
The operations of Vencor were negatively impacted by changes in
governmental reimbursement rates, by its level of indebtedness and by certain
other factors. As a result, Vencor filed for protection under chapter 11 of
the Bankruptcy Code on September 13, 1999. On March 19, 2001, the Bankruptcy
Court entered an order confirming the Final Plan restructuring Vencor's debt
and lease obligations. Under the Final Plan, the Vencor Effective Date shall
occur no later than May 1, 2001 but the Final Plan does not address the
consequences if the
50
Vencor Effective Date does not occur on or before May 1, 2001. The Company
believes that the Final Plan will likely become effective. See "--Risk
Factors--Conditions to Consummation of the Final Plan."
Vencor's financial condition, ability and willingness to meet its rent
obligations will determine the Company's rental revenues and the Company's
ability to service its indebtedness and to make distributions to its
stockholders. In addition, any failure by Vencor to conduct its operations
effectively could have a Material Adverse Effect on the Company. There can be
no assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the Master Leases,
that Vencor will be able to perform its obligations under the Master Leases
or, following the Vencor Effective Date if it occurs, under the Amended Master
Leases. Since the Master Leases and Amended Master Leases are structured as
triple-net leases under which Vencor is responsible for all or substantially
all insurance, taxes and maintenance and repair expenses required in
connection with the leased properties, the inability or unwillingness of
Vencor to satisfy its obligations under the existing Master Leases or,
following the Vencor Effective Date if it occurs, under the Amended Master
Leases, would have a Material Adverse Effect on the Company. In addition, the
credit standing of the Company is affected by the general creditworthiness of
Vencor.
Due to the Company's dependence on Vencor's rental payments as the primary
source of the Company's rental revenues, the Company may be negatively
affected by enforcing its rights under the Master Leases or, following the
Vencor Effective Date if it occurs, under the Amended Master Leases or by
terminating a Master Lease or terminating an Amended Master Lease. If Vencor
fails to comply with the terms of a Master Lease or, following the Vencor
Effective Date if it occurs, an Amended Master Lease or to comply with
applicable health care regulations and, in either case, Vencor or its lenders
fail to cure such default within the specified cure period, the Company may
have to find another lessee/operator for the properties covered by one or all
of the Master Leases or, following the Vencor Effective Date if it occurs, the
Amended Master Leases. While the Company is attempting to locate one or more
lessee/operators there could be a decrease or cessation of rental payments by
Vencor. There can be no assurance that the Company will be able to locate
another suitable lessee/operator or that if the Company is successful in
locating such an operator, the rental payments from such new operator would
not be materially less than the existing rental payments. The ability of the
Company to locate another suitable lessee/operator may be materially delayed
or limited by various state licensing, receivership, CON or other laws, as
well as by Medicare and Medicaid change of ownership rules.
In addition, pursuant to the 1998 Spin Off, the Company assigned to Vencor
and Vencor assumed the Third Party Leases, and the rights, obligations and
duties as a tenant thereunder, as well as the Third Party Guarantees. The
annual minimum rental payments under the Third Party Leases equal
approximately $15.7 million, $6.5 million, and $5.9 million for 2001, 2002 and
2003, respectively. The aggregate exposure under the Third Party Guarantees is
approximately $9.2 million. See "Note 8--Transactions With Vencor--Summary of
the Terms of Current Agreements with Vencor" to the Consolidated Financial
Statements. The Company may remain liable for substantially all of the
obligations under the Third Party Leases and the Third Party Guarantees. The
Company believes it may have valid legal defenses to the enforcement of
certain of the Third Party Leases against the Company. However, there can be
no assurance the Company would prevail in an action brought to enforce a Third
Party Lease or a Third Party Guarantee against the Company. Vencor has
indemnified the Company for any losses, claims, liabilities and the like which
may be incurred by or asserted against the Company in connection with the
Third Party Leases and the Third Party Guarantees. Pursuant to the
Stipulation, Vencor has agreed to fulfill its obligations under the Third
Party Leases and the Third Party Guarantees during the period that the
Stipulation remains in effect. In addition, under the Final Plan, if
consummated, Vencor would assume and agree to continue to perform these
indemnification obligations. See "Business--Recent Developments Regarding
Vencor." There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy these obligations or
that Vencor will continue to honor these obligations. If Vencor or certain
third party subtenants are unable or unwilling to satisfy the obligations
under the Third Party Leases, the Company may be obligated to satisfy the
obligations under the Third Party Leases. In that event, the Company may be
entitled to receive revenues from the leased properties that would mitigate
the costs incurred in connection with the satisfaction of such obligations.
The failure of Vencor to perform the
51
obligations under the Third Party Leases and/or the Third Party Guarantees or
the Company's performance of these obligations could have a Material Adverse
Effect on the Company.
In connection with the 1998 Spin Off, Vencor agreed to assume and to
indemnify the Company for any and all liabilities that may arise out of the
ownership or operation of the health care operations either before or after
the date of the 1998 Spin Off. The indemnification provided by Vencor also
covers losses, including costs and expenses, which may arise from any future
claims asserted against the Company based on these health care operations. In
addition, at the time of the 1998 Spin Off, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that (a) were pending at the
time of the 1998 Spin Off and which arose out of the ownership or operation of
the health care operations or (b) were asserted after the 1998 Spin Off and
which arise out of the ownership and operation of the health care operations
or any of the assets or liabilities transferred to Vencor in connection with
the 1998 Spin Off and to indemnify the Company for any fees, costs, expenses
and liabilities arising out of such operations. Pursuant to the Stipulation,
Vencor has agreed to fulfill these obligations during the period that the
Stipulation remains in effect. In addition, under the Final Plan, if
consummated, Vencor would assume and agree to continue to perform all of these
obligations, including the obligation of Vencor to indemnify the Company.
There can be no assurance that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy its obligations incurred in
connection with the 1998 Spin Off or that Vencor will continue to honor its
obligations incurred in connection with the 1998 Spin Off. If Vencor does not
satisfy or otherwise honor the obligations under these arrangements, then the
Company may be liable for the payment and performance of such obligations and
may have to assume the defense of such claims. The failure of Vencor to
perform these obligations or the Company's performance of these obligations
and/or the assumption of the defense of such claims could have a Material
Adverse Effect on the Company.
Under the Final Plan, if consummated, the Company would receive 1,498,500
shares of the New Vencor Common Stock on the Vencor Effective Date. If the
Final Plan is consummated and the Company receives the New Vencor Common Stock
on the Vencor Effective Date, then any material decrease in the value of such
New Vencor Common Stock could have a Material Adverse Effect on the Company.
There can be no assurance that Vencor will have sufficient assets, income
and access to financing to enable it to satisfy its obligations incurred in
connection with the 1998 Spin Off or that Vencor will continue to honor its
obligations incurred in connection with the 1998 Spin Off. For example, Vencor
has not agreed to assume the Spin Agreements and has reserved its right to
seek to reject such agreements pursuant to and subject to the applicable
provisions of the Bankruptcy Code. If Vencor does not satisfy or otherwise
honor the obligations under these arrangements, then the Company may be liable
for the payment and performance of such obligations and may have to assume the
defense of such claims. The Company's performance of these obligations and/or
the assumption of the defense of such claims could have a Material Adverse
Effect on the Company.
In connection with the 1998 Spin Off, the Company sold or otherwise
transferred substantially all of the Company's books and records relating to
the hospital, nursing facility and ancillary services businesses to Vencor.
Therefore, the Company must rely on Vencor in order to examine and/or obtain
copies of such books and records. The failure of Vencor to provide the Company
with access to or copies of such books and records could have a Material
Adverse Effect on the Company.
Vencor has informed the Company that Vencor's auditors,
PricewaterhouseCoopers LLP ("PwC"), advised Vencor that certain non-audit
services provided to Vencor during PwC's engagement as Vencor's independent
accountants by a subsidiary of PwC in connection with Vencor's efforts to sell
an equity investment raised an issue as to PwC's independence. Vencor has
informed the Company that PwC has disclosed this situation to the Commission,
which is currently investigating the issue. Vencor has informed the Company
that, notwithstanding the provision of such non-audit services, PwC advised
Vencor that PwC was and continues to be independent accountants with respect
to Vencor and it is the present intention of PwC to sign audit opinions and
consents to incorporation as necessary in connection with documents filed by
Vencor with the Commission and other
52
governmental agencies. Vencor has informed the Company that Vencor cannot
predict at this time how this issue will be resolved or what impact, if any,
such resolution will have on Vencor's past or future filings with the
Commission or other third parties, the value of the New Vencor Common Stock to
be issued to the Company upon consummation of the Final Plan, and the timing
of the registration under the Securities Act of the resale or distribution of
such New Vencor Common Stock by the Company.
Effects of Bankruptcy Proceedings
Vencor filed for protection under chapter 11 of the Bankruptcy Code on
September 13, 1999. Other tenants of the Company also have filed for
bankruptcy protection. See "--Recent Developments Regarding Vencor" and "Note
9--Commitments and Contingencies" to the Consolidated Financial Statements.
The limitations imposed by federal bankruptcy law on the ability of the
Company to enforce its agreements with these parties could have a Material
Adverse Effect on the Company.
The Company's ability to manage its assets and operations is subject to
federal and state laws that limit creditors' rights and remedies available to
real property owners to collect delinquent rents, and with respect to tenants
of the Company who are subject to a bankruptcy proceeding, to federal
bankruptcy laws. If a tenant files for bankruptcy protection, the tenant
should have an obligation to pay rent to the Company as landlord during the
pendency of the proceeding and pending the assumption or rejection of the
respective lease. The tenant, however, may dispute the obligation to pay
and/or the amount of rent to be paid pending the assumption or rejection of a
lease. If the tenant assumes a real property lease, it generally must do so
pursuant to the original contract terms and it must cure pre-petition and
post-petition defaults under the lease unless the landlord has agreed to
modify the contract terms or the bankruptcy court orders the terms modified.
If the tenant rejects a real property lease, the Company may lease the
property to another tenant. If a tenant becomes insolvent or files for
bankruptcy protection, there can be no assurance that the Company will be able
to timely recover the premises from the tenant or from a trustee or debtor-in-
possession in any bankruptcy proceeding relating to that tenant. There can
also be no assurance that the Company will receive rent in the proceeding
equal to the amount set forth in the leases or sufficient to cover the
Company's expenses with respect to the premises. If a tenant becomes subject
to federal bankruptcy protection, the Bankruptcy Code will apply, which may
restrict the amount and recoverability of the Company's claims against the
tenant. In addition, the automatic stay provisions of the Bankruptcy Code
prevent a party from exercising certain of its contractual rights, including
the right to payment of pre-petition amounts past due, while the debtor is
subject to federal bankruptcy protection. These proceedings and the
limitations imposed by the Bankruptcy Code on the ability of the Company to
enforce its agreements with these parties could have a Material Adverse Effect
on the Company. See "Note 9--Commitments and Contingencies to Consolidated
Financial Statements."
In connection with Vencor's bankruptcy filing, the Company and Vencor
entered into a Stipulation for the payment by Vencor to the Company of
approximately $15.1 million per month starting in September 1999, to be
applied against the total amount of minimum monthly base rent that is due and
payable under the Master Leases. During the period in which the Stipulation is
in effect, Vencor has agreed to fulfill all of its obligations under the Spin
Agreements as such obligations become due, including its obligation to
indemnify and defend the Company for any and all claims relating to the health
care operations and assets and liabilities transferred to Vencor in the 1998
Spin Off. Under the Final Plan, if consummated, Vencor would agree to assume
and continue to perform the Spin Agreements. However, until such time as the
Vencor Effective Date may occur, under the Stipulation Vencor has reserved its
right to seek to reject such agreements pursuant and subject to the applicable
provisions of the Bankruptcy Code. A termination of the Stipulation and/or
rejection by Vencor of the Spin Agreements could have a Material Adverse
Effect on the Company. See "--Recent Developments Regarding Vencor."
In addition, Vencor, as a debtor in possession in a bankruptcy case
commenced under the Bankruptcy Code, or any trustee appointed for it, could
seek to avoid one or more transfers made and obligations incurred as part of
or subsequent to the 1998 Spin Off under the bankruptcy avoidance powers. Such
transfers and obligations
53
could be avoided if, among other things, they were preferential or otherwise
were made or incurred with the actual intent to delay, hinder or defraud
creditors. They also could be avoided if, as of the 1998 Spin Off, Vencor did
not receive fair consideration or reasonably equivalent value in exchange for
the transfers and obligations made and incurred by it and, at the time of the
1998 Spin Off, Vencor (i) was insolvent or was rendered insolvent, (ii) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage, or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay such debts as they
would mature.
The Company believes that Vencor was solvent (in accordance with the
foregoing definitions) at the time of the 1998 Spin Off, was able to repay its
debts as they matured following the 1998 Spin Off and had sufficient capital
to carry on its business. Moreover, the Company at the time of the 1998 Spin
Off received third party opinions as to Vencor's solvency and the adequacy of
Vencor's capitalization. There is no certainty, however, that a court would
reach the same conclusions in determining whether Vencor was insolvent or
adequately capitalized at the time of, or after giving effect to, the 1998
Spin Off or that any transfer would not be avoided on other grounds. Under the
Final Plan if consummated, Vencor would release these potential claims.
Conditions to Consummation of the Final Plan
Consummation of the Final Plan is subject to the satisfaction of numerous
conditions, including: (a) no event of default exists under the Amended Master
Leases, Vencor's Exit Facility or New Senior Secured Notes that (i) has not
been waived by all parties to such agreements and (ii) would result in the
existence of a default under one or more of such agreements on the Vencor
Effective Date that, based on Vencor's knowledge as of the Vencor Effective
Date, Vencor will not be able to cure pursuant to the terms of the relevant
agreement; (b) the Stipulation has not terminated prior to the Vencor
Effective Date and the Tax Stipulation has not been terminated by Vencor prior
to the Vencor Effective Date; (c) Vencor shall not have renewed or extended
after December 10, 2000 any lease with a third party as to which the Company
may have liability thereunder because it, an affiliate or a predecessor was
the tenant prior to the assignment of the lease to Vencor unless Vencor first
has obtained a release of the Company from such liability. Many of these
conditions are outside the control of the Company and Vencor.
There can be no assurance (a) that the Final Plan will be consummated, (b)
if the conditions to consummation of the Final Plan are satisfied, of the date
that the Final Plan will be consummated, or (c) that, if the Final Plan is not
amended to provide for a later effective date and the Final Plan is not
consummated, (i) Vencor will pursue or be successful in obtaining the approval
of its creditors or the Company for a plan of reorganization on the same terms
as the Final Plan or on alternate terms, (ii) the terms of any such alternate
plan of reorganization will be acceptable to the Company, or (iii) the final
terms of any such alternate plan of reorganization will not have a Material
Adverse Effect on the Company. The Final Plan provides that the Vencor
Effective Date shall occur no later than May 1, 2001, but the Final Plan does
not address the consequences if the Vencor Effective Date does not occur on or
before May 1, 2001. If the Final Plan is not consummated by May 1, 2001, it
could have a Material Adverse Effect on the Company. The Company believes that
the Final Plan will likely become effective.
Substantial Leverage and Ability to Raise Capital
On January 31, 2000, the Company finalized the Amended Credit Agreement,
which restructured its debt under its pre-existing Bank Credit Agreement on a
long-term basis. See "Business--Recent Developments Regarding Liquidity,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Note 4--Borrowing
Arrangements" to the Consolidated Financial Statements. The Company is highly
leveraged and a substantial portion of its cash flow from operations is
dedicated to the payment of principal and interest on indebtedness and its
other obligations. The Company is dependent upon lease payments from Vencor to
meet its interest expense and principal repayment obligations under its
current debt facilities and its other obligations. If the Company's cash flow
from operations is not sufficient to meet all scheduled debt payments and its
other obligations, the Company would be required to obtain
54
additional borrowings or raise equity to meet its required debt payments and
its other obligations. The ability of the Company to incur additional
indebtedness is restricted by the terms of the Amended Credit Agreement. In
addition, adverse economic conditions could cause the terms on which the
Company can obtain additional borrowings to become unfavorable. In such
circumstances, the Company may be required to raise equity in the capital
markets or liquidate one or more investments in properties at times that may
not permit realization of the maximum return on such investments, and which
could result in adverse tax consequences to the Company. In addition, certain
health care regulations may constrain the ability of the Company to sell
assets. There can be no assurance that the Company will be able to meet its
debt service obligations or its obligations under the United States Settlement
and the failure to do so could have a Material Adverse Effect on the Company.
Lack of Control Over Properties
The Company is dependent on the ability of Vencor, as triple-net lessee
under the Master Leases, and, following the Vencor Effective Date if it
occurs, the Amended Master Leases and its other tenants to manage and maintain
the Company's leased properties. The Company may be unable to take action if
it believes Vencor or such other lessees are operating one of the leased
properties inefficiently or in a manner adverse to the Company's interests.
See "--Effects of Bankruptcy Proceedings" and "Business--Summary of the Terms
of Current Agreements with Vencor." If there is an Event of Default under a
Master Lease or, following the Vencor Effective Date if it occurs, under an
Amended Master Lease and the Company repossesses such property under a Master
Lease or under an Amended Master Lease or if such property is otherwise
returned to the Company, the Company would have to locate a suitable
lessee/operator for the property. There can be no assurance that the Company
will be able to locate another suitable lessee/operator or that if the Company
is successful in locating such an operator, that the rental payments from such
new operator would not be materially less than the existing rental payments.
In addition, the ability of the Company to locate another suitable
lessee/operator may be materially delayed or limited by various state
licensing, receivership, CON or other laws, as well as Medicare and Medicaid
change of ownership rules.
Health Care Industry Risks
Dependence on Health Care Industry
Because all of the properties are used as health care facilities, the
Company is directly affected by the risks associated with the health care
industry. The ability of Vencor and the Company's other tenants and operators
to generate profits and pay rent under their leases may be adversely affected
by such risks. See "Business--Governmental Regulation."
Vencor and the other lessees derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and
Medicaid programs. Such programs are highly regulated and subject to frequent
and substantial changes. The Budget Act made extensive changes in the Medicare
and Medicaid programs and is intended to reduce the increase in Medicare
payments by $115.0 billion and reduce the increase in Medicaid payments by
$13.0 billion between 1998 through 2002. Although there has been some payment
relief under the Refinement Act and BIPA, the reductions under the Budget Act
will likely continue to result in reduced reimbursement for the operators of
the Company's properties relative to the period prior to the effective date of
the Budget Act, thereby adversely impacting the operators' ability to satisfy
their obligations, including payment of rent, under the leases with the
Company. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures and the assumption by
health care providers of all or a portion of the financial risk of operating a
health care facility. Efforts to impose greater discounts and more stringent
cost controls by private payors are expected to continue. There can be no
assurance that adequate reimbursement levels will continue to be available for
services to be provided by Vencor and other tenants which are currently being
reimbursed by Medicare, Medicaid or private payors. Significant limits on the
scope of services reimbursed and on reimbursement rates and fees could have a
material adverse effect on the liquidity, financial condition and results of
operations of Vencor and other lessees, which, in turn, could have a Material
Adverse Effect on the Company.
55
Extensive Regulation
The health care industry is subject to extensive federal, state and local
laws and regulations that affect the operators of the Company's properties.
These include, but are not limited to, laws and regulations relating to
licensure, conduct of operations, ownership of facilities, addition of
facilities, services, prices for services and billing for services. These laws
authorize periodic inspections and investigations. If not corrected,
deficiencies can result in sanctions that include loss of licensure to operate
and loss of rights to participate in the Medicare and Medicaid programs.
Regulatory agencies have substantial powers to affect the actions of operators
of the Company's properties if the agencies believe that there is an imminent
threat to patient welfare, and in some states these powers can include
assumption of interim control over facilities through receiverships. Extensive
legislation and regulations also pertain to health care fraud and abuse,
including kickbacks, physician self-referrals and false claims. The Anti-
kickback Laws, by way of example, prohibit certain business practices and
relationships that might affect the provision and cost of health care services
reimbursable under Medicare, Medicaid and other federal health care programs,
including the payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other governmental programs. Sanctions
for violating the Anti-kickback Laws include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs
such as the Medicare and Medicaid programs. In the ordinary course of their
businesses, the Company's operators are subject regularly to inquiries,
investigations and audits by federal and state agencies that oversee these
laws and regulations. See "Business--Governmental Regulation."
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the operators' results of operations, financial condition, and their
ability to make rental payments to the Company.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable health care
regulations and, in either case, such operators or their lenders fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by bankruptcy rules and by
various state licensing, receivership, CON or other laws, as well as by
Medicare and Medicaid change-of-ownership rules. Such delays and limitations
could have a material adverse effect on the Company's ability to collect rent,
to obtain possession of leased properties, or otherwise to exercise remedies
for tenant default. In addition, the Company may also incur substantial
additional expenses in connection with any such licensing, receivership or
change-of-ownership proceedings.
Health Care Reform
Health care is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contained extensive changes to the
Medicare and Medicaid programs intended to reduce the projected amount of
increase in payments under those programs by $115.0 billion and $13.0 billion,
respectively, between 1998 and 2002. Under the Budget Act, annual growth rates
for Medicare were to be reduced from over 10% to approximately 7.5% for the
period between 1998 and 2002 based on specific program baseline projections
from the previous five years. The Refinement Act and BIPA are projected to
restore as much as $20.0 billion to the Medicare program between 2000 and
2002, without eliminating the Budget Act's spending reductions altogether.
Virtually all spending reductions have and will come from health care
operators and changes in program components.
The Budget Act reduced payments made to the hospitals operated by Vencor by
reducing incentive payments pursuant to TEFRA, allowable costs for capital
expenditures and bad debts, and payments for services to patients transferred
from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1,
56
1998. In addition, the Budget Act for the first time imposed a ceiling
limitation or "national cap" on the payments that may be made to each category
of hospitals exempt from the prospective payment system, set as the wage-
adjusted 75th percentile of the aggregate per-facility target amounts for each
such category.
The Budget Act also established SNF PPS for Medicare cost reporting periods
beginning on or after July 1, 1998. During nursing facilities' first three
cost reporting periods under SNF PPS, the per diem payment rates are based on
a blend of facility-specific and federal rates. Thereafter, the per diem
payment rates are based solely on the federal rates. The rates for such
services were published by HCFA in the Federal Register on May 12, 1998 and
updated most recently in a July 31, 2000 final rule to reflect certain
temporary payment increases authorized by the Refinement Act. BIPA authorizes
additional temporary increases and modifications to the published SNF payment
rates. The payments received under SNF PPS cover all services for Medicare
Part A patients, including all ancillary services, such as respiratory
therapy, physical therapy, occupational therapy, speech therapy and certain
covered drugs. The payments that Vencor is receiving under SNF PPS are
substantially less than before enactment of the Budget Act and will remain so
even after implementation of the Refinement Act, the Final BBRA Rule and BIPA.
Vencor has been subject to SNF PPS since July 1, 1998.
Though LTACs are presently reimbursed on a reasonable cost basis, subject
to a facility-specific target amount and a wage-adjusted, 75th percentile
"national cap" imposed on PPS-exempt hospitals by the Budget Act, the Budget
Act requires establishment of a separate prospective payment system for LTACs
("LTAC PPS"). BIPA provides that LTAC PPS must be implemented by October 1,
2002.
In addition to its impact on the Medicare program, the Budget Act also
afforded states more flexibility in administering their Medicaid plans,
including the ability to shift most Medicaid enrollees into managed care plans
without first obtaining a federal waiver. Accordingly, the Medicare and
Medicaid programs, including payment levels and methods, are in a state of
change and are less predictable than before enactment of the Budget Act.
Further Medicare reform legislation is presently under consideration by
Congress.
There also continue to be state legislative proposals that would impose
more limitations on government and private payments to providers of health
care services such as Vencor. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and
to make certain changes to private health care insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals. Regulatory changes in the Medicare and
Medicaid reimbursement systems applicable to the hospital division also are
being considered. There also are a number of legislative proposals including
cost caps and the establishment of Medicaid prospective payment systems for
nursing centers. Moreover, by repealing the Boren Amendment, the Budget Act
eases existing impediments on the states' ability to reduce their Medicaid
reimbursement levels.
There can be no assurance that the Budget Act and its progeny, LTAC PPS,
future health care legislation or other changes in the administration or
interpretation of governmental health care programs will not have a material
adverse effect on the liquidity, financial condition or results of operations
of the Company's operators which could have a material adverse effect on their
ability to make rental payments to the Company and a Material Adverse Effect
on the Company.
Implementation of Original Business Strategy
At the time of the 1998 Spin Off, the business strategy of the Company was
to diversify itself from its Vencor tenant concentration. However, past and
current conditions have impeded this strategy. Also, the terms of the Amended
Credit Agreement significantly limit the Company's ability to acquire or swap
assets from or with a third party. See "Note 4--Borrowing Arrangements" to the
Consolidated Financial Statements. Currently, the Company has no plans to
acquire additional assets. If the Company obtains the contractual ability to
acquire or swap assets under the terms of its Amended Credit Agreement, and if
the Final Plan is consummated and Vencor has stabilized its financial
condition, the Company intends to re-implement its original business strategy,
assuming it has the financial flexibility at that time to do so. Accordingly,
if the Company
57
does begin to pursue acquisitions or development of additional health care or
other properties, it may encounter certain risks and/or financing constraints.
Acquisitions entail general investment risk associated with any real estate
investments, including risks that investments will fail to perform in
accordance with expectations, the estimates of the cost of improvements
necessary for acquired properties will prove inaccurate, and the inability of
the lessee/operator to meet performance expectations. The Company does not
presently contemplate any development projects, although if the Company were
to pursue new development projects, such projects would be subject to numerous
risks, including risks of construction delays or cost overruns that may
increase project costs, new project commencement risks such as receipt of
zoning, occupancy and other required governmental approvals and permits and
the incurrence of development costs in connection with projects that are not
pursued to completion. The fact that the Company must distribute 95% (90% for
taxable years beginning after December 31, 2000) of its net taxable income in
order to maintain its qualification as a REIT may limit the Company's ability
to rely upon rental payments from its properties or subsequently acquired
properties to finance acquisitions or new developments. As a result, if debt
or equity financing is not available on acceptable terms, further acquisitions
or development activities might be curtailed or cash available for
distribution would be affected adversely.
The Company would compete for investment opportunities with entities that
have substantially greater financial resources than the Company. The Company's
ability to compete successfully for such opportunities is affected by many
factors, including the cost to the Company of obtaining debt and equity
capital at rates comparable to or better than its competitors. Competition
generally may reduce the number of suitable investment opportunities available
to the Company and increase the bargaining power of property owners seeking to
sell, thereby impeding the implementation of the Company's business strategy.
Third Party Tenant Defaults
Certain of the Company's tenants, in addition to Vencor, have filed for
protection under the Bankruptcy Code and/or are in default of their
obligations under their leases with the Company. See "Note 9--Commitments and
Contingencies" to the Consolidated Financial Statements. As a result of the
rejection of the Company's lease in bankruptcy or as a result of the Company's
enforcement of remedies under the applicable leases, possession of certain of
the affected facilities may be returned to the Company. If the Company is
unable to locate a satisfactory substitute tenant for any such facility, the
Company may elect to assume operations at the facility, sell the facility or
take certain other action relative to the facility. The Company's ability to
engage in certain of these transactions is restricted by the terms of the
Amended Credit Agreement and may require the consent of the "Required Lenders"
thereunder. There can be no assurance that such consent will be obtained. The
third party tenant defaults and bankruptcies may cause the Company's rental
revenues for the affected facilities to decrease and the Company's expenses
for the affected facilities to increase. However, the aggregate annual rental
revenue from the Company's tenants other than Vencor represents only 1.4% of
the Company's total annual rental revenue.
Risks Associated with REIT Status
Failure to Maintain Qualification
If the Company does not continue to qualify to be taxed as a REIT because
it cannot meet the applicable requirements for REIT qualification or because
it chooses not meet such requirements, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders will not be deductible
by the Company, nor will they be required to be made. To the extent of current
and accumulated earnings and profits, all distributions to stockholders will
be taxable as ordinary income, and, subject to certain limitations in the
Code, corporate stockholders may be eligible for the dividends received
deduction.
If the Company's election to be taxed as a REIT is revoked or terminated
(e.g., due to a failure to meet the REIT qualification tests), the Company
would be prohibited from re-electing REIT status for the four taxable
58
years following the year during which the Company ceased to qualify as a REIT,
unless certain relief provisions of the Code applied. It is not practical to
predict whether the Company would be entitled to such statutory relief.
Income and Asset Tests
The Company leases substantially all of its properties to Vencor and Vencor
is the primary source of the Company's rental revenues. Under the Final Plan,
if consummated, Ventas Realty would receive 1,498,500 shares of the New Vencor
Common Stock on the Vencor Effective Date as future rent. If the Final Plan is
consummated and the New Vencor Common Stock is issued to the Company, and if
as a result thereof the Company violates the 10% securities test, Vencor would
be a Related Party Tenant. As a Related Party Tenant, the rents from Vencor
would not qualify as "rents from real property" under the Code and the Company
would lose its REIT status because it likely would not be able to satisfy
either the 75% or the 95% gross income test.
In addition, if the Final Plan is consummated and the New Vencor Common
Stock is issued to the Company and the value of the New Vencor Common Stock
owned by the Company exceeds 5% of the value of the Company's total assets at
the end of the quarter in which the Company receives the New Vencor Common
Stock, the Company would violate the 5% asset test and the Company would lose
its REIT status unless the Company timely cures such violation under the
applicable provisions of the Code. There can be no assurance that relief for
such a violation would be available in all circumstances.
If the Final Plan is consummated and New Vencor Common Stock is issued to
the Company, the Company believes it will continue to be in compliance with
the 10% securities test and the 5% asset test. However, there can be no
assurance the Company is or will continue to be in compliance with either of
these tests. If the Company failed to satisfy either of these tests, the
Company would lose its REIT status, which would have a Material Adverse Effect
on the Company.
Inability to Maintain Required Distributions
The Company is required to make distributions to its stockholders to comply
with the 95% (90% for taxable years beginning after December 31, 2000)
distribution requirement and to avoid the nondeductible excise tax. See "--
Federal Income Tax Considerations--Annual Distribution Requirements." It is
expected that the Company's REIT taxable income will be less than its cash
flow due to the allowance of depreciation and other non-cash deductions in
computing REIT taxable income. However, this would be partially offset by the
value of the New Vencor Common Stock that would be received by the Company on
the Vencor Effective Date if the Final Plan is consummated and which would be
included in taxable income in the year received by the Company. The Company
anticipates that it generally will have sufficient cash or liquid assets to
enable it to satisfy the 95% (90% for taxable years beginning after December
31, 2000) distribution requirement. It is possible, however, that the Company,
from time to time, may not have sufficient cash or other liquid assets to meet
the 95% (90% for taxable years beginning after December 31, 2000) distribution
requirement or to distribute such greater amount as may be necessary to avoid
income and excise taxation, as a result of timing differences between (i) the
actual receipt of income (including the value of the New Vencor Common Stock
in the year received if the Final Plan is consummated and New Vencor Common
Stock is issued to the Company) and actual payment of deductible expenses and
(ii) the inclusion of such income and deduction of such expenses in arriving
at the Company's taxable income, or as a result of nondeductible expenses such
as principal amortization or repayments, or capital expenditures in excess of
noncash deductions. In the event that such timing differences or other cash
needs occur, the Company may find it necessary to borrow funds or to issue
equity securities (there being no assurance that it will be able to do so) or,
if possible, to pay taxable stock dividends, distribute other property or
securities (including the New Vencor Common Stock if the Final Plan is
consummated and New Vencor Common Stock is issued to the Company) or engage in
a transaction intended to enable it to meet the REIT distribution
requirements. The Company's ability to engage in certain of these transactions
is restricted by the terms of the Amended Credit Agreement. Any such
transaction would likely require the consent of the "Required Lenders" under
the Amended Credit Agreement, and there can be no assurance that such consent
would be obtained. In addition, the failure of Vencor to make rental payments
under the Master Leases or,
59
following the Vencor Effective Date if it occurs, under the Amended Master
Leases would impair materially the ability of the Company to make
distributions. In addition, the Company's ability to engage in certain of
these transactions is also restricted by registration requirements under the
Securities Act, the rules and regulations of the New York Stock Exchange and
the Securities and Exchange Commission and by other applicable laws, rules and
regulations. Consequently, there can be no assurance that the Company will be
able to make distributions at the required distribution rate or any other
rate. Although the Company currently intends to continue to qualify as a REIT
for the year ended December 31, 2000 and subsequent years, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail or elect not to continue to qualify as a REIT.
New Pond Village Mortgage Resident Bonds
The Company has a third party obligation that arises out of certain bonds
that were, and may continue to be, issued by the Company to residents of an
assisted living facility that is owned by the Company, and leased to and
operated by Atria. Proceeds from the bonds are paid to and utilized by Atria.
The obligation to repay the bonds is secured by a certain Mortgage and Trust
Indenture (the "Atria Mortgage") that encumbers (among other property) the
assisted living facility. The aggregate principal amount of the indebtedness
evidenced by the bonds is currently approximately $34.0 million. Pursuant to a
series of documents and instruments executed in connection with the Atria Spin
Off, including the lease by and between Atria and the Company (the "Atria
Lease"), Atria has assumed and agreed to repay the indebtedness evidenced by
the bonds and has agreed to indemnify and hold the Company harmless from and
against all amounts the Company may be obligated to pay under the Atria
Mortgage, including the obligation to repay the bonds. The Company may remain
the primary obligor under the bonds and the Atria Mortgage. If Atria is unable
to or does not satisfy these obligations, the Company may be liable for such
obligations. There can be no assurance that Atria will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Atria Mortgage and the bonds or that Atria will continue to honor its
obligations under the Atria Mortgage and the bonds. If Atria does not perform
or otherwise honor these obligations, the Company may be liable for the
payment and performance of these obligations. However, such failure would
constitute an Event of Default under the Atria Lease entitling the Company to
terminate the Atria Lease, repossess the property, and/or exercise all other
available remedies under the Atria Lease, subject to any defenses Atria may
have and also subject to laws relating to or affecting creditors rights or
general equitable principles. The payment or performance of these obligations
by the Company could have a Material Adverse Effect on the Company. The
Company is currently engaged in efforts to have the Company released from the
liability under the bonds and the Atria Mortgage, or to cause Atria to provide
additional collateral to secure Atria's obligations regarding the bonds. There
can be no assurance, however, that the Company will be successful in its
attempts to either be released from this liability or to procure such
additional security.
Potential Liabilities Due to Fraudulent Transfer Considerations, Legal
Dividend Requirements and Other Claims
The Company
The 1998 Spin Off, including the simultaneous distribution of the Vencor
common stock to the Ventas stockholders, is subject to review under fraudulent
conveyance laws. Under these laws, if a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee or debtor-in-
possession in bankruptcy of the Company or any of its respective subsidiaries)
were to determine that, as of the 1998 Spin Off, the Company did not receive
fair consideration or reasonably equivalent value for distributing the stock
distributed in the 1998 Spin Off and, at the time of the 1998 Spin Off, the
Company or any of its subsidiaries (i) was insolvent or was rendered
insolvent, (ii) had unreasonably small capital with which to carry on its
business and all businesses in which it intended to engage, or (iii) intended
to incur, or believed it would incur, debts beyond its ability to repay such
debts as they would mature, then such court could among other things order the
holders of the stock distributed in the 1998 Spin Off to return the value of
the stock and any dividends paid thereon and/or invalidate, in whole or in
part, the 1998 Spin Off as a fraudulent conveyance.
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Vencor
Although Vencor has not formally asserted a claim, Vencor's legal counsel
has raised questions relating to potential fraudulent conveyance or obligation
issues and other claims relating to the 1998 Spin Off. At the time of the 1998
Spin Off, the Company obtained an opinion from an independent third party that
addressed issues of solvency and adequate capitalization. Nevertheless, if a
fraudulent conveyance or obligation claim or other claim is ultimately
asserted by Vencor, its creditors, or others, the ultimate outcome of any such
claim cannot presently be determined. The Company intends to defend these
claims vigorously if they are asserted in a court, arbitration or mediation
proceeding. If these claims were to prevail, they would have a Material
Adverse Effect on the Company. See "Note 8--Transactions with Vencor" and
"Note 11--Litigation" to the Consolidated Financial Statements. If the Final
Plan is consummated, these claims would be released by Vencor and its
creditors.
Legal Dividend Requirements
In addition, the 1998 Spin Off is subject to review under state corporate
distribution and dividend statutes. Under Delaware law, a corporation may not
pay a dividend to its stockholders if (i) the net assets of the corporation do
not exceed its capital, unless the amount proposed to be paid as a dividend is
less than the corporation's net profits for the current and/or preceding
fiscal year in which the dividend is to be paid, or (ii) after giving effect
to the dividend, the capital of the corporation is less than the aggregate
amount allocable to all classes of its stock.
The Company believes that (i) the Company and each of its subsidiaries were
solvent (in accordance with the foregoing definitions) at the time of the 1998
Spin Off, were able to repay their debts as they matured following the 1998
Spin Off and had sufficient capital to carry on their respective businesses
and (ii) the 1998 Spin Off was consummated entirely in compliance with
Delaware law. There is no certainty, however, that a court would reach the
same conclusions in determining whether the Company was insolvent at the time
of, or after giving effect to, the 1998 Spin Off or whether lawful funds were
available for the 1998 Spin Off.
The Spin Agreements
The Spin Agreements provide for the allocation, immediately prior to the
1998 Spin Off, of certain debt of the Company. Further, pursuant to the Spin
Agreements, from and after the date of the 1998 Spin Off, each of the Company
and Vencor is responsible for the debts, liabilities and other obligations
related to the businesses which it owns and operates following the
consummation of the 1998 Spin Off. It is possible that a court would disregard
the allocation agreed to among the parties and require the Company or Vencor
to assume responsibility for obligations allocated to the other, particularly
if the other were to refuse or to be unable to pay or perform the subject
allocated obligations. See "--Effects of Bankruptcy Proceedings," and "Note
11--Litigation" to the Consolidated Financial Statements.
Tax Claims
Following the Company's REIT election, the Company is deemed to be a former
C corporation for income tax purposes. As such, the Company potentially
remains subject to corporate level taxes for any asset dispositions occurring
between January 1, 1999 and December 31, 2008. See "Note 7--Income Taxes" to
the Consolidated Financial Statements. The Internal Revenue Service is
currently reviewing the federal income tax returns for tax years ending
December 31, 1997 and 1998 of the Company (which then operated under the name
Vencor). The income tax returns for the Company for subsequent years are also
subject to a review. There can be no assurances as to the ultimate outcome of
these matters or whether such outcome will have a Material Adverse Effect on
the Company. However, the resulting tax liabilities, if any, for the tax years
ended December 31, 1997 and 1998 will be satisfied first from the loss of net
operating loss ("NOL") carryforwards (including the NOL carryforwards that
were utilized to offset the Company's federal income tax liability for 1999
and 2000), and if the tax liabilities exceed the amount of NOL carryforwards,
then from the amounts held by the Company in the
61
segregated accounts under the Tax Stipulation provided the Tax Stipulation is
then in effect, or, if the Final Plan has been consummated, from the escrowed
amounts under the Tax Refund Escrow Agreement. To the extent such NOL
carryforwards and the available amounts under either the Tax Stipulation, if
it is then in effect, or the Tax Refund Escrow Agreement, if the Final Plan
has been consummated, are not sufficient to satisfy such liabilities, Vencor
has indemnified the Company for certain but not all of these tax liabilities
under the Tax Allocation Agreement. There can be no assurance that the NOL
carryforwards and the amounts, if any, under the Tax Stipulation or the Tax
Refund Escrow Agreement will be sufficient to satisfy these liabilities or
that Vencor has any obligation to indemnify the Company for particular
liabilities or that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its indemnity obligations under the Tax
Allocation Agreement or that Vencor will continue to honor such
indemnification obligations.
Interest Rate Swap Agreement
The terms of the Company's interest rate swap agreement require that the
Company make a cash payment or otherwise post collateral to the counterparty
if the fair value loss to the Company exceeds certain levels (the "threshold
levels"). See "Note 4--Borrowing Arrangements" to the Consolidated Financial
Statements. The threshold levels vary based on the relationship between the
Company's debt obligations and the tangible fair value of its assets as
defined in the Bank Credit Agreement. Under the interest rate swap agreement,
if collateral must be posted, the amount of such collateral must equal the
difference between the fair value unrealized loss of the interest rate swap
agreement at the time of such determination and the threshold amount. If the
Company posts collateral in accordance with the interest rate swap agreement,
the Company's liquidity and access to financing could be adversely impacted.
There can be no assurance that the Company will have sufficient assets,
income and access to financing to enable it to post collateral if required to
do so under the interest rate swap agreement. The Company's failure to post
collateral as and in accordance with the terms of the interest rate swap
agreement could have a Material Adverse Effect on the Company.
Item 2. Properties
The Company believes that it has a diversified portfolio of health care
facilities in terms of geography and the health care services provided at such
facilities. The Company believes that the geographic diversity of the
properties makes the portfolio less susceptible to adverse changes in state
regulation and regional economic downturns. The long-term acute care hospitals
owned by the Company primarily provide long-term acute care to medically
complex, chronically ill patients, covering approximately 4,093 beds in 45
hospitals as of December 31, 2000. The nursing facilities owned by the Company
are leading providers of rehabilitation services, including physical,
occupational and speech therapies, and care for patients with Alzheimer's
disease, covering approximately 27,952 beds in 216 nursing facilities as of
December 31, 2000. The personal care facilities owned by the Company provide
services including supporting living services, neurorehabilitation,
neurobehavioral management and vocational programs, covering approximately 136
beds in eight centers as of December 31, 2000.
62
The following tables set forth information for each of the Master Leases
and the facilities leased thereunder. Pursuant to the terms of the Amended
Credit Agreement, the Company and Ventas Realty granted a mortgage on all of
the facilities set forth in the following tables effective February 28, 2000.
The chart also includes under the heading "Other Facilities" those properties
under leases with non-Vencor lessees:
Number of Number of Number of
Number of Skilled Skilled Number of Personal
Hospital Licensed Nursing Nursing Personal Care
Facilities Hospital Facilities Facility Care Facility
("H") Beds ("SNF") Beds Facilities Beds
---------- -------- ---------- --------- ---------- ---------
Master Lease 1.......... 17 1,532 83 10,469 -- --
Master Lease 2.......... 9 968 45 5,846 -- --
Master Lease 3.......... 10 768 38 4,919 -- --
Master Lease 4.......... 9 825 44 5,762 -- --
--- ----- --- ------ --- ---
Total All Vencor
Facilities............. 45 4,093 210 26,996
Other Facilities........ -- -- 6 956 8 136
--- ----- --- ------ --- ---
Total All Facilities.... 45 4,093 216 27,952 8 136
=== ===== === ====== === ===
Master Lease 1
Facility
Facility Name City State Type
------------- ---- ----- --------
Vencor Hospital--Phoenix........................ Phoenix AZ H
Valley Healthcare & Rehabilitation Center....... Tucson AZ SNF
Sonoran Rehabilitation & Care Center............ Phoenix AZ SNF
Vencor Hospital--San Leandro.................... San Leandro CA H
Vencor Hospital--Orange County.................. Westminster CA H
Vencor Hospital--San Diego...................... San Diego CA H
Recovery Inn of Menlo Park...................... Menlo Park CA H
Nob Hill Healthcare Center...................... San Francisco CA SNF
Canyonwood Nursing & Rehabilitation Center...... Redding CA SNF
Lawton Healthcare Center........................ San Francisco CA SNF
La Veta Healthcare Center(a).................... Orange CA SNF
Bay View Nursing & Rehabilitation Center........ Alameda CA SNF
Aurora Care Center.............................. Aurora CO SNF
Andrew House Healthcare......................... New Britain CT SNF
Nutmeg Pavilion Healthcare...................... New London CT SNF
Vencor Hospital--Coral Gables................... Coral Gables FL H
Vencor Hospital--North Florida.................. Green Cove Spr. FL H
East Manor Medical Care Center.................. Sarasota FL SNF
Savannah Specialty Care Center.................. Savannah GA SNF
Cascade Care Center............................. Caldwell ID SNF
Lewiston Rehabilitation and Care Center......... Lewiston ID SNF
Mountain Valley Care and Rehabilitation......... Kellogg ID SNF
Vencor Hospital--Chicago North.................. Chicago IL H
Vencor Hospital--Northlake...................... Northlake IL H
Vencor Hospital--LaGrange....................... LaGrange IN H
Vencor Hospital--Indianapolis................... Indianapolis IN H
Royal Oaks Healthcare & Rehabilitation Center... Terre Haute IN SNF
Southwood Health & Rehabilitation Center........ Terre Haute IN SNF
Columbia Healthcare Facility.................... Evansville IN SNF
Muncie Health Care & Rehabilitation............. Muncie IN SNF
63
Facility
Facility Name City State Type
------------- ---- ----- --------
Westview Nursing & Rehabilitation Center...... Bedford IN SNF
Vencor Hospital--Louisville................... Louisville KY H
Winchester Centre for Health/Rehabilitation... Winchester KY SNF
Lexington Centre for Health & Rehabilitation.. Lexington KY SNF
Northfield Centre for Health &
Rehabilitation............................... Louisville KY SNF
Laurel Ridge Rehabilitation & Nursing Center.. Jamaica Plain MA SNF
Blue Hills Alzheimer's Care Center............ Stoughton MA SNF
Country Manor Rehabilitation & Nursing
Center....................................... Newburyport MA SNF
Hammersmith House Nursing Care Center......... Saugus MA SNF
Timberlyn Heights Nursing & Alz. Center....... Great Barrington MA SNF
Briarwood Health Care Nursing Ctr............. Needham MA SNF
Westridge Healthcare Center................... Marlborough MA SNF
Bolton Manor Nursing Home..................... Marlborough MA SNF
Quincy Rehabilitation & Nursing Center........ Quincy MA SNF
West Roxbury Manor............................ West Roxbury MA SNF
Eagle Pond Rehabilitation & Living Center..... South Dennis MA SNF
Blueberry Hill Healthcare..................... Beverly MA SNF
Colony House Nursing & Rehabilitation Center.. Abington MA SNF
Walden Rehabilitation & Nursing Center........ Concord MA SNF
Harrington House Nursing & Rehabilitation
Center....................................... Walpole MA SNF
Norway Rehabilitation & Living Center......... Norway ME SNF
Shore Village Rehabilitation & Nursing
Center....................................... Rockland ME SNF
Brentwood Rehabilitation & Nursing Center..... Yarmouth ME SNF
Fieldcrest Manor Nursing Home................. Waldoboro ME SNF
Vencor Hospital--Minneapolis.................. Golden Valley MN H
Vencor Hospital--St. Louis.................... St. Louis MO H
Park Place Health Care Center................. Great Falls MT SNF
Parkview Acres Care & Rehabilitation Center... Dillon MT SNF
Sunnybrook Alzheimer's & HC Spec.............. Raleigh NC SNF
Blue Ridge Rehabilitation & Healthcare
Center....................................... Asheville NC SNF
Cypress Pointe Rehabilitation & HC Center..... Wilmington NC SNF
Winston-Salem Rehabilitation & HC Center...... Winston-Salem NC SNF
Silas Creek Manor............................. Winston-Salem NC SNF
Guardian Care of Roanoke Rapids............... Roanoke Rapids NC SNF
Rehabilitation & Nursing Center of Monroe..... Monroe NC SNF
Rehabilitation & Health Center of Gastonia.... Gastonia NC SNF
Chapel Hill Rehabilitation & Healthcare
Center....................................... Chapel Hill NC SNF
Dover Rehabilitation & Living Center.......... Dover NH SNF
Hanover Terrace Healthcare.................... Hanover NH SNF
Las Vegas Healthcare & Rehabilitation Center.. Las Vegas NV SNF
Franklin Woods Health Care Center............. Columbus OH SNF
Winchester Place Nursing & Rehabilitation
Center....................................... Canal Winchester OH SNF
Minerva Park Nursing & Rehabilitation Center.. Columbus OH SNF
Coshocton Health & Rehabilitation Center...... Coshocton OH SNF
Lebanon Country Manor......................... Lebanon OH SNF
Vencor Hospital--Oklahoma City................ Oklahoma City OK H
Sunnyside Care Center......................... Salem OR SNF
Vencor Hospital--Pittsburgh................... Oakdale PA H
Vencor Hospital--Chattanooga.................. Chattanooga TN H
Madison Healthcare & Rehabilitation Center.... Madison TN SNF
64
Facility
Facility Name City State Type
------------- ---- ----- --------
Masters Health Care Center.................... Algood TN SNF
Wasatch Care Center........................... Ogden UT SNF
St. George Care and Rehabilitation Center..... St. George UT SNF
Federal Heights Rehabilitation & Nursing
Center....................................... Salt Lake City UT SNF
Nansemond Pointe Rehabilitation & HC Center... Suffolk VA SNF
River Pointe Rehabilitation & Healthcare
Center....................................... Virginia Beach VA SNF
Arden Rehabilitation & Healthcare Ctr......... Seattle WA SNF
Northwest Continuum Care Center............... Longview WA SNF
Rainier Vista Care Center..................... Puyallup WA SNF
Vencor of Vancouver HC & Rehabilitation....... Vancouver WA SNF
Heritage Health & Rehabilitation Center....... Vancouver WA SNF
Queen Anne Healthcare......................... Seattle WA SNF
Colony Oaks Care Center....................... Appleton WI SNF
North Ridge Med. & Rehabilitation Center...... Manitowoc WI SNF
Family Heritage Med. & Rehabilitation Center.. Wisconsin Rapids WI SNF
Sheridan Medical Complex...................... Kenosha WI SNF
Woodstock Health & Rehabilitation Center...... Kenosha WI SNF
Mountain Towers Healthcare & Rehabilitation... Cheyenne WY SNF
Wind River Healthcare & Rehabilitation Ctr.... Riverton WY SNF
Sage View Care Center......................... Rock Springs WY SNF
Master Lease 2
Facility
Facility Name City State Type
------------- ---- ----- --------
Rehabilitation & Healthcare Center of
Birmingham(a)................................ Birmingham AL SNF
Desert Life Rehabilitation & Care Center...... Tucson AZ SNF
Vencor Hospital--Ontario...................... Ontario CA H
Magnolia Gardens Care Center.................. Burlingame CA SNF
Maywood Acres Healthcare Center............... Oxnard CA SNF
Cherry Hills Health Care Center............... Englewood CO SNF
Hamilton Rehabilitation & Healthcare Center... Norwich CT SNF
Homestead Health Center....................... Stamford CT SNF
Vencor Hospital--St. Petersburg............... St. Petersburg FL H
Vencor Hospital--Central Tampa................ Tampa FL H
Titusville Rehabilitation & Nursing Center.... Titusville FL SNF
Bay Pointe Nursing Pavilion................... St. Petersburg FL SNF
Rehabilitation & Healthcare Center of Tampa... Tampa FL SNF
Rehabilitation & Health Center of Cape Coral.. Cape Coral FL SNF
Casa Mora Rehabilitation & Ext Care(a)........ Bradenton FL SNF
Lafayette Nursing & Rehabilitation Center..... Fayetteville GA SNF
Hillcrest Rehabilitation Care Center.......... Boise ID SNF
Nampa Care Center............................. Nampa ID SNF
Weiser Rehabilitation and Care Center......... Weiser ID SNF
Vencor Hospital--Sycamore..................... Sycamore IL H
Rolling Hills Health Care Center.............. New Albany IN SNF
Windsor Estates Health & Rehabilitation Ctr... Kokomo IN SNF
Parkwood Health Care Center................... Lebanon IN SNF
Columbus Health & Rehabilitation Center....... Columbus IN SNF
Oakview Nursing & Rehabilitation Center....... Calvert City KY SNF
65
Facility
Facility Name City State Type
------------- ---- ----- --------
Maple Manor Healthcare Center................... Greenville KY SNF
Crawford Skilled Nursing & Rehabilitation
Center......................................... Fall River MA SNF
Hallmark Nursing & Rehabilitation Center........ New Bedford MA SNF
Hillcrest Nursing Home.......................... Fitchburg MA SNF
Country Gardens Sk. Nursing & Rehabilitation.... Swansea MA SNF
Franklin Sk. Nursing & Rehabilitation Center.... Franklin MA SNF
Eastside Rehabilitation and Living Center....... Bangor ME SNF
Kennebunk Nursing Center........................ Kennebunk ME SNF
Vencor Hospital--Metro Detroit.................. Detroit MI H
Vencor Hospital--Kansas City.................... Kansas City MO H
LaSalle Healthcare Center....................... Durham NC SNF
Guardian Care of Henderson...................... Henderson NC SNF
Guardian Care of Kinston........................ Kinston NC SNF
Guardian Care of Elizabeth City................. Elizabeth City NC SNF
Greenbriar Terrace Healthcare(a)................ Nashua NH SNF
Torrey Pines Care Center........................ Las Vegas NV SNF
West Lafayette Rehabilitation & Nursing Ctr..... West Lafayette OH SNF
Cambridge Health & Rehabilitation Center........ Cambridge OH SNF
Health Havens Nursing & Rehabilitation Center... E. Providence RI SNF
Primacy Healthcare & Rehabilitation Center...... Memphis TN SNF
Vencor Hospital--Ft. Worth Southwest............ Ft. Worth TX H
Vencor Hospital--Houston Northwest.............. Houston TX H
Vencor Hospital--Ft. Worth West................. Ft. Worth TX H
Wasatch Valley Rehabilitation................... Salt Lake City UT SNF
Harbour Pointe Med. & Rehabilitation Ctr........ Norfolk VA SNF
Bay Pointe Medical & Rehabilitation Centre...... Virginia Beach VA SNF
Lakewood Healthcare Center...................... Lakewood WA SNF
San Luis Medical & Rehabilitation Center........ Greenbay WI SNF
Colonial Manor Medical & Rehabilitation Center.. Wausau WI SNF
Master Lease 3
Facility
Facility Name City State Type
------------- ---- ----- --------
Rehabilitation & Healthcare Center of Mobile(a)... Mobile AL SNF
Villa Campana Health Center....................... Tucson AZ SNF
THC--Orange County................................ Orange County CA H
Californian Care Center........................... Bakersfield CA SNF
Alta Vista Healthcare Center...................... Riverside CA SNF
Brighton Care Center.............................. Brighton CO SNF
Camelot Nursing & Rehabilitation Center........... New London CT SNF
Parkway Pavilion Healthcare....................... Enfield CT SNF
Vencor Hospital--Hollywood........................ Hollywood FL H
Healthcare & Rehabilitation Ctr of Sanford........ Sanford FL SNF
Carrollwood Care Center........................... Tampa FL SNF
Windsor Woods Convalescent Center................. Hudson FL SNF
Highland Pines Rehabilitation Center.............. Clearwater FL SNF
Savannah Rehabilitation & Nursing Center.......... Savannah GA SNF
Specialty Care of Marietta........................ Marietta GA SNF
Emmett Rehabilitation and Healthcare.............. Emmett ID SNF
66
Facility
Facility Name City State Type
------------- ---- ----- --------
Meadowvale Health & Rehabilitation Center..... Bluffton IN SNF
Wedgewood Healthcare Center................... Clarksville IN SNF
Cedars of Lebanon Nursing Center.............. Lebanon KY SNF
Riverside Manor Health Care................... Calhoun KY SNF
Danville Centre for Health & Rehabilitation... Danville KY SNF
Vencor Hosp--Boston Northshore................ Peabody MA H
Vencor Hospital--Boston....................... Boston MA H
Presentation Nursing & Rehabilitation Center.. Brighton MA SNF
Sachem Nursing & Rehabilitation Center........ East Bridgewater MA SNF
Newton and Wellesley Alzheimer Center......... Wellesley MA SNF
River Terrace................................. Lancaster MA SNF
Augusta Rehabilitation Center................. Augusta ME SNF
Brewer Rehabilitation & Living Center......... Brewer ME SNF
Westgate Manor................................ Bangor ME SNF
Vencor Hospital--Detroit...................... Detroit MI H
Vencor Hospital--Greensboro................... Greensboro NC H
Pettigrew Rehabilitation & Healthcare Center.. Durham NC SNF
Raleigh Rehabilitation & Healthcare Center.... Raleigh NC SNF
Lincoln Nursing Center(a)..................... Lincoln NC SNF
Guardian Care of Zebulon...................... Zebulon NC SNF
THC--Las Vegas Hospital....................... Las Vegas NV H
Medford Rehab & Healthcare Centre............. Medford OR SNF
Wyomissing Nursing & Rehabilitation Center.... Reading PA SNF
Cordova Rehabilitation & Nursing Center....... Cordova TN SNF
Vencor Hospital--San Antonio.................. San Antonio TX H
Vencor Hospital--Mansfield.................... Mansfield TX H
Crosslands Rehabilitation & Health Care Ctr... Sandy UT SNF
Edmonds Rehabilitation & Healthcare Center.... Edmonds WA SNF
Vencor Hospital--Mt. Carmel................... Mt. Carmel WI H
Vallhaven Care Center......................... Neenah WI SNF
Mt. Carmel Medical & Rehabilitation Center.... Burlington WI SNF
Mt. Carmel Medical & Rehabilitation Center.... Milwaukee WI SNF
Master Lease 4 And Corydon Lease
Facility
Facility Name City State Type
------------- ---- ----- --------
Rehabilitation & Healthc. Center of
Huntsville................................... Huntsville AL SNF
Vencor Hospital--Tucson....................... Tucson AZ H
Kachina Point Health Care & Rehabilitation.... Sedona AZ SNF
Valley Gardens HC & Rehabilitation............ Stockton CA SNF
Village Square Nursing & Rehabilitation
Center....................................... San Marcos CA SNF
Vencor Hospital--Denver....................... Denver CO H
Castle Garden Care Center..................... Northglenn CO SNF
Windsor Rehabilitation & Healthcare Center.... Windsor CT SNF
Courtland Gardens Health Center, Inc.......... Stamford CT SNF
Vencor Hospital--Ft. Lauderdale............... Ft. Lauderdale FL H
Colonial Oaks Rehabilitation Center--Ft.
Myers........................................ Ft. Meyers FL SNF
Evergreen Woods Health & Rehabilitation....... Springhill FL SNF
North Broward Rehabilitation & Nursing
Center....................................... Pompano Beach FL SNF
Pompano Rehabilitation/Nursing Center......... Pompano Beach FL SNF
67
Facility
Facility Name City State Type
------------- ---- ----- --------
Abbey Rehabilitation & Nsg. Center............ St. Petersburg FL SNF
Tucker Nursing Center......................... Tucker GA SNF
Moscow Care Center............................ Moscow ID SNF
Vencor Hospital--Lake Shore................... Chicago IL H
Valley View Health Care Center................ Elkhart IN SNF
Wildwood Healthcare Center.................... Indianapolis IN SNF
Bremen Health Care Center..................... Bremen IN SNF
Rosewood Health Care Center................... Bowling Green KY SNF
Hillcrest Health Care Center.................. Owensboro KY SNF
Woodland Terrace Health Care Fac.............. Elizabethtown KY SNF
Harrodsburg Health Care Center................ Harrodsburg KY SNF
Vencor Hospital--New Orleans.................. New Orleans LA H
Brigham Manor Nursing & Rehabilitation Ctr.... Newburyport MA SNF
Oakwood Rehabilitation & Nursing Center....... Webster MA SNF
Star of David Nursing & Rehabilitation/Alz
Center....................................... West Roxbury MA SNF
Brittany Healthcare Center.................... Natick MA SNF
Den-Mar Rehabilitation & Nursing Center(a).... Rockport MA SNF
Embassy House Sk. Nursing & Rehabilitation.... Brockton MA SNF
Great Barrington Rehabilitation & Nursing
Center....................................... Great Barrington MA SNF
Winship Green Nursing Center.................. Bath ME SNF
Rose Manor Health Care Center................. Durham NC SNF
Guardian Care of Rocky Mount.(a).............. Rocky Mount NC SNF
Homestead Health Care & Rehabilitation Ctr.... Lincoln NE SNF
Vencor Hospital--Albuquerque(a)............... Albuquerque NM H
Chillicothe Nursing & Rehabilitation Center... Chillicothe OH SNF
Pickerington Nursing & Rehabilitation Center.. Pickerington OH SNF
Logan Health Care Center...................... Logan OH SNF
Bridgepark Center for Rehabilitation & Nursing
Sv........................................... Akron OH SNF
Vencor Hospital--Philadelphia................. Philadelphia PA H
Oak Hill Nursing & Rehabilitation Center...... Pawtucket RI SNF
Vencor Hospital--Houston(a)................... Houston TX H
San Pedro Manor............................... San Antonio TX SNF
Vencor Hospital--Arlington, VA................ Arlington VA H
Birchwood Terrace Healthcare(a)............... Burlington VT SNF
Bellingham Health Care & Rehabilitation Svc... Bellingham WA SNF
Eastview Medical & Rehabilitation Center...... Antigo WI SNF
Kennedy Park Medical & Rehabilitation Center.. Schofield WI SNF
South Central Wyoming HC. & Rehabilitation.... Rawlins WY SNF
Vencor Corydon................................ Corydon IN SNF
- --------
(a) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of the ground lease, the improvements revert to
the landlord.
68
Other Facilities
Facility Name City State Facility Type
------------- ---- ----- -------------
Birchwood Care Center............................ Marne MI SNF
Clara Barton Terrace............................. Flint MI SNF
Autumnwood Manor................................. Lansing MI SNF
Bear Creek Rehabilitation Center................. Rochester MN SNF
Shadow Mountain Convalescent Center.............. Las Vegas NV SNF
Marietta Convalescent Center..................... Marietta OH SNF
Tangram--8 sites................................. San Marcos TX Personal Care
Under the Final Plan, if consummated, the Company would consent to the
closure by Vencor of the Company's hospital known as Vencor Hospital Mt.
Carmel in Milwaukee, Wisconsin and the conversion of the hospital beds to
nursing facility beds at the Company's adjoining nursing facility known as Mt.
Carmel Nursing and Rehabilitation Center. Vencor would be required to continue
to pay rent for Vencor Hospital Mt. Carmel and to reimburse the Company for
any diminution in value for the loss of the licensed beds at Vencor Hospital
Mt. Carmel upon the expiration of the lease term applicable to Vencor Hospital
Mt. Carmel. On the Vencor Effective Date, should it occur, Vencor Hospital Mt.
Carmel would be removed from the list of the Company's facilities.
At the time of the 1998 Spin Off, the Company was the lessee of a nursing
facility known as Hacienda Rehabilitation and Care Center in Sierra Vista,
Arizona (the "Hacienda Facility") under a lease agreement with an option to
purchase in favor of the Company. The Company retained the leasehold rights to
the Hacienda Facility in the 1998 Spin Off and subleased the facility to
Vencor under one of the Master Leases. The Company exercised the option to
purchase the Hacienda Facility prior to the 1998 Spin Off but was unable to
consummate the purchase due to a dispute with the landlord/owner of the
Hacienda Facility. Under the Final Plan, if consummated, the Hacienda Facility
would be removed from the applicable Master Lease and Vencor's sublease
obligations would be terminated as of the Vencor Effective Date.
Item 3. Legal Proceedings
Reference is made to "Note 11--Litigation" to the Consolidated Financial
Statements for a description of certain Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
69
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is listed and traded on the New York Stock Exchange
("NYSE") under the ticker symbol of VTR. As of the close of business on March
30, 2001, there were 68,698,807 shares of Common Stock outstanding and
approximately 3,450 stockholders of record. The prices in the table below for
the calendar quarters indicated since the first quarter of 1999 represent the
high and low sales prices for the Common Stock as reported on the NYSE. Cash
dividends of $0.39 per share were paid in the first quarter of 1999, $0.62 per
share were paid in the third quarter of 2000 and $0.29 per share were paid in
the first quarter of 2001 for the 2000 tax year. No other cash dividends were
paid on the Common Stock during such periods.
Sales Price
of Common
Stock
-------------
Calendar Quarter High Low
- ---------------- ------ ------
First Quarter 1999................................................ 13.75 4.625
Second Quarter 1999............................................... 6.0625 3.1875
Third Quarter 1999................................................ 5.500 3.375
Fourth Quarter 1999............................................... 5.375 3.6875
First Quarter 2000................................................ 4.25 2.6875
Second Quarter 2000............................................... 4.25 3.125
Third Quarter 2000................................................ 5.8125 3.25
Fourth Quarter 2000............................................... 5.75 4.3125
First Quarter 2001................................................ 8.62 5.5625
The Company declared its first dividend of $0.39 per share on January 13,
1999 which dividend was paid on February 17, 1999 to stockholders of record on
January 29, 1999. The Company declared a dividend of $0.62 per share on
September 8, 2000, which dividend was paid in cash on September 28, 2000 to
shareholders of record on September 18, 2000. The $0.39 per share dividend
paid on February 17, 1999, when combined with the $0.62 per share dividend
paid on September 28, 2000, represents 95% of the Company's 1999 taxable
income reported on its 1999 federal tax return. The Company declared a
dividend of $0.29 per share on December 20, 2000, which dividend was paid on
January 15, 2001 to shareholders of record on December 30, 2000. The Company
believes that the $0.29 per share dividend paid on January 15, 2001 represents
95% of the Company's estimated 2000 taxable income. The Company currently
intends to continue to make distributions to its stockholders and anticipates
that its distributions in 2001 with respect to 2001 will be equal to
approximately 90% of taxable income for fiscal year 2001 (the "Distribution
Policy"). If the Company should be relieved of the restriction in the Amended
Credit Agreement limiting dividends to 90% of taxable income, the Company
intends to reevaluate the Distribution Policy. See "Business--Federal Income
Tax Considerations--Annual Distribution Requirements" and "Note 4--Borrowing
Arrangements" to the Consolidated Financial Statements. The Company currently
has not determined when any such distributions would be made, although the
Company currently intends to initiate and maintain the payment of a quarterly
dividend and pay the minimum required distribution for 2001 on or prior to
January 31, 2002. There can be no assurance that the Company will maintain its
Distribution Policy or that the Distribution Policy will not change. See
"Business--Federal Income Tax Considerations--Annual Distribution
Requirements" and "--Risk Factors."
The Company's Distribution Policy and the frequency and amounts of any
dividends could be affected by an adverse change in the results of operations
of the Company, an adverse change in economic conditions affecting the
Company's business or the business of Vencor and the other operators of its
properties or adverse changes in market and competitive factors that the
Company's Board deems relevant in setting a distribution policy, and
limitations placed on the payment of distributions in the Company's Amended
Credit Agreement. See "Note 4--Borrowing Arrangements" to the Consolidated
Financial Statements. In particular, any nonpayment of rent by Vencor under
the Master Leases, or any expectation that such nonpayment will occur in the
future, would have a material impact on the amount of the Company's
distributions. Subject to restrictions under the Company's Amended Credit
Agreement and other obligations, the Board, in its sole discretion, will
determine the actual distribution amount and timing and the character of the
asset to be distributed.
70
Although the Company currently believes that it has met the requirements to
continue to qualify as a REIT for the year ended December 31, 2000 and
although the Company intends to continue to qualify as a REIT for the year
ending December 31, 2001 and subsequent tax years, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail or elect not to continue to qualify as a REIT. The Company will be
required to make timely distributions to its stockholders to comply with the
95% (90% for taxable years beginning after December 31, 2000) distribution
requirement, to maintain REIT status and to avoid the nondeductible excise
tax. See "Business--Federal Income Tax Considerations--Annual Distribution
Requirements." It is possible, however, that the Company, from time to time,
may not have sufficient cash or other liquid assets to meet the 95% (90% for
taxable years beginning after December 31, 2000) distribution requirement or
to distribute such greater amount as may be necessary to avoid income and
excise taxation. See "Business--Risk Factors--Risks Associated with REIT
Status--Inability to Maintain Required Distributions" and "Business--Federal
Income Tax Considerations--Annual Distribution Requirements."
On February 24, 2000, the Company granted then members of the Board of
Directors (a) options to purchase an aggregate of 26,000 shares of Common
Stock of the Company at an exercise price of $3.3125 per share of Common
Stock, the closing price of the Common Stock on the date of grant of the
options, and (b) 97,357 shares of restricted Common Stock of the Company.
Fifty percent of the options and restricted shares vested on the grant date
and the remaining 50% vest on the first anniversary date of the grant date.
The options may be exercised for cash by surrendering options or common stock
with a value equal to the exercise price at any time prior to the tenth
anniversary of the grant. There were no proceeds to the Company from the
issuance of the options or the restricted stock. Based upon the number of
offerees and the nature of their relationship with the Company, the options
and the restricted stock were issued without registration under the Securities
Act, in reliance on an exemption contained in Section 4 (2) of the Securities
Act.
71
Item 6. Selected Financial Data
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed under Item 14 (c) and are included in this Annual Report on Form 10-
K.
For the
Years ended period from
December 31, May 1, 1998 to
------------------- December 31,
2000 1999 1998
-------- --------- --------------
($s in thousands,
except per share amounts)
Operating Data
Rental Income............................. $232,841 $ 228,600 $149,933
General and administrative and other
expenses................................. 20,857 21,566 5,697
United States Settlement.................. 96,493 -- --
Interest expense.......................... 95,319 88,753 59,428
Loss on uncollectible amounts due from
tenants.................................. 48,328 34,418 --
Net income (loss) before extraordinary
charge................................... (61,245) 42,535 34,809
Net income (loss)......................... (65,452) 42,535 26,758
Per Share Data
Net income (loss) per common share before
extraordinary charge, Basic.............. $ (0.90) $ 0.63 $ 0.51
Net income (loss) per common share,
Basic.................................... (0.96) 0.63 0.39
Net income (loss) per common share,
Diluted.................................. (0.96) 0.63 0.39
Dividends declared per common share....... 0.91 0.39 --
FFO per diluted share(1).................. 1.12 1.25 1.25
Other Data
Net cash provided by operating
activities............................... $ 85,338 $ 103,580 $ 86,757
Net cash provided by (used in) investing
activities............................... 5,359 371 (908)
Net cash provided by (used in) financing
activities............................... (142,890) 35,305 (85,511)
FFO(1).................................... 76,479 85,023 84,660
Weighted average shares outstanding,
Basic.................................... 68,010 67,754 67,681
Weighted average shares outstanding,
Diluted.................................. 68,131 67,989 67,865
Balance Sheet Data
Real estate investments, net.............. $848,545 $ 894,791
Cash and cash equivalents................. 87,401 139,594
Total assets.............................. 981,145 1,071,199
Notes payable and other debt.............. 886,385 974,247
United States Settlement.................. 96,493 --
Stockholders' Equity (deficit)............ (117,514) 8,345
- --------
(1) The Company considers funds from operation ("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 accounting
principles generally accepted in the United States ("GAAP")), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation for real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO presented herein is not
necessarily comparable to FFO presented by other real estate companies due
to the fact that not all real estate companies use the same definition. FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial
performance or as an alternative to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is FFO indicative of sufficient cash flow to fund all of the
Company's needs.
72
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this report.
Portfolio Overview
The following information as of December 31, 2000 provides an overview of
the Company's portfolio of health care properties, which primarily include
skilled nursing facilities and hospitals operated by Vencor. For a description
of the principal terms and provisions of the Master Leases, see "Business--
Summary of the Terms of Current Agreements with Vencor."
Year ended December 31, 2000
--------------------------------------------------------------------
Percent
# of # of of 2000 Percent of Investment
Portfolio by Type Properties Beds Revenue* Revenue* Investment Investment Per Bed
- ----------------- ---------- ------ -------- -------- ---------- ---------- ----------
($'s in thousands)
Skilled Nursing
Facilities............. 216 27,952 $138,815 59.6% $ 824,226 70.1% $29.5
Hospitals............... 45 4,093 93,272 40.1 344,780 29.3 84.2
Personal Care
Facilities............. 8 136 754 0.3 7,137 0.6 52.4
--- ------ -------- ----- ---------- ----- -----
Total................. 269 32,181 $232,841 100.0% $1,176,143 100.0% $36.5
=== ====== ======== ===== ========== ===== =====
- --------
* Excludes personal care facilities.
Year ended
December 31, 2000
--------------------
Portfolio by Operator/Tenant* Revenue* Percentage*
- ----------------------------- -------- -----------
($'s in thousands)
Vencor..................................................... $229,621 98.6%
Other...................................................... 3,220 1.4
-------- -----
Total.................................................... $232,841 100.0%
======== =====
- --------
* Based on the stated contract rent under the Master Leases, as opposed to
amounts paid pursuant to the Rent Stipulation, and without regard to write-
offs.
The Company's portfolio is broadly diversified by geographic location with
rental revenues from facilities with no state comprising more than ten percent
of the Company's rental revenues.
In addition to the diversification of lease rental revenues from the
geographic diversification of the portfolio, the majority of the Company's
facilities are located in states that have certificate of need requirements.
Certain states require state approval for development and expansion of health
care facilities and services, including findings of need for additional or
expanded health care facilities or services. A CON, which is issued by
governmental agencies with jurisdiction over health care facilities, is at
times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The CON rules and regulations may restrict an
operator's ability to expand the Company's properties in certain
circumstances.
Skilled Revenue
Nursing Percentage*
Certificate of Need States Facilities Hospitals Total
- -------------------------- ---------- ----------- -----
States with CON Requirement....................... 74.7% 58.3% 67.9%
States without CON Requirement.................... 25.3 41.7 32.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
- --------
* Excludes personal care facilities.
73
Results of Operations
The Company elected to qualify as a REIT for federal income tax purposes
for the year ended December 31, 1999. The Company believes that it has
satisfied the requirements to continue to qualify as a REIT for the tax year
ended December 31, 2000 and the Company intends to continue to qualify as a
REIT for federal income tax purposes for the year ended December 31, 2001 and
subsequent years. No net provision for federal corporate income taxes has been
made for the years ended December 31, 2000 and 1999 in the accompanying
Consolidated Financial Statements due to the Company's election to qualify as
a REIT for the year ended December 31, 1999, the Company's belief that it will
continue to qualify as a REIT for the year ended December 31, 2000 and the
existence of net operating losses. The financial results for the year ended
December 31, 2000 and 1999 are not comparable to the period from May 1, 1998
to December 31, 1998 due to the difference in the time periods covered and the
omission of a net provision for income taxes in the 1999 and 2000 financial
statements due to the Company's intention to qualify as a REIT and the use of
a portion of the Company's net operating loss carryforward.
Years ended December 31, 2000 and December 31, 1999
Rental income for the year ended December 31, 2000 was $232.8 million, of
which $229.6 million (98.6%) was from leases with Vencor as compared to rental
income for the year ended December 31, 1999 of $228.6 million, of which $225.1
million (98.5%) resulted from leases with Vencor. Interest and other income
totaled approximately $9.5 million and $4.4 million for the years ended
December 31, 2000 and 1999, respectively. The increase in interest was
primarily the result of earnings from investment of larger cash reserves
during the year as well as higher interest rates and interest received from
taxing authorities. If the Final Plan is consummated, interest income in 2001
will decrease because the Company's cash reserves will be substantially
reduced due to debt amortization, payments which would be made under the
United States Settlement, dividend distributions and deposits of the Subject
Refunds into the Tax Escrow.
Expenses totaled $304.5 million for the year ended December 31, 2000 and
included $42.2 million of depreciation expense on real estate assets and $95.3
million of interest on the Amended Credit Agreement and other debt. For the
year ended December 31, 1999 expenses totaled $190.7 million and included
$42.7 million of depreciation expense on real estate assets and $88.8 million
of interest on the Bank Credit Agreement and other debt. The $113.8 million
variance in expenses was due primarily to (a) a charge in 2000 of $96.5
million related to the United States Settlement, (b) an increased charge to
earnings in 2000 of $48.3 million for unpaid rent from tenants (versus $34.4
million in the same period in the prior year), which primarily includes the
difference between the minimum monthly base rent that would be due under the
terms of the Master Leases with Vencor and the base rent that was paid under
the terms of the Stipulation, (c) increased interest expense and (d) increased
general and administrative expenses.
In the fourth quarter of 2000, the Company recorded a $96.5 million charge
related to the United States Settlement. Under the United States Settlement,
the terms of which are documented in the Final Plan, the Company will pay
$103.6 million to the federal government, of which $34.0 million is to be paid
on the Vencor Effective Date. The balance of $69.6 million bears interest at
6% per annum and is payable in equal quarterly installments over a five-year
term commencing on the last day of the first calendar quarter in which the
Vencor Effective Date occurs. The Company will also pay $0.4 million in legal
fees to counsel for the relators in the qui tam actions. The charge to the
fourth quarter was discounted for accounting purposes based on an imputed
borrowing rate of 10.75%.
The loss on uncollectible rent increased for the year ended December 31,
2000 to $48.3 million from $34.4 million for the year ended December 31, 1999.
Under the Final Plan, if consummated, the Company would waive its right to the
payment of (a) $18.9 million for the August 1999 monthly base rent under the
Master Leases, and (b) the difference between the rent required to be paid
under the terms of the Master Leases and the rent received by the Company
under the Stipulation after the Petition Date and prior to the beginning of
the month immediately following the Vencor Effective Date. As a result of
delays in the extended Vencor bankruptcy proceeding and
74
the determination that such an amount is uncollectible, the Company wrote off
approximately $48.3 million and $34.4 million of rents receivable from tenants
for the years ended December 31, 2000 and 1999, respectively. The write-off
consists of the following:
2000 1999
------- -------
($'s in
thousands)
The difference between the minimum monthly base rent under
the Master Leases and Stipulation........................... $48,018 $15,000
August 1999 monthly base rent under the Master Leases........ -- 18,884
Charge for rent due under a lease with Vencor which is under
dispute..................................................... (124) 226
Rent due from non-Vencor tenants............................. 434 308
------- -------
$48,328 $34,418
======= =======
For the year ended December 31, 2000, interest expense increased 7.4% to
$95.3 million from $88.8 million for the same period in the prior year. The
increase is due primarily to the higher interest rates under the Amended
Credit Agreement. The increase was offset in part by the reduced principal
amount ($886.4 million and $974.2 million as of December 31, 2000 and 1999,
respectively) and reduced amortization of deferred financing fees. For the
year ended December 31, 2000, deferred financing fees were $3.2 million
compared to $6.0 million for the year ended December 31, 1999. Included in the
1999 deferred financing was $1.6 million of amortization for fees incurred in
the fourth quarter of 1999 related to the extension of the maturity of the
$275.0 million Bridge Loan facility from October 30, 1999 to February 28, 2000
(the "Bridge Loan"). See "Note 4--Borrowing Arrangements" to the Consolidated
Financial Statements.
General and administrative expenses increased 24.7% to $9.7 million for the
year ended December 31, 2000 from $7.8 million in the prior year. The increase
is primarily attributed to (a) federal, state and local tax contingencies
arising from and prior to the 1998 Spin Off, (b) compensation expense, (c)
insurance and (d) public company expense. The increase was offset by
reductions in federal excise tax.
Professional fees totaled approximately $10.8 million for the year ended
December 31, 2000, as compared to $12.5 million for the year ended December
31, 1999. The decrease relates primarily to the reduction in unusual
professional fees ($8.4 million in 2000 and $10.7 million in 1999) incurred as
a result of ongoing negotiations with Vencor. Fees incurred in the third and
fourth quarter of 1999 were significant in connection with Vencor's bankruptcy
filing and in connection with the Company's business strategy alternatives as
discussed above in "--Recent Developments Regarding Vencor" and "--Recent
Developments Regarding Liquidity." Legal and financial advisory fees are
anticipated to decline after the Vencor Effective Date but may continue to be
material.
During the first quarter of 2000, the Company incurred an extraordinary
loss of approximately $4.2 million related to the write-off of the unamortized
deferred financing fees associated with the Bank Credit Agreement. See "Note
4--Borrowing Arrangements" to the Consolidated Financial Statements.
During the fourth quarter of 2000, the Company sold a 99 bed nursing
facility in Toledo, Ohio, and a 120 bed facility in Grayling, Michigan which
were leased and operated by third party tenants. A net gain from the
disposition of these facilities was recorded for $1.0 million. In September of
1999, the Company realized a gain of approximately $0.3 million on the sale of
a tract of land pursuant to a pre-existing option.
After extraordinary expenses of $4.2 million, or $0.06 per share and the
impact of the Unites States Settlement, as discussed above, net loss for the
year ended December 31, 2000 was $65.5 million or $0.96 per share. Net income
for the year ended December 31, 1999 was $42.5 million or $0.63 per diluted
share.
Total revenue will likely decrease from 2000 levels in 2001 as a result of
reduced rent from Vencor if the Final Plan is consummated, the sale of two
facilities, the defaults and/or bankruptcy of tenants (other than Vencor) and
reduced interest income. See "Business--Recent Developments Regarding Vencor,"
"--Risk Factors--Effects of Bankruptcy Proceedings" and "--Conditions to
Consummation of the Final Plan."
75
During the fourth quarter of 1999, a tenant at one of the Company's
facilities ceased paying rent on the facility leased by it and filed for
protection under the United States Bankruptcy Code. The Company deemed the
asset to be impaired and recorded an impairment loss of $1.9 million to write
down the asset to its estimated fair value as of December 31, 1999.
The Company incurred $0.4 million and $1.3 million in non-recurring
employee severance costs in the first quarter of 2000 and 1999.
In connection with the 1998 Spin Off and the consummation of the Bank
Credit Agreement, the Company entered into an interest rate swap agreement (on
a notional amount of $850.0 million at December 31, 2000) to reduce the impact
of changes in interest rates on the Company's floating rate debt. On August 4,
1999, the Company entered into an agreement with the interest rate swap
agreement counterparty to shorten the maturity of the interest rate swap
agreement from December 31, 2007 to June 30, 2003, in exchange for a payment
in 1999 from the counterparty to the Company of $21.6 million. So long as the
Company has debt in excess of $750.0 million, the Company will amortize the
$21.6 million payment for financial accounting purposes in future periods
beginning in July 2003 and ending in December 2007. On January 31, 2000, the
Company further amended the swap agreement, pursuant to which the parties
agreed, for purposes of certain calculations set forth in the swap agreement,
to continue to use certain defined terms set forth in the Bank Credit
Agreement. The Company paid $6.4 million in 1999 related to the interest rate
swap agreement which is included in interest expense. For the year ended
December 31, 2000, the Company received $4.3 million related to the interest
rate swap which is included in interest expense.
The Period from May 1, 1998 to December 31, 1998
Rental revenue for the period from May 1, 1998 to December 31, 1998 totaled
$149.9 million, of which $147.9 million resulted from leases with Vencor.
Operating expenses totaled $94.2 million and included $28.7 million of
depreciation expense on real estate assets and $59.4 million of interest on
bank credit facilities and other debt. Interest expense also included $1.2
million in net payments on the interest rate swap agreement and $3.2 million
in amortization and deferred financing fees. The Company also recorded a
provision for income taxes of approximately $21.2 million for the period from
May 1, 1998 to December 31, 1998. Income from operations was $34.8 million, or
$0.51 per share. The Company incurred an extraordinary loss for the period
from May 1, 1998 to December 31, 1998 of $8.1 million, or $0.12 per share, net
of income taxes, related to the extinguishment of debt. Net income for the
period from May 1, 1998 to December 31, 1998 was $26.8 million, or $0.39 per
diluted share.
76
Funds from Operations
Funds from operations ("FFO") for the years ended December 31, 2000 and
1999 totaled $76.5 million or $1.12 per diluted share and $85.0 million or
$1.25 per diluted share, respectively. FFO for the period from May 1, 1998 to
December 31, 1998 totaled $84.7 million, or $1.25 per diluted share. FFO for
the years ended December 31, 2000 and 1999 has been decreased for the
aforementioned unusual professional fees, write-off of tenant receivables and
asset impairment expense and non-recurring employee severance costs. In
calculating FFO for the period from May 1, 1998 to December 31, 1998, the
Company has added back to net income the $21.2 million of income tax expense
to be consistent with the 2000 and 1999 presentations when no income taxes are
assumed to be due because of the Company's qualification as a REIT. FFO for
the years ended December 31, 2000 and 1999 and the period from May 1, 1998 to
December 31, 1998 is summarized in the following table:
For the
period from
Year Ended Year Ended May 1, 1998 to
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
(In thousands, except per share amounts)
Net income (loss)....... $(65,452) $42,535 $26,758
Extraordinary loss on
extinguishment of
debt................... 4,207 -- 8,051
-------- ------- -------
Income (loss) before
extraordinary loss..... (61,245) 42,535 34,809
Provision for income
taxes.................. -- -- 21,151
Depreciation on real
estate assets.......... 42,188 42,742 28,700
United States
Settlement............. 96,493 -- --
Realized gain on sale of
assets................. (957) (254) --
-------- ------- -------
Funds from operations... $ 76,479 $85,023 $84,660
======== ======= =======
FFO per diluted share... $ 1.12 $ 1.25 $ 1.25
======== ======= =======
Shares outstanding,
diluted................ 68,131 67,989 67,865
======== ======= =======
The Company considers FFO an appropriate measure of performance of an
equity REIT and the Company uses the NAREIT definition of FFO. NAREIT defines
FFO as net income (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation for
real estate assets, and after adjustments for unconsolidated partnerships and
joint ventures. In July of 2000, NAREIT revised the definition of FFO to
include the add back of impairment losses to GAAP net income to arrive at FFO.
The Company did not book any impairment in 2000. FFO presented herein is not
necessarily comparable to FFO presented by other real estate companies due to
the fact that not all real estate companies use the same definition. FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance
or as an alternative to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is FFO
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. The Company believes that in order to facilitate a clear understanding
of the consolidated historical operating results of the Company, FFO should be
examined in conjunction with net income as presented in the Consolidated
Financial Statements and data included elsewhere in this Form 10-K.
Asset/Liability Management
Asset/liability management is a key element of the Company's overall risk
management program. The objective of asset/liability management is to support
the achievement of business strategies while maintaining appropriate risk
levels. The asset/liability management process focuses on a variety of risks,
including market risk (primarily interest rate risk) and credit risk.
Effective management of these risks is an important determinant of the
absolute levels and variability of FFO and net worth. The following discussion
addresses the Company's integrated management of assets and liabilities,
including the use of derivative financial instruments. The Company does not
use derivative financial instruments for speculative purposes.
77
Market Risk
The following discussion of the Company's exposure to various market risks
contains "forward-looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Nevertheless, because of the inherent unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected in such forward-looking information.
The Company earns revenue by leasing its assets under leases that primarily
are long-term triple net leases in which the rental rate is generally fixed
with annual escalators, subject to certain limitations. The Company's debt
obligations are floating rate obligations whose interest rate and related
monthly interest payments vary with the movement in LIBOR. See "Note 4--
Borrowing Arrangements" to the Consolidated Financial Statements. The general
fixed nature of the Company's assets and the variable nature of the Company's
debt obligations creates interest rate risk. If interest rates were to rise
significantly, the Company's lease revenue might not be sufficient to meet its
debt obligations. In order to mitigate this risk, at or about the date the
Company spun off its health care operations in connection with the 1998 Spin
Off, it also entered into an interest rate swap to effectively convert most of
its floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. As of December 31, 2000, the
Company had an $850.0 million interest rate swap outstanding with a highly
rated counterparty in which the Company pays a fixed rate of 5.985% and
receives LIBOR from the counterparty.
The interest rate swap agreement originally was in a notional amount of
$1.0 billion and would have expired in varying amounts on December 31 of each
year through December 31, 2007. On August 4, 1999, the Company entered into an
agreement with the interest rate swap agreement counterparty to shorten the
maturity of the interest rate swap agreement from December 31, 2007 to June
30, 2003, in exchange for a payment from the counterparty to the Company of
$21.6 million. The notional amount of the interest rate swap agreement is
scheduled to decline from $850.0 million as of December 31, 2000 as follows:
Amount Date
------ -----------------
$800,000,000............................................. December 31, 2001
$775,000,000............................................. December 31, 2002
-- June 30, 2003
When interest rates rise the interest rate swap agreement increases in fair
value to the Company and when interest rates fall the interest rate swap
agreement declines in value to the Company. As of December 31, 2000, interest
rates had fallen and the interest rate swap agreement was in an unrealized
loss position to the Company of approximately $4.1 million. As of December 31,
1999 the interest rates had risen and the interest rate swap agreement was in
an unrealized gain position to the Company of approximately $20.4 million. To
highlight the sensitivity of the interest rate swap agreement to changes in
interest rates, the following summary shows the effects of a hypothetical
instantaneous change of 100 basis points (BPS) in interest rates as of
December 31, 2000 and December 31, 1999:
2000 1999
------------ ------------
Notional Amount.............................. $850,000,000 $875,000,000
Fair Value to the Company.................... (4,128,614) 20,369,672
Fair Value to the Company Reflecting Change
in Interest Rates
-100 BPS................................... (20,959,825) (2,857,857)
+100 BPS................................... 12,189,566 42,698,286
The terms of this interest rate swap agreement require that the Company
make a cash payment or otherwise post collateral to the counterparty if the
fair value loss to the Company exceeds certain levels (the "threshold
levels"). See "Note 4--Borrowing Arrangements" to the Consolidated Financial
Statements. The threshold levels vary based on the relationship between the
Company's debt obligations and the tangible fair value of its assets as
defined in the Bank Credit Agreement and outlined below:
78
Threshold
Debt to Tangible FMV Level
-------------------- -----------
50% to 55%..................................................... $25,000,000
40% to 49%..................................................... $35,000,000
39% or lower................................................... $45,000,000
As of December 31, 2000, the Company believes that the threshold level
under the interest rate swap agreement was a fair value unrealized loss of
$35.0 million and the interest rate swap agreement was in an unrealized loss
position to the Company of $4.1 million. Under the interest rate swap
agreement, if collateral must be posted, the principal amount of such
collateral must equal the difference between the fair value unrealized loss of
the interest rate swap agreement at the time of such determination and the
threshold amount. On January 31, 2000, the Company entered into a letter
agreement with the counterparty to the swap agreement for the purpose of
amending the swap agreement. The letter agreement provides that, for purposes
of certain calculations set forth in the swap agreement, the parties agree to
continue to use certain defined terms set forth in the Bank Credit Agreement.
As of December 31, 2000 and December 31, 1999, the interest rate swap
agreement was in a position under the threshold level, and therefore no
collateral was required to be posted under the interest rate swap agreement.
The differences in the Company's market risk exposure relating to the
interest rate swap agreement at December 31, 2000 and 1999 were caused by
fluctuations in interest rates and by changes in the notional amounts.
Credit Risk
The Company monitors credit risk under its lease agreements with its
tenants by monitoring publicly available financial information, discussions
with its tenants and review of information otherwise available to the Company.
Pursuant to the 1998 Spin Off, the Company has a significant concentration of
credit risk under its Amended Master Leases. For the year ended December 31,
2000 lease rental revenues from Vencor totaled $229.6 million or 98.6% of the
Company's total rental income for the period ($181.7 million or 98.4%, net of
write-offs). For the year ended December 31, 1999 and for the period from May
1, 1998 to December 31, 1998, lease rental revenues from Vencor comprised
$225.1 million or 98.5% ($191.0 million or 98.3%, net of write-offs) and
$147.9 million, or approximately 98.7%, respectively, of the Company's total
lease rental revenues of $228.6 million ($194.2 million after write-offs) for
the year ended December 31, 1999 and $149.9 million for the period from May 1,
1998 to December 31, 1998. Accordingly, Vencor's financial condition and
ability to meet its rent obligations will determine the Company's rental
revenues and its ability to make distributions to its stockholders. The
operations of Vencor were negatively impacted by changes in reimbursement
rates, by its level of indebtedness and by certain other factors. Vencor filed
for protection under the Bankruptcy Code on September 13, 1999. The Company,
Vencor and Vencor's major creditors restructured Vencor's debt and lease
obligations and on March 19, 2001, the Bankruptcy Court entered an order on
its docket confirming the Final Plan. Consummation of the Final Plan is
subject to the satisfaction of numerous conditions, many of which are outside
the control of the Company and Vencor. See "Business--Risk Factors--Conditions
to Consummation of the Final Plan."
The terms of the Stipulation currently governs the rental payments to be
made under the Master Leases. In addition, certain other tenants of the
Company have experienced financial difficulty and/or filed for bankruptcy. See
"Risk Factors--Recent Developments Regarding Vencor,"--"Effects of Bankruptcy
Proceedings" and "--Governmental Regulation." In addition, any failure by
Vencor to effectively conduct its operations could have a material adverse
effect on its business reputation or on its ability to enlist and maintain
patients in its facilities. There can be no assurance that Vencor will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Master Leases or following the Vencor Effective Date if
it occurs, under the Amended Master Leases. Since the Company derives in
excess of 98% of its rental revenues from Vencor and since the Master Leases
or following the Vencor Effective Date if it occurs, the Amended Master
Leases, are triple-net leases under which Vencor is responsible for all
insurance, taxes and maintenance and
79
repair expenses required in connection with the leased properties, the
inability of Vencor to satisfy its obligations under the Master Leases or
following the Vencor Effective Date if it occurs, under the Amended Master
Leases, would have a material adverse effect on the condition of the leased
properties, as well as a Material Adverse Effect on the Company. See
"Business--Federal Income Tax Considerations" and "--Risk Factors--Dependence
on Vencor."
Liquidity and Capital Resources
Liquidity
Cash provided by operations totaled $85.3 million and $103.6 million for
the years ended December 31, 2000 and 1999, respectively, and $86.8 million
for the period from May 1, 1998 to December 31, 1998. Net cash provided by
investing activities for the year ended December 31, 2000 totaled $5.4 million
and included proceeds from the sale of two facilities. Net cash provided by
investing activities for the year ended December 31, 1999 totaled $0.4
million. Net cash used in investing activities was $0.9 million for the period
from May 1, 1998 to December 31, 1998. For the year ended December 31, 2000,
net cash used in financing activities was $142.9 and included dividend
payments of $42.4 million, repayments of borrowings of $87.9 million and
deferred financing costs of $12.6 million. Net cash provided by financing
activities totaled $35.3 million for the year ended December 31, 1999 and net
cash used in financing activities totaled $85.5 million for the period from
May 1, 1998 to December 31, 1998. Cash provided by financing activities for
the year ended December 31, 1999 resulted primarily from borrowings under the
Company's revolving line of credit and from a payment received in connection
with the shortening of the Company's interest rate swap, net of dividends
paid.
Credit Facility
In connection with the 1998 Spin Off, the Company refinanced substantially
all of its long-term debt. In connection with the refinancing arrangements,
the Company entered into the Bank Credit Agreement and retained approximately
$6.0 million of prior debt obligations. As of December 31, 1999, the
outstanding balances under the Bank Credit Agreement amounted to $974.2
million.
On January 31, 2000, the Company and all of its lenders entered into the
Amended Credit Agreement, which amended and restated the Bank Credit
Agreement. Under the Amended Credit Agreement, borrowings bear interest at an
applicable margin over an interest rate selected by the Company. Such interest
rate may be either (a) the Base Rate, which is the greater of (i) the prime
rate or (ii) the federal funds rate plus 50 basis points, or (b) LIBOR.
Borrowings under the Amended Credit Agreement are comprised of: (1) a new
$25.0 million revolving credit line (the "Revolving Credit Line") that expires
on December 31, 2002, which bears interest at either LIBOR plus 2.75% or the
Base Rate plus 1.75%; (2) a $200.0 million term loan due December 31, 2002
(the "Tranche A Loan"), which bears interest at either LIBOR plus 2.75% or the
Base Rate plus 1.75%; (3) a $300.0 million term loan due December 31, 2005
(the "Tranche B Loan"), which bears interest at either LIBOR plus 3.75% or the
Base Rate plus 2.75%; and (4) a $473.4 million term loan due December 31, 2007
(the "Tranche C Loan"), which bears interest at either LIBOR plus 4.25% or the
Base Rate plus 3.25%. The interest rate on the Tranche B Loan will reduce by
.50% (50 basis points) once $150.0 million of the Tranche B Loan has been
repaid. In addition, in connection with the consummation of the Amended Credit
Agreement on January 31, 2000, the Company paid a $7.3 million loan-
restructuring fee. The fee is being amortized proportionately over the terms
of the related loans and agreements.
Under the terms of the Amended Credit Agreement, it would have been an
Event of Default if the Vencor Effective Date did not occur on or before the
Vencor Effective Date Deadline. When it became apparent that the Vencor
Effective Date would not occur by December 31, 2000, the Company initiated
discussions with the administrative agent for the lenders under the Amended
Credit Agreement in an effort to obtain a waiver or amendment of this
covenant. The Company and substantially all of its lenders entered into an
Amendment and Waiver, whereby the Vencor Effective Date Deadline was extended
from December 31, 2000 to March 31, 2001.
80
In consideration for this extension, the Company paid a fee of $0.2 million to
the lenders executing the Amendment and Waiver and agreed to amend the
principal amortization schedules of certain of the loans under the Amended
Credit Agreement. The Company exercised its option under the Amendment and
Waiver to extend the Vencor Effective Date Deadline from March 31, 2001 to
April 30, 2001. In consideration of this extension, the Company paid a fee of
approximately $0.1 million to the lenders that executed the Amendment and
Waiver. Under the Amendment and Waiver, the Company has the further options to
extend the Vencor Effective Date Deadline through (a) May 31, 2001 in exchange
for the payment on or before April 30, 2001 of a fee equal to 0.20% per annum
on the outstanding principal balance of the loans under the Amended Credit
Agreement, and (b) June 30, 2001 in exchange for the payment on or before May
31, 2001 of a fee equal to 0.25% per annum on the outstanding principal
balance of the loans under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, an Event of Default will
be deemed to have occurred if the Vencor Effective Date does not occur on or
before the Vencor Effective Date Deadline, as same may be extended. Subject to
any defenses available to the Company, if such an Event of Default were to
occur, the Company could be required to immediately repay all the indebtedness
under the Amended Credit Agreement upon the demand of the "Required Lenders,"
as defined in the Amended Credit Agreement. If it appears that the Vencor
Effective Date will not occur by the Vencor Effective Date Deadline, as
extended, the Company intends to initiate discussions with the administrative
agent for its lenders under the Amended Credit Agreement to obtain a waiver or
amendment of this covenant. Under the Amended Credit Agreement, a waiver or
amendment of this covenant must be approved by lenders holding (in the
aggregate) greater than 50% of the total credit exposure under the Amended
Credit Agreement. There can be no assurance (i) that the Final Plan or an
alternate plan of reorganization for Vencor will become effective on or before
the Vencor Effective Date Deadline, as same may be extended, (ii) that the
Company will obtain a waiver or amendment of the covenant if the Final Plan or
an alternate plan of reorganization for Vencor does not become effective on or
before the Vencor Effective Date Deadline, as same may be extended, (iii) that
the terms of such a waiver or amendment would not have a Material Adverse
Effect on the Company, or (iv) that the failure to obtain such a waiver or
amendment would not have a Material Adverse Effect on the Company.
The Amended Credit Agreement, as revised by the Amendment and Waiver,
provides for the following amortization schedule: (a) with respect to the
Tranche A Loan, (i) $50.0 million was paid at closing on January 31, 2000,
(ii) $35.0 million was paid on December 20, 2000, (iii) $15.0 million was paid
on March 30, 2001, and (iv) after the Vencor Effective Date, all Excess Cash
Flow pursuant to a monthly sweep as more fully described below (the "Monthly
Sweep") will be applied to the Tranche A Loan until $200.0 million in total
has been paid down on the Amended Credit Agreement, with the remaining
principal balance of the Tranche A Loan due December 31, 2002; (b) with
respect to the Tranche B Loan, (i) $20.0 million was paid on March 30, 2001,
(ii) a one-time paydown of Excess Cash (as defined in the Amended Credit
Agreement) is scheduled to be made on or before the thirtieth day after the
Vencor Effective Date as more fully described below (the "B Sweep"), (iii)
$30.0 million is scheduled to be paid on December 30, 2003 and $50.0 million
is scheduled to be paid on December 30, 2004, and (iv) the remaining principal
balance is due December 31, 2005; and (c) with respect to the Tranche C Loan,
there are no scheduled paydowns of principal and the final maturity is
scheduled for December 31, 2007. The facilities under the Amended Credit
Agreement are pre-payable without premium or penalty.
The B Sweep, if any, is scheduled to be made on the thirtieth day after the
Vencor Effective Date (the "B Sweep Payment Date"). The B Sweep is a one-time
payment equal to the Company's cash and cash equivalents on hand on the B
Sweep Payment Date minus the sum of (to the extent not then paid) (i) amounts
payable under the United States Settlement during the succeeding three months,
(ii) a reasonable reserve to pay the applicable portion of the Company's
minimum REIT dividend for quarters prior to and including the Vencor Effective
Date, (iii) $1.0 million and (iv) other specified amounts. Currently, the
Company believes that it will not be required to pay any amounts under the B
Sweep.
The first Monthly Sweep is scheduled to be made on the last day of the
month following the first full calendar month after the date that is thirty
days after the Vencor Effective Date and will cover the period from
81
30 days after the Vencor Effective Date to the end of the last day of the
month preceding the payment date. Thereafter, the Monthly Sweep will be made
on the last business day of each month for the preceding month. The Monthly
Sweep will be in an amount equal to the Company's total cash receipts for the
applicable period, minus the sum of (i) cash disbursements by the Company
during the applicable period, (ii) up to $1.0 million for a working capital
reserve, (iii) a reserve in an amount equal to the unpaid minimum REIT
dividend for all prior periods and for the current calendar quarter, (iv) the
obligations due under the United States Settlement during the next three
months, (v) taxes and (vi) other specified amounts.
During the first quarter of 2000, the Company incurred an extraordinary
loss of approximately $4.2 million relating to the write-off of the
unamortized deferred financing costs associated with the Bank Credit
Agreement.
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders regarding the restructuring of the Company's
long term debt, including the $275.0 million Bridge Loan (the "Waiver and
Extension Agreement"), the Company paid a $2.4 million waiver fee which was
fully amortized over the three month extension period under the Waiver and
Extension Agreement. In connection with the consummation of the Amended Credit
Agreement on January 31, 2000, the Company paid a $7.3 million loan
restructuring fee. This fee is being amortized proportionately over the terms
of the related loans and agreements.
In the fourth quarter of 2000, the Company recorded a $96.5 million charge
related to the United States Settlement. Under the United States Settlement,
the terms of which are documented in the Final Plan, the Company will pay
$103.6 million to the federal government, of which $34.0 million will be paid
on the Vencor Effective Date. The balance of $69.6 million bears interest at
6% per annum and is payable in equal quarterly installments over a five-year
term commencing on the last day of the quarter in which the Vencor Effective
Date occurs. The Company will also pay $0.4 million in legal fees to counsel
for the relators in the qui tam actions. The charge to the fourth quarter was
discounted for accounting purposes based on an imputed borrowing rate of
10.75%. See "Note 11--Litigation" to the Consolidated Financial Statements.
The Amended Credit Agreement is secured by liens on substantially all of
the Company's real property and any related leases, rents and personal
property. Certain properties are being held in escrow by counsel for the
agents under the Amended Credit Agreement pending the receipt of third party
consents and/or resolution of certain other matters. In addition, the Amended
Credit Agreement contains certain restrictive covenants, including, but not
limited to, the following: (a) until such time that $200.0 million in
principal amount has been paid down, the Company can only pay dividends based
on a certain minimum percentage of its taxable income (equal to 95% of its
taxable income for the year ending December 31, 2000 and 90% of its taxable
income for years ending on or after December 31, 2001); however, after $200.0
million in total principal paydowns, the Company will be allowed to pay
dividends for any year in amounts up to 80% of funds from operations ("FFO"),
as defined in the Amended Credit Agreement; (b) limitations on additional
indebtedness, acquisitions of assets, liens guarantees, investments,
restricted payments, leases, affiliate transactions and capital expenditures;
and (c) certain financial covenants, including requiring that the Company have
(i) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (ii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month after the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a "Material Adverse Effect," as defined in the
Amended Credit Agreement. In addition, the Amended Credit Agreement provides
that if the Company is in compliance with its financial covenants and the
covenant relating to releases in the Vencor bankruptcy on the Vencor Effective
Date, no event or condition arising primarily from the Final Plan shall be
deemed to have caused a "Material Adverse Effect," as defined in the Amended
Credit Agreement, to have occurred.
82
If the Vencor Effective Date occurs, the Company thereafter would be
subject to certain financial covenants under the Amended Credit Agreement,
including those requiring the Company to have (i) Consolidated EBITDA (as
defined in the Amended Credit Agreement) on the last day of each fiscal
quarter after the Vencor Effective Date at least equal to 80% of the Company's
Projected Consolidated EBITDA (as defined in the Amended Credit Agreement) on
the Vencor Effective Date; and (ii) a ratio of Consolidated EBITDA to
Consolidated Interest Expense (as defined in the Amended Credit Agreement) on
a trailing four quarter basis, of at least 1.20 to 1.00. Certain of these
covenants may be waived by holders of more than 50% of the principal
indebtedness under the Amended Credit Agreement.
Interest Rate Swap
In connection with the 1998 Spin Off, the Company entered into an interest
rate swap agreement to reduce the impact of changes in interest rates on its
floating rate debt obligations. See "--Asset/Liability Management--Market
Risk." The interest rate swap resulted in a net decrease in interest expense
during 2000 of $4.3 million and a net increase in interest expense during 1999
of $6.4 million. See "--Results of Operations."
The fair value of the interest rate swap agreement is not recognized in the
Consolidated Financial Statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Asset/Liability Management"
and "Note 1--Organization and Significant Accounting Policies" to the
Consolidated Financial Statements.
Dividends
In order to continue to qualify as a REIT, the Company must make annual
distributions to its stockholders of at least 95% (90% for tax years ending
after December 31, 2000) of its "REIT taxable income" (excluding net capital
gain). The Company elected to qualify as a REIT for the year ending December
31, 1999. The Company believes that it has satisfied the requirements to
qualify as a REIT for the tax year ended December 31, 2000 and the Company
intends to continue to qualify as a REIT for the tax year ending December 31,
2001 and subsequent years. The Company paid dividends equal to 95% of its
taxable income for 1999. On January 15, 2001 the Company paid a dividend of
$0.29 per share for 2000 which amount is equal to 95% of the Company's
estimated taxable income for 2000. The Company intends to pay a dividend for
2001 equal to at least 90% of the Company's taxable income for 2001. The 2001
dividend may be satisfied by a combination of cash or other property or
securities.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions
in computing REIT taxable income. However, this would be partially offset by
the value of the New Vencor Common Stock that would be received by the Company
if the Final Plan is consummated, which would be included in taxable income in
the year received by the Company. The Company anticipates that it generally
will have sufficient cash or liquid assets to enable it to satisfy the 95%
(90% for taxable years beginning after December 31, 2000) distribution
requirement. It is possible, however, that the Company, from time to time, may
not have sufficient cash or other liquid assets to meet the 95% (90% for
taxable years beginning after December 31, 2000) distribution requirement or
to distribute such greater amount as may be necessary to avoid income and
excise taxation. See "Business--Risk Factors--Risks Associated with REIT
Status--Inability to Maintain Required Distributions," "Market for
Registrant's Common Equity and Related Stockholder Matters" and "Business--
Federal Income Tax Considerations."
Capital Expenditures and Property Acquisitions
Capital expenditures to maintain and improve the leased properties
generally will be incurred by the tenants. Accordingly, the Company does not
believe that it will incur any major expenditures in connection with the
leased properties. After the terms of the leases expire, or in the event that
the tenants are unable to meet their obligations under the leases, the Company
anticipates that any expenditures for which it may become responsible to
maintain the leased properties will be funded by cash flows from operations or
through additional borrowings.
83
To the extent that unanticipated expenditures or significant borrowings are
required, the Company's liquidity may be affected adversely. The Company's
ability to make expenditures and borrow funds is restricted by the terms of
the Amended Credit Agreement. Any such capital expenditures or borrowings
would likely require the consent of the "Required Lenders" under the Amended
Credit Agreement, and there can be no assurance that such consent would be
obtained.
The Company invested $14.6 million during the period from May 1, 1998 to
December 31, 1998 to acquire health care-related properties. The properties
purchased included two skilled nursing facilities and eight personal care
facilities. One of the properties acquired was a skilled nursing facility
purchased from Vencor under the Development Agreement for $6.2 million in the
third quarter of 1998. The Company did not acquire any properties in 1999 or
2000 and does not currently intend to acquire any additional properties in
2001.
Other
The Company loaned, with interest provisions, approximately $3.4 million,
net of repayments, to certain current and former executive officers of the
Company to finance the income taxes payable by them as a result of the vesting
of Common Stock of the Company awarded as compensation to such officers (the
"Restricted Stock") and the 1998 Spin Off. The loans are payable over periods
ranging from a four to a ten year period.
In connection with the 1998 Spin Off, the Company also received newly
issued Vencor Series A Non-Voting Convertible Preferred Stock. The Company
sold the preferred stock to certain of its employees at the time, which
includes both current Vencor employees and current and former employees of the
Company, for $17.7 million and used the proceeds to repay long-term debt.
Certain of the Company's tenants, other than Vencor, have defaulted in the
payment of rent to the Company under the Company's leases with such tenants.
One of the Company's tenants, IHS Acquisition No. 151, Inc., has filed for
protection under the Bankruptcy Code. Rental revenue of the Company from
tenants other than Vencor is likely to be substantially less in 2001 due to
the sale of two facilities in 2000 and the defaults and/or bankruptcy filing
by certain of these tenants. See "Business--Other Recent Developments" and
"Note 9--Commitments and Contingencies" to the Consolidated Financial
Statements.
Vencor Plan of Reorganization
See "Business--Recent Developments Regarding Vencor" for a discussion of
the terms of the Final Plan pursuant to which Vencor's debt and lease
obligations have been restructured.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of certain quantitative and quantitative disclosures about
market risk, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset/Liability Management."
Item 8. Financial Statements and Supplementary Data
Financial statements and financial statement schedules required to be filed
by this Item 8 are set forth following the index page at page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
84
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items is incorporated by reference from
the definitive proxy statement to be filed by the Company pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this Form 10-K which includes the required information; however,
certain information required by Item 10 is included in "Note 13--Related Party
Transactions" to the Consolidated Financial Statements.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
2.1(a) Fourth Amended Joint Plan of Reorganization of Vencor, Inc. and
Affiliated Debtors under Chapter 11 of the Bankruptcy Code.
2.2(b) Order Confirming the Fourth Amended Joint Plan of Reorganization of
Vencor, Inc. and Affiliated Debtors under Chapter 11 of the
Bankruptcy Code, as entered by the United States Bankruptcy Court
for the District of Delaware on March 16, 2001.
3.1.1(c) Certificate of Incorporation of the Company, as amended.
3.1.2(d) Certificate of Amendment to Certificate of Incorporation of the
Company.
3.2(e) Third Amended and Restated Bylaws of the Company.
4.1(f) Specimen Common Stock Certificate.
4.2.1(g) Amended and Restated Credit, Security, Guaranty and Pledge
Agreement, by and among Ventas Realty, Limited Partnership, a
Delaware limited partnership, as borrower thereunder, each of the
Company and Ventas LP Realty, L.L.C., a Delaware limited liability
company, as Guarantors, each of the Lenders therein named, Bank of
America, N.A., as Administrative Agent, and Morgan Guaranty Trust
Company of New York, as Documentation Agent, dated as of January 31,
2000.
4.2.2 Amendment and Waiver dated as of December 20, 2000 to the Credit
Agreement, among Ventas Realty, Limited Partnership, as Borrower,
the Guarantors referred to in the Credit Agreement, Bank of America,
N.A., as Lender, Issuing Bank and as Administrative Agent for the
Lenders under the Credit Agreement, Morgan Guaranty Trust Company of
New York, as a Lender and as Documentation Agent for the Lenders
under the Credit Agreement, and the Consenting Lenders.
4.2.3(h) Assignment of Leases and Rents, dated as of January 31, 2000, from
Ventas Realty, Limited Partnership, Assignor, to Bank of America,
N.A., as Administrative Agent, Assignee, with respect to Facility
no. 111 located at Rolling Hills Health Care Center, 36255 St.
Joseph Road, New Albany, Indiana (Floyd County).
85
Exhibit
Number Description of Document
------- -----------------------
4.2.4(i) Mortgage, Open End Mortgage, Deed of Trust, Trust Deed, Deed to
Secure Debt, Credit Line Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Financing Statement, dated as of
January 31, 2000, between Ventas Realty, Limited Partnership,
Mortgagor/Trustor/Grantor/Debtor, to Bank of America, N.A., as
Administrative Agent, Mortgagee/Beneficiary/Grantee/Secured Party,
with respect to Facility no. 111 located at Rolling Hills Health
Care Center, 36255 St. Joseph Road, New Albany, Indiana (Floyd
County).
4.2.5(j) Schedule of Agreements Substantially Identical in all Material
Respects to Agreements filed as Exhibits 4.2.3 and 4.2.4 to this
filing, pursuant to Instruction 2 to Item 601 of Regulation S-K.
4.3.1(k) Rights Agreement, dated as of July 20, 1993, between the Company and
National City Bank, as Rights Agent.
4.3.2(l) First Amendment to Rights Agreement, dated as of August 11, 1995,
between the Company and National City Bank, as Rights Agent.
4.3.3(m) Second Amendment to Rights Agreement, dated February 1, 1998,
between the Company and National City Bank, as Rights Agent.
4.3.4(n) Third Amendment to Rights Agreement, dated July 27, 1998, between
the Company and National City Bank, as Rights Agent.
4.3.5(o) Fourth Amendment to Rights Agreement, dated as of April 15, 1999,
between the Company and National City Bank, as Rights Agent.
4.3.6(p) Fifth Amendment to Rights Agreement, dated as of December 15, 1999,
between the Company and National City Bank, as Rights Agent.
4.3.7(q) Sixth Amendment to Rights Agreement, dated as of May 22, 2000,
between the Company and National City Bank, as Rights Agent.
4.4 Letter Agreement relating to a waiver of the provisions of Article
XII of the Certificate of Incorporation of Ventas, Inc. in favor of
the Baupost Group, LLC, dated February 28, 2001.
4.5(r) Letter Agreement relating to a waiver of the provisions of Article
XII of the Certificate of Incorporation of Ventas, Inc. in favor of
Cohen & Steers Capital Management, Inc., dated May 8, 2000.
4.6(s) Letter Agreement terminating the waiver of provisions of Article XII
of the Certificate of Incorporation of Ventas, Inc. in favor of
Franklin Mutual Advisors, LLC, dated September 27, 2000.
4.7 Letter Agreement relating to a waiver of the provisions of Article
XII of the Certificate of Incorporation of Ventas, Inc. in favor of
Cramer Rosenthal & McGlynn, LLC, Inc., dated February 14, 2001.
10.1(t)* Directors and Officers Insurance and Company Reimbursement Policies.
10.2(u)* Form of Ventas, Inc. Promissory Note.
10.3(v)* Amendment to Promissory Note entered into as of December 31, 1998 by
and between Ventas Realty, Limited Partnership and W. Bruce
Lunsford.
10.4.1(w) Form of Agreement and Plan of Reorganization between the Company and
Vencor, Inc.
10.4.2(x) Form of Distribution Agreement between Vencor, Inc. and the Company.
86
Exhibit
Number Description of Document
------- -----------------------
10.4.3(y) Form of Development Agreement.
10.4.4(z) Form of Participation Agreement.
10.4.5(aa) Tax Allocation Agreement, dated as of April 30, 1998, by and
between the Company and Vencor, Inc.
10.4.6(bb) Agreement of Indemnity--Third Party Leases, dated April 30, 1998,
by and between Vencor, Inc. and its subsidiaries and the Company.
10.4.7(cc) Agreement of Indemnity--Third Party Contracts, dated April 30,
1998, by and between Vencor, Inc. and its subsidiaries and the
Company.
10.5.1(dd) Form of Master Lease Agreement between Vencor, Inc. and the
Company.
10.5.2(ee) Form of Amendment to Master Lease Agreement between Vencor, Inc.
and the Company.
10.5.3(ff) Form of Second Amendment to Master Lease, dated April 12, 1999,
between the Company and Vencor, Inc.
10.6.1(gg)* Form of Employment Agreement, dated as of July 31, 1998, between
Ventas, Inc. and each of W. Bruce Lunsford and Thomas T. Ladt.
10.6.2(hh)* Amendment to Employment Agreement entered into as of December 31,
1998 by and between Ventas, Inc. and W. Bruce Lunsford.
10.7(ii)* Separation and Release Agreement, dated February 29, 2000,
between Ventas, Inc. and Steven T. Downey.
10.8(jj)* Employment Agreement, dated as of July 31, 1998, between Ventas,
Inc. and T. Richard Riney.
10.9(kk)* Employment Agreement, dated as of January 13, 1999, between
Ventas, Inc. and John Thompson.
10.10.1(ll)* 1987 Non-Employee Directors Stock Option Plan.
10.10.2(mm)* Amendment to the 1987 Non-Employee Directors Stock Option Plan,
dated April 30, 1998.
10.11.1(nn)* 1987 Incentive Compensation Program.
10.11.2(oo)* Amendment to the 1987 Incentive Compensation Program, dated May
15, 1991.
10.11.3(pp)* Amendments to the 1987 Incentive Compensation Program, dated May
18, 1994.
10.11.4(qq)* Amendment to the 1987 Incentive Compensation Program, dated
February 15, 1995.
10.11.5(rr)* Amendment to the 1987 Incentive Compensation Program, dated
September 27, 1995.
10.11.6(ss)* Amendment to the 1987 Incentive Compensation Program, dated May
15, 1996.
10.11.7(tt)* Amendment to 1987 Incentive Compensation Program, dated April 30,
1998.
10.11.8(uu)* Amendment to the 1987 Incentive Compensation Program, dated
December 31, 1998.
10.12(vv)* Ventas, Inc. 2000 Incentive Compensation Plan.
10.13(ww)* Ventas, Inc. 2000 Stock Option Plan for Directors.
10.14(xx)* TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan.
10.15.1(yy)* Form of Ventas, Inc., formerly known as Vencor, Inc., Change-in-
Control Severance Agreement.
87
Exhibit
Number Description of Document
------- -----------------------
10.15.2(zz)* Amendment No. 1 to Change-in-Control Severance Agreement entered
into as November 19, 1997 between the Company and W. Bruce
Lunsford.
10.15.3(aaa)* Amendment No. 2 to Change-in-Control Severance Agreement entered
into as of December 31, 1998 by and between the Company and W.
Bruce Lunsford.
10.15.4(bbb)* Form of Amendment to Change-in-Control Severance Agreement,
dated as of September 30, 1999, between Ventas, Inc. and each of
Steven T. Downey, T. Richard Riney and John C. Thompson.
10.16(ccc) Form of Indemnification Agreement for directors of TheraTx.
10.17(ddd) Form of Assignment and Assumption of Lease Agreement between
Hillhaven and certain subsidiaries, on the one hand, and Tenet
and certain subsidiaries on the other hand, together with the
related Guaranty by Hillhaven, dated on or prior to January 31,
1990.
10.18(eee) Amended and Restated Guarantee Reimbursement Agreement dated as
of April 28, 1998 among Vencor, Inc., Vencor Healthcare, Inc.
and Tenet Healthcare Corporation, Inc.
10.19(fff)* Employment Agreement, dated March 5, 1999, between the Company
and Debra A. Cafaro.
10.20(ggg)* Form of Amendment to Employment Agreement, dated as of September
30, 1999, between Ventas, Inc. and each of Steven T. Downey, T.
Richard Riney and John C. Thompson.
10.21(hhh) First Amended and Restated Agreement of Limited Partnership,
executed and delivered by the Company and Ventas LP Realty,
L.L.C., dated as of January 31, 2000.
10.22(iii)* Employment Agreement dated May 6, 2000 by and between the
Company and Brian Wood.
10.23(jjj)* Stipulation and Order by and among Vencor, Inc., Vencor
Operating Inc. and Vencor Nursing Centers Limited Partnership
and Ventas, Inc. and Ventas Realty Limited Partnership, dated as
of September 13, 1999.
10.24(kkk) Stipulation and Order dated May 23, 2000 between the Company and
Vencor, Inc.
11 Statement regarding computation of per share earnings.
21(lll) Subsidiaries of the Company.
23 Consent of Independent Auditors.
- --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(a) Incorporated herein by reference to Exhibit 2.1 to Vencor, Inc.'s Form 8-K
dated March 19, 2001.
(b) Incorporated herein by reference to Exhibit 2.2 to Vencor, Inc.'s Form 8-K
dated March 19, 2001.
(c) Incorporated herein by reference to Exhibit 3 to the Company's Form 10-Q
for the quarterly period ended September 30, 1995.
(d) Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q
for the quarterly period ended June 30, 1998.
(e) Incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K
for the year ended December 31, 1997.
(f) Incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-K
for the year ended December 31, 1998.
(g) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K
filed February 8, 2000.
88
(h) Incorporated herein by reference to Exhibit 10.1.1 to the Company's Form
8-K filed March 8, 2000.
(i) Incorporated herein by reference to Exhibit 10.1.2 to the Company's Form
8-K filed March 8, 2000.
(j) Incorporated herein by reference to Exhibit 10.1.3 to the Company's Form
8-K filed March 8, 2000.
(k) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A.
(l) Incorporated herein by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A/A.
(m) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A/A.
(n) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A12B/A.
(o) Incorporated herein by reference to Exhibit 1 to the Company's Form 8-A/A,
filed on April 19, 1999.
(p) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A12B/A, filed on December 22, 1999.
(q) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A/A.
(r) Incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q
for the quarterly period ended September 30, 2000.
(s) Incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-Q
for the quarterly period ended September 30, 2000.
(t) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-
K for the year ended December 31, 1995.
(u) Incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-
Q for the quarterly period ended June 30, 1998.
(v) Incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-
K for the year ended December 31, 1998.
(w) Incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-
K for the year ended December 31, 1998.
(x) Incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-
K for the year ended December 31, 1998.
(y) Incorporated herein by reference to Exhibit 10.10 to the Company's Form
10-K for the year ended December 31, 1998.
(z) Incorporated herein by reference to Exhibit 10.11 to the Company's Form
10-K for the year ended December 31, 1998.
(aa) Incorporated herein by reference to Exhibit 10.9 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(bb) Incorporated herein by reference to Exhibit 10.11 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(cc) Incorporated herein by reference to Exhibit 10.12 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(dd) Incorporated herein by reference to Exhibit 10.8 to the Company's Form
10-K for the year ended December 31, 1998.
(ee) Incorporated herein by reference to Exhibit 10.9 to the Company's Form
10-K for the year ended December 31, 1998.
(ff) ncorporated herein by reference to Exhibit 99.1 to the Company's Form 8-
K filed April 12, 1999.
(gg) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended September 30, 1998.
(hh) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1998.
(ii) Incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-
K filed March 8, 2000.
(jj) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended September 30, 1998.
89
(kk) Incorporated herein by reference to Exhibit 10.20 to the Company's Form
10-K for the year ended December 31, 1998.
(ll) Incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1.
(mm) Incorporated herein by reference to Exhibit 10.14 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(nn) Incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1.
(oo) Incorporated herein by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8.
(pp) Incorporated herein by reference to Exhibit 10.13 to the Company's Form
10-K for the year ended December 31, 1994.
(qq) Incorporated herein by reference to Exhibit 10.14 to the Company's Form
10-K for the year ended December 31, 1994.
(rr) Incorporated herein by reference to Exhibit 10.17 to the Company's Form
10-K for the year ended December 31, 1995.
(ss) Incorporated herein by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1996.
(tt) Incorporated herein by reference to Exhibit 10.13 to the Company's Form
10-Q for the quarterly period ended June 30, 1998.
(uu) Incorporated herein by reference to Exhibit 10.30 to the Company's Form
10-K for the year ended December 31, 1998.
(vv) Incorporated herein by reference to Exhibit A to the Company's definitive
proxy statement on Schedule 14A dated April 18, 2000.
(ww) Incorporated herein by reference to the Exhibit B to the Company's
definitive proxy statement on Schedule 14A dated April 18, 2000.
(xx) Incorporated herein by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 of TheraTx.
(yy) Incorporated herein by reference to Exhibit 10.32 to the Company's Form
10-K for the year ended December 31, 1997.
(zz) Incorporated herein by reference to Exhibit 10.43 to the Company's Form
10-K for the year ended December 31, 1998.
(aaa) Incorporated herein by reference to Exhibit 10.44 to the Company's Form
10-K for the year ended December 31, 1998.
(bbb) Incorporated herein by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarterly period ended September 30, 1999.
(ccc) Incorporated herein by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of TheraTx.
(ddd) Incorporated herein by reference to Exhibit 10.37 to the Company's Form
10-K for the year ended December 31, 1995.
(eee) Incorporated herein by reference to Exhibit 10.20 to the Company's Form
10-K for the year ended December 31, 1999.
(fff) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended March 31, 1999.
(ggg) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended September 30, 1999.
(hhh) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K filed February 8, 2000.
(iii) Incorporated herein by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended June 30, 2000.
(jjj) Incorporated herein by reference to Exhibit 10.1 to the Company's 8-K
filed September 20, 1999.
(kkk) Incorporated herein by reference to Exhibit 10.2 to the Company's 10-Q
for the quarterly period ended June 30, 2000.
(lll) Incorporated herein by reference to Exhibit 21 to the Company's Form 10-
K for the fiscal year ended December 31, 1998.
90
(b) Reports on Form 8-K:
On December 5, 2000, the Company filed a Current Report on Form 8-K
announcing that on December 4, 2000 it had reached agreement with Vencor and
the other major constituencies in the Vencor reorganization on the material
economic terms of the second amended plan of reorganization of Vencor, which
was filed with the Bankruptcy Court on December 1, 2000.
On December 22, 2000, the Company filed a Current Report on Form 8-K
announcing that on December 20, 2000 it had received a waiver under its
existing long-term amended credit agreement extending the deadline for the
effective date of the plan of reorganization for Vencor from December 31, 2000
to March 31, 2001 with an additional three month extension option. The Company
also announced that its Board of Directors declared an annual cash dividend of
$0.29 per share for 2000, payable on January 15, 2001 to shareholders of
record on December 30, 2000.
On February 5, 2001, the Company filed a Current Report on Form 8-K
announcing that on January 30, 2001 Sheli Z. Rosenberg had been elected to the
Company's Board of Directors. The Company also announced that it would make a
presentation on February 6, 2001 at the UBS Warburg Global Healthcare Services
Conference held in New York City. Lastly, the Company announced that the
common stock dividends it paid or declared in 2000, including those paid in
January 2001 to stockholders of record on December 30, 2000, qualify to be
treated as ordinary income in 2000, in accordance with Internal Revenue Code
Section 857 governing real estate investment trusts.
On February 6, 2001, the Company filed a Current Report on Form 8-K
announcing that it delivered a presentation on February 6, 2001 at the UBS
Warburg Global Healthcare Services Conference held in New York City. The
Company also attached as an exhibit to the Form 8-K a copy of the slides it
presented at the conference.
On February 26, 2001, the Company filed a Current Report on Form 8-K
announcing that on February 23, 2001 Vencor had filed a brief with the
Bankruptcy Court stating that Vencor's Fourth Amended Plan had been
overwhelmingly accepted by the classes of creditors entitled to vote on the
Fourth Amended Plan.
On March 5, 2001, the Company filed a Current Report on Form 8-K announcing
that on March 1, 2001 the Bankruptcy Court confirmed Vencor's Fourth Amended
Plan and that the Company voted in favor of the Fourth Amended Plan.
On March 20, 2001, the Company filed a Current Report on Form 8-K
announcing the terms of the United States Settlement.
On April 2, 2001, the Company filed a Current Report on Form 8-K announcing
it intended to seek an automatic 15-day extension for the filing of its Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 to coordinate
such filing with Vencor's emergence from bankruptcy. The Company also
announced that it paid $35 million of principal to its lenders and exercised
the option in its Amended Credit Agreement to extend through April 30, 2001
the deadline by which the Vencor Effective Date must occur. Lastly, the
Company announced its results for the year ended December 31, 2000.
On April 11, 2001, the Company filed a Current Report on Form 8-K
announcing that it delivered a presentation on April 11, 2001 at the Merrill
Lynch Health Services Conference held in Washington, D.C. The Company also
attached as an exhibit to the Form 8-K a copy of the slides it presented at
the conference.
(c) Financial Statement Schedules:
The response to this portion of Item 14 is included in the financial
statement schedules listed in the index to Consolidated Financial Statements
and Financial Statement Schedule listed on page F-1 of this Report.
91
Item 14(c). Financial Statements and Supplemental Data
VENTAS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets at December 31, 2000 and 1999................... F-3
Consolidated Statements of Operations for the years ended December 31, 2000
and 1999 and the period from May 1, 1998 to December 31, 1998.............. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2000 and 1999 and the period from May 1, 1998 to
December 31, 1998.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000
and 1999 and the period from May 1, 1998 to December 31, 1998.............. F-6
Notes to Consolidated Financial Statements.................................. F-7
Consolidated Financial Statement Schedule
Schedule III--Real Estate and Accumulated Depreciation.................... S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions, and are inapplicable, or the
information required is included in the Consolidated Financial Statements or
notes thereto and therefore have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Ventas, Inc.
We have audited the accompanying consolidated balance sheets of Ventas,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years
then ended and for the period from May 1, 1998 through December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ventas, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for the years then ended and for the period
from May 1, 1998 through December 31, 1998, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 2, 2001
F-2
VENTAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(In thousands)
2000 1999
---------- ----------
Assets
Real estate investments:
Land................................................. $ 120,151 $ 120,891
Building and improvements............................ 1,055,992 1,061,656
---------- ----------
1,176,143 1,182,547
Accumulated depreciation............................. (327,598) (287,756)
---------- ----------
Total real estate investments...................... 848,545 894,791
Cash and cash equivalents.............................. 87,401 139,594
Restricted cash--disputed tax refunds and accumulated
interest.............................................. 26,893 --
Recoverable federal income taxes, restricted in 2000... 3,211 26,610
Deferred financing costs, net.......................... 10,875 5,702
Notes receivable from employees........................ 3,422 3,611
Other.................................................. 798 891
---------- ----------
Total assets....................................... $ 981,145 $1,071,199
========== ==========
Liabilities and stockholders' equity (deficit)
Liabilities:
Notes payable and other debt......................... $ 886,385 $ 974,247
United States Settlement............................. 96,493 --
Deferred gain on partial termination of interest rate
swap agreement...................................... 21,605 21,605
Accrued dividend..................................... 19,846 --
Accounts payable and other accrued liabilities....... 13,720 9,886
Other liabilities--disputed tax refunds and
accumulated interest................................ 30,104 26,610
Deferred income taxes................................ 30,506 30,506
---------- ----------
Total liabilities.................................. 1,098,659 1,062,854
---------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, 10,000 shares authorized, unissued.. -- --
Common stock, $0.25 par value; authorized 180,000
shares; issued 73,608 shares in 2000 and 1999....... 18,402 18,402
Capital in excess of par value....................... 132,228 139,723
Unearned compensation on restricted stock............ (1,338) (2,080)
Retained earnings (deficit).......................... (121,323) 6,409
---------- ----------
27,969 162,454
Treasury stock--5,172 shares in 2000 and 5,619 shares
in 1999............................................. (145,483) (154,109)
---------- ----------
Total stockholders' equity (deficit)............... (117,514) 8,345
---------- ----------
Total liabilities and stockholders' equity
(deficit)......................................... $ 981,145 $1,071,199
========== ==========
See accompanying notes.
F-3
VENTAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 and 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands, except per share amounts)
For the Period
From May 1, 1998
to December 31,
2000 1999 1998
-------- -------- ----------------
Revenues:
Rental income............................ $232,841 $228,600 $149,933
Interest and other income................ 9,481 4,391 201
-------- -------- --------
Total revenues......................... 242,322 232,991 150,134
-------- -------- --------
Expenses:
General and administrative............... 9,689 7,767 4,190
Professional fees........................ 10,813 12,527 1,507
Non-recurring employee severance costs... 355 1,272 --
United States Settlement................. 96,493 -- --
Loss on uncollectible amounts due from
tenants................................. 48,328 34,418 --
Loss on impairment of assets............. -- 1,927 --
Amortization of restricted stock grants.. 1,339 1,304 349
Depreciation on real estate investments.. 42,188 42,742 28,700
Interest................................. 95,319 88,753 59,428
-------- -------- --------
Total expenses......................... 304,524 190,710 94,174
-------- -------- --------
Income (loss) before gain on disposal of
real estate assets, provision for income
taxes and extraordinary loss.............. (62,202) 42,281 55,960
Net gain on real estate disposals.......... 957 254 --
-------- -------- --------
Income (loss) before provision for income
taxes and extraordinary loss.............. (61,245) 42,535 55,960
Provision for income taxes................. -- -- 21,151
-------- -------- --------
Income (loss) before extraordinary loss.... (61,245) 42,535 34,809
Extraordinary loss on extinguishment of
debt, net of income tax benefit of $4,935
in 1998................................... (4,207) -- (8,051)
-------- -------- --------
Net income (loss).......................... $(65,452) $ 42,535 $ 26,758
======== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary
loss.................................. $ (0.90) $ 0.63 $ 0.51
Extraordinary loss on extinguishment of
debt.................................. (0.06) -- (0.12)
-------- -------- --------
Net income (loss)...................... $ (0.96) $ 0.63 $ 0.39
======== ======== ========
Diluted:
Income (loss) before extraordinary
loss.................................. $ (0.90) $ 0.63 $ 0.51
Extraordinary loss on extinguishment of
debt.................................. (0.06) -- (0.12)
-------- -------- --------
Net income (loss)...................... $ (0.96) $ 0.63 $ 0.39
======== ======== ========
Weighted average number of shares
outstanding, basic........................ 68,010 67,754 67,681
Weighted average number of shares
outstanding, diluted...................... 68,131 67,989 67,865
See accompanying notes.
F-4
VENTAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2000 and 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands)
Capital
in Unearned
Excess Compensation
Common of On Retained
Stock Par Restricted Earnings Treasury
Par Value Value Stock (Deficit) Stock Total
--------- -------- ------------ --------- --------- ---------
Balance at May 1, 1998.. $18,389 $139,480 $ -- $ (36,395) $(157,869) $ (36,395)
Net income for the
period from May 1, 1998
to December 31, 1998... -- -- -- 26,758 -- 26,758
Proceeds from issuance
of shares for stock
incentive plans........ 13 142 -- -- -- 155
Grant of restricted
stock, net of
forfeitures............ -- 481 (2,311) -- 1,954 124
Amortization of
restricted stock
grants................. -- -- 349 -- -- 349
------- -------- ------- --------- --------- ---------
Balance at December 31,
1998................... 18,402 140,103 (1,962) (9,637) (155,915) (9,009)
Net income for the year
ended December 31,
1999................... -- -- -- 42,535 -- 42,535
Dividends to common
stockholders--$0.39 per
share.................. -- -- -- (26,489) -- (26,489)
Proceeds from issuance
of shares for stock
incentive plans........ -- (58) -- -- 62 4
Grant of restricted
stock, net of
forfeitures............ -- (232) (1,512) -- 1,744 --
Amortization of
restricted stock
grants................. -- (90) 1,394 -- -- 1,304
------- -------- ------- --------- --------- ---------
Balance at December 31,
1999................... 18,402 139,723 (2,080) 6,409 (154,109) 8,345
Net loss for the year
ended December 31,
2000................... -- -- -- (65,452) -- (65,452)
Dividends to common
stockholders--$0.91 per
share.................. -- -- -- (62,280) -- (62,280)
Proceeds from issuance
of shares for stock
incentive plans........ -- (168) -- -- 190 22
Grant of restricted
stock, net of
forfeitures............ -- (7,327) (597) -- 8,436 512
Amortization of
restricted stock
grants................. -- -- 1,339 -- -- 1,339
------- -------- ------- --------- --------- ---------
Balance at December 31,
2000................... $18,402 $132,228 $(1,338) $(121,323) $(145,483) $(117,514)
======= ======== ======= ========= ========= =========
See accompanying notes.
F-5
VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 and 1999 and the Period From
May 1, 1998 to December 31, 1998
(In thousands)
For the Period From
May 1, 1998 to
2000 1999 December 31, 1998
--------- --------- -------------------
Cash flows from operating activities:
Net income (loss)................... $ (65,452) $ 42,535 $ 26,758
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation....................... 42,264 42,803 28,700
Amortization of deferred financing
costs............................. 3,236 6,049 3,223
Amortization of restricted stock
grants............................ 1,339 1,304 349
Normalized rents................... (117) (140) --
Loss on impairment of assets....... -- 1,927 --
Gain on sale of assets............. (957) (254) --
Extraordinary loss on
extinguishment of debt............ 4,207 -- 8,051
Provision for deferred income
taxes............................. -- -- 20,151
United States Settlement........... 96,493 -- --
Changes in operating assets and
liabilities:
(Increase) decrease in amount due
from Vencor, Inc.................. -- 6,967 (6,843)
Increase in restricted cash........ (26,893) -- --
Increase (decrease) in accounts
receivable and other assets....... 23,378 (27,025) (87)
Increase in accounts payable and
accrued and other liabilities..... 7,840 29,414 6,455
--------- --------- -----------
Net cash provided by operating
activities...................... 85,338 103,580 86,757
Cash flows from investing activities:
Purchase of furniture and
equipment......................... -- (299) (15)
Sale (purchase) of real estate
properties........................ 5,170 254 (14,566)
Repayment (issuance) of notes
receivable from employees......... 189 416 (4,027)
Sale of Vencor, Inc. preferred
stock in connection with the 1998
Spin Off Transaction.............. -- -- 17,700
--------- --------- -----------
Net cash provided by (used in)
investing activities............ 5,359 371 (908)
Cash flows from financing activities:
Net change in borrowings under
revolving line of credit.......... -- 173,143 29,600
Proceeds from long-term debt....... -- -- 951,540
Repayment of long-term debt........ (87,862) (130,023) (54,596)
Repayment of long-term debt in
connection with the 1998 Spin
Off............................... -- -- (1,000,171)
Proceeds from partial termination
of interest rate swap agreement... -- 21,605 --
Payment of deferred financing
costs............................. (12,616) (2,935) (12,039)
Issuance of common stock........... 22 4 155
Cash distribution to stockholders.. (42,434) (26,489) --
--------- --------- -----------
Net cash provided by (used in)
financing activities............ (142,890) 35,305 (85,511)
--------- --------- -----------
Increase (decrease) in cash and cash
equivalents......................... (52,193) 139,256 338
Cash and cash equivalents at
beginning of period................. 139,594 338 --
--------- --------- -----------
Cash and cash equivalents at end of
period.............................. $ 87,401 $ 139,594 $ 338
========= ========= ===========
Supplemental disclosure of cash flow
information:
Interest paid including swap
payments and receipts........... $ 91,080 $ 86,125 $ 52,649
========= ========= ===========
See accompanying notes.
F-6
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Ventas, Inc. ("Ventas" or the "Company") is a Delaware corporation that
elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), beginning with the tax
year ended December 31, 1999. Although the Company believes that it has
satisfied the requirements to continue to qualify as a REIT for the year ended
December 31, 2000 and although the Company intends to continue to qualify as a
REIT for the year ending December 31, 2001 and subsequent tax years, it is
possible that economic, market, legal, tax or other considerations may cause
the Company to fail or elect not to qualify as a REIT in any such tax year. The
Company owned or leased 45 hospitals, 216 nursing facilities and eight personal
care facilities in 36 states as of December 31, 2000. The Company conducts
substantially all of its business through a wholly owned operating partnership,
Ventas Realty, Limited Partnership ("Ventas Realty"). The Company operates in
one segment which consists of owning and leasing health care facilities and
leasing or subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health care
services.
On May 1, 1998, the Company effected a corporate reorganization (the "1998
Spin Off") pursuant to which the Company was separated into two publicly held
corporations. A new corporation, subsequently named Vencor, Inc. ("Vencor"),
was formed to operate the hospital, nursing facility and ancillary services
businesses. Pursuant to the terms of the 1998 Spin Off, the Company distributed
the common stock of Vencor to stockholders of record of the Company as of April
27, 1998. The Company, through its subsidiaries, continued to hold title to
substantially all of the real property and to lease such real property to
Vencor. At such time, the Company also changed its name to Ventas, Inc. and
refinanced substantially all of its long-term debt. For financial reporting
periods subsequent to and including 1998 Spin Off, the historical financial
statements of the Company were assumed by Vencor, and the Company is deemed to
have commenced operations on May 1, 1998. In addition, for certain reporting
purposes under this Form 10-K and other filings, the Commission treats the
Company as having commenced operations on May 1, 1998. The financial results
for the years ended December 31, 2000 and 1999 are not comparable to the period
from May 1, 1998 to December 31, 1998 included in the Consolidated Statements
of Operations or the Consolidated Statements of Cash Flows due to the
difference in the time periods covered and the omission of a net provision for
income taxes in the 2000 and 1999 financial statements due to the Company's
qualifying in 1999 and intent to qualify in 2000 as a REIT and the use of a
portion of the Company's net operating loss ("NOL") carryforward.
The Company owns and leases a geographically diverse portfolio of health
care related facilities, including hospitals, nursing facilities and personal
care facilities whose principal tenants are health care related companies. As a
result of announcements during 1999 by Vencor, the subsequent bankruptcy filing
by Vencor and industry-wide factors, the Company suspended the implementation
of its original business strategy in 1999. The Company continued the suspension
of the implementation of its original business strategy during 2000 due to the
ongoing Vencor bankruptcy proceedings. See "Note 8--Transactions with Vencor."
New Accounting Pronouncements
In June of 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting ("SFAS") No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
F-7
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 133, as amended, requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. As discussed in "Note 4--Borrowing Arrangements," the Company uses
derivative instruments to protect against the risk of interest rate movements
on future cash flows under its variable rate debt agreements. On January 1,
2001, the Company adopted SFAS No. 133, and at that time, designated anew the
derivative instruments in accordance with the requirements of the new standard.
The transition adjustment to adopt SFAS No. 133 will be presented as a
cumulative effect adjustment, as described in Accounting Principles Board
Opinion No. 20, Accounting Changes, in the 2001 Consolidated Financial
Statements. The adoption of the standard as of January 1, 2001 resulted in the
recognition of a liability of $4.1 million to reflect the fair value of the
Company's interest rate swap agreement and an identical reduction to other
comprehensive income, a component of stockholders' equity. In addition, the
$21.6 million deferred gain recognized on a terminated derivative position (See
"Note 4--Borrowing Arrangements") was reclassified to other comprehensive
income, resulting in a cumulative adjustment to other comprehensive income of
$17.5 million. The transition amounts were determined based on the interpretive
guidance issued by the Financial Accounting Standards Board to date. The FASB
continues to issue interpretive guidance that could require changes in the
Company's application of the standard and adjustments to the transition
amounts. SFAS No. 133 may increase or decrease reported net income and
stockholders' equity prospectively, depending on future levels of interest
rates, the computed "effectiveness" of the derivatives, as that term is defined
by SFAS No. 133, and other variables affecting the fair values of derivative
instruments and hedged items, but will have no effect on cash flows. The
Company believes that the hedge will be highly effective as defined by SFAS No.
133.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
Ventas Realty and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
Real Estate Investments
Investments in real estate properties are recorded at cost. The cost of the
properties acquired is allocated between land and buildings based generally
upon independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 50 years.
Impairment of Assets
Provisions for impairment losses related to long-lived assets, if any, are
recognized when expected future cash flows are less than the carrying values of
the assets. If indicators of impairment are present, the Company evaluates the
carrying value of the related real estate investments in relationship to the
future undiscounted cash flows of the underlying operations. The Company
adjusts the net book value of leased properties and other long-lived assets to
fair value, if the sum of the expected future cash flow or sales proceeds is
less than book value. See "Note 9--Commitments and Contingencies."
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost
which approximates fair value.
F-8
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Financing Costs
Deferred financing costs are amortized as a component of interest expense
over the terms of the related borrowings using a method that approximates a
level yield, and are net of accumulated amortization of approximately $2.2
million and $9.2 million at December 31, 2000 and 1999, respectively.
Revenue Recognition
Rental revenue is recognized as earned over the terms of the related leases
which are treated as operating leases. Such income includes periodic increases
based on pre-determined formulas as defined in the lease agreements. See "Note
8--Transactions with Vencor--The 1998 Spin Off." Certain leases with tenants
other than Vencor contain provisions relating to increases in rental payments
over the terms of the leases. Rental income under these leases is recognized
over the term of each lease on a straight-line basis.
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
In addition, the Company grants shares of restricted stock to certain
executive officers and directors. Shares of restricted stock vest cumulatively
in two to four equal annual installments beginning either on the date of grant
or on first anniversary of the date of the grant. In accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
compensation expense is recognized for these restricted stock grants over the
vesting period.
Accounting Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of rental revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Segment Reporting
The Company has one primary reportable segment, which consists of investment
in real estate. The Company's primary business is owning and leasing health
care facilities and leasing or subleasing such facilities to third parties,
primarily Vencor (See "Note 3--Concentration of Credit Risk"). All leases are
triple-net leases, which require the tenants to pay all property related
expenses. Substantially all depreciation and interest expenses reflected in the
statement of operations relate to the ownership of the Company's investment in
real estate.
2. Real Estate Investments
In the 1998 Spin Off, the Company and Ventas Realty (collectively the
"Landlord") and Vencor, Inc. and Vencor Operating, Inc. (collectively, the
"Tenant") entered into four master lease agreements governing the lease of
substantially all of the Company's real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing facilities).
The leased properties under the four master lease agreements were divided into
groups of properties and a master lease agreement was entered into with respect
to each such group of properties. In August 1998, Ventas Realty and Vencor
Nursing Centers Limited Partnership entered into a fifth master lease agreement
for a single nursing facility in Corydon, Indiana. The four multi-facility
master lease
F-9
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreements and the single facility master lease agreement for Corydon, Indiana
are individually referred to herein as a "Master Lease" and collectively as
the "Master Leases." Under the Final Plan (as defined in "Note 3--
Concentration of Credit Risk"), if consummated, the Tenant would assume the
Master Leases and the Tenant and the Landlord simultaneously would amend and
restate the Master Leases in the form of four agreements styled as amended and
restated master leases (collectively, the "Amended Master Leases") setting
forth the material terms governing the properties covered by the Amended
Master Leases. The Corydon, Indiana facility would be incorporated into
Amended Master Lease #4. There would be several renewal bundles of properties
under each Amended Master Lease, with each bundle containing approximately 7
to 12 properties. All properties within a bundle would have primary terms
ranging from 10 to 15 years commencing May 1, 1998, plus renewal options
totaling fifteen years. Each Amended Master Lease would remain a "triple-net
lease" or an "absolute-net lease" pursuant to which Tenant is required to pay
all insurance, taxes, utilities, maintenance and repairs related to the
properties. Under each Amended Master Lease, the aggregate annual rent would
be referred to as Base Rent (as defined in each Amended Master Lease). Base
Rent would equal the sum of Current Rent (as defined in each Amended Master
Lease) and Accrued Rent (as defined in each Amended Master Lease). The Tenant
would be obligated to pay the portion of Base Rent that is Current Rent, and
unpaid Accrued Rents, as set forth below. From the first day of the first
month following the Vencor Effective Date through April 30, 2004, Base Rent
would equal Current Rent. Under the Amended Master Leases, the initial annual
aggregate Base Rent would be scheduled to be $180.7 million from the first day
of the first month following the Vencor Effective Date occurs to April 30,
2002. For the period from May 1, 2002 through April 30, 2004, annual aggregate
Base Rent, payable all in cash, would escalate on May 1 of each year at an
annual rate of 3.5% over the Prior Period Base Rent (as defined in the Amended
Master Leases) if certain Tenant revenue parameters are obtained. Assuming
such Tenant revenue parameters are obtained, Annual Base Rent under the
Amended Master Leases would be $187.0 million from May 1, 2002 to April 30,
2003 and $193.6 million from May 1, 2003 to April 30, 2004. Base Rent for the
month in which the Vencor Effective Date occurs would be $15.1 million, the
monthly rental required under the stipulation and order entered into by Vencor
and the Company on or about September 13, 1999 (the "Stipulation").
The minimum annual rentals that would be due under the terms of the Amended
Master Leases, excluding rent escalations would be as follows (in thousands):
2001.............................................................. $ 181,010
2002.............................................................. 180,714
2003.............................................................. 180,714
2004.............................................................. 180,714
2005.............................................................. 180,714
Thereafter........................................................ 791,193
----------
Total........................................................... $1,695,059
==========
If the Final Plan is consummated, of the $180.7 million of Annual Base Rent
under the Amended Master Leases to be paid for the period commencing on the
first day of the first month after the Vencor Effective Date, 67.1% is
attributable to nursing facilities and 32.9% is attributable to hospitals.
Each Amended Master Lease would provide that beginning May 1, 2004, if a
Vencor Bank Refinancing Transaction (as defined below) has occurred, the 3.5%
annual escalator would be paid in cash and the Base Rent would continue to
equal Current Rent. If a Vencor Bank Refinancing Transaction has not occurred,
then on May 1, 2004 the annual aggregate Base Rent would be comprised of (a)
Current Rent payable in cash which would escalate annually by an amount equal
to 2% of Prior Period Base Rent, and (b) an additional annual non-cash accrued
escalator amount of 1.5% of the Prior Period Base Rent which would accrete
from year to year including
F-10
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an interest accrual at LIBOR (as defined in the Amended Master Leases) plus
450 basis points (compounded annually) to be added to the annual accreted
amount (but such interest will not be added to the aggregate Base Rent in
subsequent years). The unpaid Accrued Rent would become payable, and all
future Base Rent escalators would be payable in cash, upon the occurrence of
any one of the following (a "Vencor Bank Refinancing Transaction"): (a) any
transaction pursuant to which all or substantially all of the indebtedness of
the Tenant under the Tenant's new senior secured credit agreement is purchased
by the Tenant or another party at the Tenant's direction or is repaid; (b) any
amendment of the new senior secured notes or new senior secured credit
agreement pursuant to which either (i) the principal amount of the Tenant's
indebtedness thereunder (as such indebtedness is in effect immediately prior
to such amendment) is increased (excepting therefrom increases attributable to
the capitalization of accrued interest or protective advances by the lenders
under the new senior secured notes), or (ii) the loan amount, maturity or
other material terms and conditions thereof (as such terms and conditions are
in effect immediately prior to such amendment), are modified to match, better
or otherwise respond to the terms and conditions of alternative financing
which has been offered to the Tenant; (c) any bona fide, binding offer is made
to the Tenant to provide financing on terms better than those of the new
senior secured credit agreement, sufficient to (i) pay in full, or purchase at
or above par, all of the indebtedness of the Tenant under the new senior
secured credit agreement and (ii) pay in full all Unpaid Accrued Rent owing as
of such date, whether or not such offer is accepted or consummated; and (d)
the termination or expiration of the applicable Amended Master Lease as to all
properties under such lease. However, with respect to subsection (d), above
the Landlord's right to receive payment of the Unpaid Accrued Rent is
subordinate to the receipt of payment of the indebtedness of the Tenant by the
lenders under the new senior secured notes issued pursuant to the new senior
secured credit agreement. Upon the occurrence of any of the events referenced
in subsections (a) through (d) above, the annual aggregate Base Rent payable
in cash would thereafter escalate at the annual rate of 3.5% and there would
be no further accrual feature for rents arising after the occurrence of such
events.
The future contracted minimum rentals, excluding rent escalations but with
normalized rents where applicable, for the remainder of the terms of non-
Vencor leases are as follows (in thousands):
Other(1)
--------
2001................................................................ $1,384
2002................................................................ 1,037
2003................................................................ 798
2004................................................................ 776
2005................................................................ 776
Thereafter.......................................................... 2,974
------
Total............................................................. $7,745
======
- --------
(1) Excludes tenants that have defaulted under the terms of their respective
leases or that have voluntarily filed for protection under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code").
During the fourth quarter of 2000, the Company sold a 99 bed facility in
Toledo, Ohio and a 120 bed facility in Grayling, Michigan which were leased
and operated by third party tenants. A net gain from the dispositions of these
facilities was recorded for $1.0 million.
3. Concentration of Credit Risk
As of December 31, 2000, 70.1% of the Company's real estate investments
related to skilled nursing facilities. The remaining real estate investments
consist of hospitals and personal care facilities. The Company's
F-11
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
facilities are located in 36 states and rental revenues from operations in any
one state do not account for more than ten percent (10%). Approximately 98.0%
of the Company's real estate investments, based on the original cost of such
investments, are operated by Vencor and approximately 98.6% (or 98.4% net of
write-offs) of rental revenue in 2000 was derived from the Master Leases.
Because the Company leases substantially all of its properties to Vencor and
Vencor is the primary source of the Company's rental revenues, Vencor's
financial condition and ability to satisfy its rent obligations under the
Master Leases and certain other agreements will significantly impact the
Company's rental revenues and its ability to service its indebtedness and its
other obligations and to make distributions to its stockholders. The operations
of Vencor were negatively impacted by changes in governmental reimbursement
rates, by its level of indebtedness and by certain other factors. As a result,
on September 13, 1999, Vencor filed for protection under the Bankruptcy Code
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). Following lengthy and extensive negotiations, in November
of 2000, the Company, Vencor and Vencor's major creditors reached agreement on
the material economic terms for the restructuring of Vencor's debt and lease
obligations. Vencor's fourth amended plan of reorganization was confirmed (as
confirmed, the "Final Plan") by court order entered on the docket on March 19,
2001.
Consummation of the Final Plan is subject to the satisfaction of numerous
conditions, many of which are outside of the control of the Company and Vencor.
There can be no assurance (a) that the Final Plan will be consummated, (b) if
the conditions to consummation of the Final Plan are satisfied, of the date
that the Final Plan will be consummated, or (c) that, if the Final Plan is not
amended to provide for a later effective date and the Final Plan is not
consummated, (i) Vencor will pursue or be successful in obtaining the approval
of its creditors or the Company for another plan of reorganization on the same
terms as the Final Plan or on alternate terms, (ii) the terms of any alternate
plan of reorganization will be acceptable to the Company, or (iii) the final
terms of any alternate plan of reorganization will not have a material adverse
effect on the business, financial condition, results of operations and
liquidity of the Company, on the Company's ability to service its indebtedness
and on the Company's ability to make distributions to its stockholders as
required to continue to qualify as a REIT (a "Material Adverse Effect"). The
Final Plan provides that the Vencor Effective Date shall occur no later than
May 1, 2001, but the Final Plan does not address the consequences if the Vencor
Effective Date does not occur on or before May 1, 2001. The Company believes
that the Final Plan will likely become effective.
There can be no assurance that Vencor will have sufficient assets, income
and access to financing to enable it to satisfy its obligations under the
Master Leases or that Vencor will perform its obligations under the Master
Leases. The Master Leases are structured as "triple-net leases" under which
Vencor is responsible for all or substantially all insurance, taxes and
maintenance and repair expenses required in connection with the leased
properties. The inability or unwillingness of Vencor to satisfy its obligations
under the Master Leases would have a Material Adverse Effect on the Company. In
addition, the credit standing of the Company is affected by the general
creditworthiness of Vencor. See "Note 8--Transactions with Vencor."
In addition, if the Final Plan is consummated and Vencor emerges from
bankruptcy, there can be no assurance that Vencor would have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Amended Master Leases or that Vencor would perform its obligations under
the Amended Master Leases. It would have a Material Adverse Effect on the
Company if Vencor was unable to or chose not to perform its obligations under
the Amended Master Leases.
The Company generally invests excess cash in short term maturities of time
deposits and other similar cash equivalents as required by the Amended Credit
Agreement (as defined below). See "Note 4--Borrowing Arrangements."
F-12
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Borrowing Arrangements
On January 31, 2000, the Company and all of its lenders entered into the
Amended and Restated Credit, Security, Guaranty and Pledge Agreement (the
"Amended Credit Agreement"), which amended and restated the $1.2 billion credit
agreement (the "Bank Credit Agreement") the Company entered into at the time of
the 1998 Spin Off. Under the Amended Credit Agreement, borrowings bear interest
at an applicable margin over an interest rate selected by the Company. Such
interest rate may be either (a) the Base Rate, which is the greater of (i) the
prime rate or (ii) the federal funds rate plus 50 basis points, or (b) LIBOR.
Borrowings under the Amended Credit Agreement are comprised of: (1) a $25.0
million revolving credit line (the "Revolving Credit Line") that expires on
December 31, 2002, which bears interest at either LIBOR plus 2.75% or the Base
Rate plus 1.75%; (2) a $200.0 million term loan due December 31, 2002 (the
"Tranche A Loan"), which bears interest at either LIBOR plus 2.75% or the Base
Rate plus 1.75%; (3) a $300.0 million term loan due December 31, 2005 (the
"Tranche B Loan"), which bears interest at either LIBOR plus 3.75% or the Base
Rate plus 2.75%; and (4) a $473.4 million term loan due December 31, 2007 (the
"Tranche C Loan"), which bears interest at either LIBOR plus 4.25% or the Base
Rate plus 3.25%. The interest rate on the Tranche B Loan will be reduced by
.50% (50 basis points) once $150.0 million of the Tranche B Loan has been
repaid. In addition, in connection with the consummation of the Amended Credit
Agreement on January 31, 2000, the Company paid a $7.3 million loan-
restructuring fee. This fee is being amortized proportionately over the terms
of the related loans and agreements.
Under the terms of the Amended Credit Agreement, it was an Event of Default
if the Vencor Effective Date did not occur on or before December 31, 2000 (the
"Vencor Effective Date Deadline"). When it became apparent that the Vencor
Effective Date would not occur by December 31, 2000, the Company initiated
discussions with the administrative agent for the lenders under the Amended
Credit Agreement in an effort to obtain a waiver or amendment of this
provision. The Company and substantially all of its lenders entered into an
Amendment and Waiver dated as of December 20, 2000 (the "Amendment and Waiver")
to the Amended Credit Agreement, whereby the deadline for the Vencor Effective
Date Deadline was extended from December 31, 2000 to March 31, 2001. In
consideration for this extension, the Company paid a fee of $0.2 million to the
lenders executing the Amendment and Waiver and agreed to amend the amortization
schedules on certain of the loans under the Amended Credit Agreement. The
Company exercised its option under the Amendment and Waiver to extend the
Vencor Effective Date Deadline from March 31, 2001 to April 30, 2001. In
consideration of this extension, the Company paid a fee of approximately $0.1
million to the lenders that executed the Amendment and Waiver. Under the
Amendment and Waiver, the Company has the further option to extend the Vencor
Effective Date Deadline through (a) May 31, 2001 in exchange for the payment on
or before April 30, 2001 of a fee equal to 0.20% per annum on the outstanding
principal balance of the loans under the Amended Credit Agreement and (b) June
30, 2001 in exchange for the payment on or before May 31, 2001 of a fee of
0.25% per annum on the outstanding principal balance of the loans under the
Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, an Event of Default will be
deemed to have occurred if the Vencor Effective Date does not occur on or
before the Vencor Effective Date Deadline, as same may be extended. Subject to
any defenses available to the Company, if such an Event of Default were to
occur, the Company could be required to immediately repay all the indebtedness
under the Amended Credit Agreement upon the demand of the "Required Lenders,"
as defined in the Amended Credit Agreement. If it appears that the Vencor
Effective Date will not occur by the Vencor Effective Date Deadline, as
extended, the Company intends to initiate discussions with the administrative
agent for its lenders under the Amended Credit Agreement to obtain a waiver or
amendment of this covenant. Under the Amended Credit Agreement, a waiver or
amendment of this covenant must be approved by lenders holding (in the
aggregate) greater than 50% of the total credit exposure under the Amended
Credit Agreement. There can be no assurance (i) that the Final Plan or an
alternate plan of reorganization for Vencor will become effective on or before
the Vencor Effective Date Deadline, as same may be extended, (ii) that the
Company will obtain a waiver or amendment of the covenant if
F-13
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Final Plan or an alternate plan of reorganization for Vencor does not
become effective on or before the Vencor Effective Date Deadline, as same may
be extended, (iii) that the terms of such a waiver or amendment would not have
a Material Adverse Effect on the Company, or (iv) that the failure to obtain
such a waiver or amendment would not have a Material Adverse Effect on the
Company.
The Amended Credit Agreement, as revised by the Amendment and Waiver,
provides for the following amortization schedule: (a) with respect to the
Tranche A Loan, (i) $50.0 million was paid at closing on January 31, 2000,
(ii) $35.0 million was paid on December 20, 2000, (iii) $15.0 million was paid
on March 30, 2001, and (iv) after the Vencor Effective Date, all Excess Cash
Flow pursuant to a monthly sweep as more fully described below (the "Monthly
Sweep") will be applied to the Tranche A Loan until $200.0 million in total
has been paid down on the Amended Credit Agreement, with the remaining
principal balance of the Tranche A Loan due December 31, 2002; (b) with
respect to the Tranche B Loan, (i) $20.0 million was paid on March 30, 2001,
(ii) a one-time paydown of Excess Cash is scheduled to be made on or before
the thirtieth day after the Vencor Effective Date as more fully described
below (the "B Sweep"), (iii) $30.0 million is scheduled to be paid on December
30, 2003 and $50.0 million is scheduled to be paid on December 30, 2004 and
(iv) the remaining principal balance is due December 31, 2005; and (c) with
respect to the Tranche C Loan, there are no scheduled paydowns of principal
and the final maturity of December 31, 2007. The facilities under the Amended
Credit Agreement are pre-payable without premium or penalty.
The B Sweep, if any, is scheduled to be made on the thirtieth day after the
Vencor Effective Date (the "B Sweep Payment Date"). The B Sweep is a one-time
payment equal to the Company's cash and cash equivalents on hand on the B
Sweep Payment Date minus the sum of (to the extent not then paid) (i) amounts
payable under the United States Settlement (as defined in "Note 8--
Transactions with Vencor") during the succeeding three months, (ii) a
reasonable reserve to pay the applicable portion of the Company's minimum REIT
dividend for quarters prior to and including the Vencor Effective Date, (iii)
$1.0 million and (iv) other specified amounts. Currently, the Company believes
that it will not be required to pay any amounts under the B Sweep.
The first Monthly Sweep is scheduled to be made on the last day of the
month following the first full calendar month after the date that is thirty
days after the Vencor Effective Date and will cover the period from 30 days
after the Vencor Effective Date to the end of the last day of the month
preceding the payment date. Thereafter, the Monthly Sweep will be made on the
last business day of each month for the preceding month. The Monthly Sweep
will be in an amount equal to the Company's total cash receipts for the
applicable period, minus the sum of (i) cash disbursements by the Company
during the applicable period, (ii) up to $1.0 million for a working capital
reserve, (iii) a reserve in an amount equal to the unpaid minimum REIT
dividend for all prior periods and for the current calendar quarter, (iv) an
amount equal to the obligations due under the United States Settlement during
the next three months, (v) taxes and (vi) other specified amounts.
The following is a summary of long term borrowings at December 31, 2000 (in
thousands):
Amount
--------
Tranche A Loan, bearing interest at a rate of LIBOR plus 2.75%
(9.48% at December 31, 2000), due December 31, 2002............... $113,017
Tranche B Loan, bearing interest at a rate of LIBOR plus 3.75%
(10.48% at December 31, 2000), due December 31, 2005.............. 300,000
Tranche C Loan, bearing interest at a rate of LIBOR plus 4.25%
(10.98% at December 31, 2000), due December 31, 2007.............. 473,368
--------
$886,385
========
F-14
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Amended Credit Agreement is secured by liens on substantially all of
the Company's real property and any related leases, rents and personal
property. Certain properties are being held in escrow by counsel for the
agents under the Amended Credit Agreement pending the receipt of third party
consents and/or resolution of certain other matters. In addition, the Amended
Credit Agreement contains certain restrictive covenants, including, but not
limited to, the following: (a) until such time that $200.0 million in
principal amount has been paid down, the Company can only pay dividends based
on a certain minimum percentage of its taxable income (equal to 95% of its
taxable income for the year ending December 31, 2000 and 90% of its taxable
income for years ending on or after December 31, 2001); however, after $200.0
million in total principal paydowns, the Company will be allowed to pay
dividends for any year in amounts up to 80% of funds from operations ("FFO"),
as defined in the Amended Credit Agreement; (b) limitations on additional
indebtedness, acquisitions of assets, liens, guarantees, investments,
restricted payments, leases, affiliate transactions and capital expenditures;
and (c) certain financial covenants, including requiring that the Company have
(i) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (ii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month after the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a Material Adverse Effect. In addition, the Amended
Credit Agreement provides that if the Company is in compliance with the
financial covenants and the covenant relating to releases in the Vencor
bankruptcy on the Vencor Effective Date, no event or condition arising
primarily from the Final Plan shall be deemed to have caused a "Material
Adverse Effect," as defined in the Amended Credit Agreement, to have occurred.
If the Vencor Effective Date occurs, the Company thereafter would be
subject to certain financial covenants under the Amended Credit Agreement,
including those requiring the Company to have (i) Consolidated EBITDA (as
defined in the Amended Credit Agreement) on the last day of each fiscal
quarter after the Vencor Effective Date at least equal to 80% of the Company's
Projected Consolidated EBITDA (as defined in the Amended Credit Agreement) on
the Vencor Effective Date; and (ii) a ratio of Consolidated EBITDA to
Consolidated Interest Expense (as defined in the Amended Credit Agreement) on
a trailing four quarter basis, of at least 1.20 to 1.00. Certain of these
covenants may be waived by holders of more than 50% of the principal
indebtedness under the Amended Credit Agreement.
During the first quarter of 2000, the Company incurred an extraordinary
loss of approximately $4.2 million relating to the write-off of the
unamortized deferred financing costs associated with the Bank Credit
Agreement.
In connection with the 1998 Spin Off, the Company refinanced substantially
all of its long-term debt. As a result, the Company incurred an after tax
extraordinary loss on extinguishment of debt of $8.1 million, net of a $4.9
million tax benefit for the period from May 1, 1998 to December 31, 1998.
The following is a summary of long-term borrowings at December 31, 1999 (in
thousands):
Amount
--------
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25% (8.72% to 8.74% at December 31, 1999).................. $202,743
Bridge facility loan, bearing interest at a base rate of LIBOR plus
2.75% (9.23% at December 31, 1999)................................ 275,000
Term A Loan, bearing interest at a base rate of LIBOR plus 2.25%
(8.74% at December 31, 1999)...................................... 181,818
Term B Loan, bearing interest at a base rate of LIBOR plus 2.75%
(9.24% at December 31, 1999)...................................... 314,682
Other.............................................................. 4
--------
$974,247
========
F-15
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 29, 1999, in conjunction with the execution of an agreement with
over 95% of the Company's lenders regarding the restructuring of the Company's
long term debt, including the $275.0 million Bridge Loan (the "Waiver and
Extension Agreement"), the Company paid a $2.4 million waiver fee which was
fully amortized over the three month extension period under the Waiver and
Extension Agreement. In connection with the consummation of the Amended Credit
Agreement on January 31, 2000, the Company paid a $7.3 million loan
restructuring fee. This fee is being amortized proportionately over the terms
of the related loans and agreements.
In connection with the 1998 Spin Off and the consummation of the Bank Credit
Agreement, the Company entered into an interest rate swap agreement (on a
notional amount of $850.0 million outstanding at December 31, 2000) to reduce
the impact of changes in interest rates on the Company's floating rate debt
obligations. The original agreement expired in varying amounts through December
2007; however, as discussed below, the agreement was amended to expire in
varying amounts through June 2003. The agreement provides for the Company to
pay a fixed rate at 5.985% and receive LIBOR (floating rate). The terms of the
interest rate swap agreement require that the Company make cash payment or
otherwise post collateral to the counterparty if the fair value loss to the
Company exceeds certain levels. The threshold levels vary based on the
relationship between the Company's debt obligations and the tangible fair value
of its assets as defined in the Bank Credit Agreement.
On August 4, 1999, the Company entered into an agreement with the interest
rate swap agreement counterparty to shorten the maturity of the interest rate
swap agreement from December 31, 2007 to June 30, 2003, in exchange for a
payment in 1999 from the counterparty to the Company of $21.6 million. So long
as the Company has debt in excess of $750.0 million, the Company will amortize
the $21.6 million payment for financial accounting purposes in future periods
beginning in July 2003 and ending December 2007. See "Note 1--Organization and
Significant Accounting Policies--New Accounting Pronouncements."
On January 31, 2000, the Company entered into a letter agreement with the
counterparty to the swap agreement for the purpose of amending the swap
agreement. The letter agreement provides that, for purposes of certain
calculations set forth in the swap agreement, the parties agree to continue to
use certain defined terms set forth in the Bank Credit Agreement. As of
December 31, 2000, no collateral was required to be posted under the interest
rate swap agreement.
The notional amount of the interest rate swap agreement was $850.0 million
on December 31, 2000 and will amortize as follows (in thousands):
December 31, 2001.................................................... $50,000
December 31, 2002.................................................... 25,000
June 30, 2003........................................................ 775,000
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement. However, the Company does not
anticipate nonperformance by the financial institution counterparty. The net
interest rate difference incurred on these contracts for the years ended
December 31, 2000 and 1999 and for the period from May 1, 1998 to December 31,
1998 was $4.3 million receipt, $6.4 million payment and $1.2 million payment,
respectively, and has been included in interest expense in the Consolidated
Financial Statements.
5. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
. Cash and cash equivalents: The carrying amount of cash and cash
equivalents reported in the balance sheet approximates fair value because
of the short maturity of these instruments.
F-16
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Notes receivable from employees: The fair values of the notes receivable
from employees are estimated using a discounted cash flow analysis, using
interest rates being offered for similar loans to borrowers with similar
credit ratings.
. Interest rate swap agreement: The fair values of the Company's interest
rate swap agreement are based on rates being offered for similar
arrangements.
. Notes payable: The fair values of the Company's borrowings under variable
rate agreements approximate their carrying value.
. United States Settlement: The fair value of the Company's settlement with
the United States approximates its carrying value.
At December 31, 2000 and 1999 the carrying amounts and fair values of the
Company's financial instruments are as follows (in thousands):
2000 1999
------------------- -----------------
Carrying Carrying Fair
Amount Fair Value Amount Value
-------- ---------- -------- --------
Cash and cash equivalents............. $ 87,401 $ 87,401 $139,594 $139,594
Notes receivable from employees....... 3,422 2,921 3,611 3,219
Interest rate swap agreement.......... -- (4,129) -- 20,370
Notes payable......................... 886,385 886,385 974,247 974,247
United States Settlement.............. 96,493 96,493 -- --
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.
6. Stockholders' Equity and Stock Options
The Company has five plans under which options to purchase common stock
have been, or may be, granted to officers, employees and non-employee
directors (the following are collectively referred to as the "Plans"): (1) The
1987 Incentive Compensation Program (Employee Plan); (2) The 2000 Incentive
Compensation Plan (Employee Plan); (3) The 1987 Stock Option Plan for Non-
Employee Directors; (4) The 2000 Stock Option Plan for Directors; and (5) The
TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. On May 23, 2000,
the Company's shareholders voted in favor of the amendment and restatement of
the 1997 Stock Option Plan for Non-Employee Directors as the 2000 Stock Option
Plan for Directors and the amendment and restatement of the 1997 Incentive
Compensation Plan as the 2000 Incentive Compensation Plan (the "2000 Incentive
Plan"). As part of the amendment and restatement of the 2000 Incentive Plan,
the Company's Board of Directors increased the number of shares reserved for
issuance under the 2000 Incentive Plan upon the exercise of awards and payment
of benefits in connection with awards by 2.22 million shares and increased the
maximum number of shares with respect to which stock options can be granted
during a calendar year to any given individual to 750,000 shares.
Under the Plans, options are exercisable at the market price at the date of
grant, expire ten years from the date of grant, and vest over varying periods
ranging from one to four years. The Company has also granted options and
restricted stock to certain officers, employees and non-employee directors
outside of the Plans. The options and shares of restricted stock that have
been granted outside the Plans vest over varying periods and the options are
exercisable at the market price at the date of grant and expire ten years from
the date of grant. As of
F-17
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, options for 4,065,775 shares had been granted to eligible
participants and remained outstanding (including options granted and held by
Vencor employees) under the provisions of the Plans. As of December 31, 2000,
options for 679,861 shares had been granted outside of the Plans to certain
employees and non-employee directors and remained outstanding. The Company
granted 466,705 and 188,500 shares of restricted stock for the years ended
December 31, 2000 and 1999, respectively, and 150,000 shares of restricted
stock for the period from May 1, 1998 to December 31, 1998. The market value
of the restricted shares on the date of the award has been recorded as
unearned compensation on restricted stock, with the unamortized balance shown
as a separate component of stockholders' equity. Unearned compensation is
amortized to expense over the vesting period, with charges to operations of
approximately $1.3 million for both 2000 and 1999, respectively, and $0.3
million for the period from May 1, 1998 to December 31, 1998.
The Company currently utilizes the 2000 Incentive Compensation Plan
(Employee Plan) and the 2000 Stock Option Plan for Directors for option and
stock grants. Under the terms of the Ventas, Inc. 2000 Incentive Compensation
Plan (Employee Plan), the Company has reserved 5,620,000 shares for grants to
be issued to employees. Under the terms of the Ventas, Inc. 2000 Stock Option
Plan for Directors, the Company has reserved 200,000 shares for grants to be
issued to non-employee directors. As of December 31, 2000, the number of
shares available for future grants under the Ventas, Inc. 2000 Incentive
Compensation Plan (Employee Plan) are 3,176,339 and under the Ventas, Inc.
2000 Stock Option Plan for Directors are 150,500.
The following is a summary of stock option activity for the Company in
1998, 1999 and 2000:
Weighted
Range of Exercise Average
Activity Shares Prices Exercise Price
-------- ---------- --------------------- --------------
A. 2000 Activity
Outstanding at beginning
of period............... 5,066,530 $ 0.1231 - $27.0095 $13.4575
Options Granted........ 319,739 3.3125 - 4.0000 3.3481
Options Exercised...... (19,688) 0.8000 - 3.0595 1.1228
Options Canceled....... (620,945) 0.6279 - 27.0095 14.3051
---------- -------- -------- --------
Outstanding at end of
period.................. 4,745,636 $ 0.1231 - $26.0476 $12.7134
==========
Exercisable at end of
period.................. 3,631,587 $ 0.1231 - $26.0476 $13.2590
==========
B. 1999 Activity
Outstanding at beginning
of period............... 5,379,229 $ 0.1231 - $27.0095 $15.6758
Options Granted........ 1,052,000 1.6880 - 12.1875 5.2289
Options Exercised...... (7,031) 0.5479 - 0.5479 0.5479
Options Canceled....... (1,357,668) 1.4774 - 26.0091 15.8066
---------- -------- -------- --------
Outstanding at end of
period.................. 5,066,530 $ 0.1231 - $27.0095 $13.4926
==========
Exercisable at end of
period.................. 3,046,064 $ 0.1231 - $27.0095 $13.8731
==========
C. 1998 Activity
Outstanding at beginning
of period............... 4,308,674 $ 0.1231 - $27.8200 $16.4776
Options Granted........ 2,097,900 10.8125 - 17.5831 14.0358
Options Exercised...... (62,811) 0.1970 - 18.8004 4.1115
Options Canceled....... (964,534) 5.8851 - 27.8200 16.4455
---------- -------- -------- --------
Outstanding at end of
period.................. 5,379,229 $ 0.1231 - $27.0095 $15.6758
==========
Exercisable at end of
period.................. 2,171,706 $ 0.1231 - $27.0095 $15.8051
==========
F-18
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock options outstanding at December 31, 2000 follows:
Outstanding Exercisable
Range of As of Weighted Average as of
Exercise December 31, Remaining Weighted Average December 31, Weighted Average
Prices 2000 Contractual Life Exercise Price 2000 Exercise Price
- -------- ------------ ---------------- ---------------- ------------ ----------------
$ 0.1231
to
$ 8.0000 1,260,417 8.5 $ 4.5715 844,807 $ 4.7900
$ 8.0001
to
$13.2500 377,841 4.7 11.2891 306,378 11.4746
$13.2501
to
$26.0476 3,107,378 5.7 16.1890 2,480,402 16.3639
--------- ---------
4,745,636 6.4 $12.7134 3,631,587 $13.2590
========= =========
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation
(Statement 123). This standard prescribes a fair value based method of
accounting for employee stock options or similar equity instruments and
requires certain pro forma disclosures. For purposes of the pro forma
disclosures required under Statement 123, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
estimated fair value of options granted for the years ended December 31, 2000
and 1999 and the period from May 1, 1998 to December 31, 1998 was
approximately $135,770, $1,232,000 and $817,000, respectively.
Pro forma information follows (in thousands, except per share amounts):
2000 1999 1998
-------- ------- -------
Pro forma income (loss) available to common
stockholders................................... $(69,138) $36,203 $19,803
Pro forma earnings (loss) per common share:
Basic and Diluted............................. $ (1.02) $ .53 $ .29
In determining the estimated fair value of the Company's stock options as
of the date of grant, a Black-Scholes option pricing model was used with the
following assumptions:
2000 1999 1998
------- ------- -------
Risk free interest rate......................... 6.7% 6.0% 6.0%
Dividend yield.................................. 14.0% 12.0% 9.0%
Volatility factors of the expected market price
for the Company's common stock................. .567% .25% .25%
Weighted average expected life of options....... 8 years 8 years 8 years
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
7. Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code
of 1986 (the "Code"), as amended, commencing with its taxable year that ended
December 31, 1999. The Company intends to continue to operate in such a manner
as to enable it to qualify as a REIT. The Company's actual qualification and
taxation
F-19
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as a REIT depends upon its ability to meet, on a continuing basis, distribution
levels, stock ownership, and the various qualification tests imposed under the
Code. No net provision for income taxes has been recorded in the Consolidated
Financial Statements for the years ended December 31, 2000 and 1999 due to the
Company's intention to continue to qualify as a REIT, distribute 95% of its
2000 and 1999 taxable income as a dividend and the existence of carryforward
operating losses that offset the remaining 2000 and 1999 liability for federal
corporate income taxes. Although the Company believes that it has satisfied the
requirements to continue to qualify as a REIT for the year ended December 31,
2000 and although the Company intends to continue to qualify as a REIT for the
year ended December 31, 2000 and subsequent years, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail or elect not to qualify as a REIT in any such tax year.
As a REIT, the Company is generally not subject to federal income tax on
income it distributes to stockholders, as long as it distributes 100% of REIT
taxable income. The Company believes it has met the annual distribution
requirement by payment of 95% of its estimated 2000 taxable income as a result
of its $0.29 per share dividend on January 15, 2001. The Company believes that
it met the annual distribution requirement for 1999 as a result of its $0.39
per share dividend paid in February 1999 and its $0.62 per share dividend paid
in September 2000. During 1999, the Company was subject to a federal excise tax
under REIT regulations of the Code to the extent that required distributions to
qualify as a REIT for 1999 were not paid by January 31, 2000 and recorded such
expense and liability of $1.5 million in the Consolidated Financial Statements
for the year ended December 31, 1999. Net taxable income for federal income tax
purposes results from net income for financial reporting purposes adjusted for
the differences between the financial reporting and tax bases of assets and
liabilities, including depreciation, impairment losses on real estate, the
United States Settlement liability, and the deferred gain on the partial
termination of the interest rate swap agreement. For the eight-month period
from May 1, 1998 to December 31, 1998, the Company was taxed at the statutory
corporate rates as a C corporation.
The net difference between tax bases and the reported amount of the
Company's assets and liabilities for federal income tax purposes was
approximately $48.3 million more than the book bases of those assets and
liabilities for financial reporting purposes for the year ended December 31,
2000. For the year ended December 31, 1999, the net difference between tax
bases and the reported amount of the Company's assets and liabilities for
federal income tax purposes was $37.7 million less than the book bases of those
assets and liabilities for financial reporting purposes.
The Company made no income tax payments for the years ended December 31,
2000 and 1999 and the period from May 1, 1998 to December 31, 1998. The Company
utilized net operating loss ("NOL") carryforwards of $1.0 million and $3.0
million in 2000 and 1999, respectively, to offset taxes due on the 5% of
undistributed net taxable income of the Company for these years. During the
year ended December 31, 2000, the Company received refunds for state and local,
franchise and other miscellaneous taxes of $1.1 million and the Company's
entitlement to such refunds was not disputed by Vencor. As of December 31,
2000, the Company has recorded a tax contingency of $3.7 million for estimated
tax contingencies arising from and prior to the Spin Off. Included in general
administrative expenses on the Company's 2000 statement of operations is a tax
contingency expense of $2.6 million for federal, state, local, franchise and
other miscellaneous taxes, net of the Company's receipt in 2000 of refunds
referred to above.
As a former C corporation for federal income tax purposes, the Company
potentially remains subject to corporate level taxes for any asset dispositions
between January 1, 1999 to December 31, 2008 ("built-in gains tax"). The amount
of income potentially subject to corporate level tax is generally equal to the
excess of the fair value of the asset over its adjusted tax basis as of
December 31, 1998, or the actual amount of taxable gain, whichever is greater.
Any gain recognized during this period of time could be offset by available net
operating
F-20
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
losses and capital loss carryforwards. The deferred income tax liability of
$30.5 million at December 31, 2000 and 1999 reflects a previously established
liability to be utilized for any built-in gain tax incurred on assets that are
disposed of prior to January 1, 2009.
On February 3, 2000 the Company received a refund (the "Refund") of
approximately $26.6 million from the Internal Revenue Service representing
$25.3 million from the refund of income taxes paid by it from 1996 and 1997 and
$1.3 million from accrued interest thereon as a result of a carrybacks of
losses reported in the Company's 1998 federal income tax return. The United
States Department of the Treasury--Internal Revenue Service filed a proof of
claim in the Vencor bankruptcy proceeding asserting a claim against Vencor for
the Refund. The Company asserted that it was entitled to the Refund pursuant to
the terms of the Tax Allocation Agreement and other legal grounds. Vencor, in
turn, asserted that it was entitled to the Refund pursuant to the terms of the
Tax Allocation Agreement (See "Note 8--Transactions with Vencor") and on other
legal grounds.
The Company, Ventas Realty and Vencor entered into a stipulation relating to
certain of these federal, state and tax refunds (including the Refund) on or
about May 23, 2000 (the "Tax Stipulation"). Under the terms of the Tax
Stipulation, which was approved by the Vencor Bankruptcy Court on May 31, 2000,
proceeds of certain federal, state and local tax refunds (together with
interest paid by the applicable taxing authority) for tax years ending prior to
or including April 30, 1998 (the "Subject Periods"), received by either company
on or after September 13, 1999, with interest thereon from the date of deposit
at the lesser of the actual interest earned and 3% per annum, were held by the
recipient of such refunds in segregated interest bearing accounts. The Tax
Stipulation contains notice provisions relating to the withdrawal of funds by
either company from the segregated accounts for the payment of certain federal,
state and local taxes for the Subject Periods and related fees and expenses. If
the Final Plan is consummated, the Company and Vencor would enter into a Tax
Refund Escrow Agreement and First Amendment of the Tax Allocation Agreement
(the "Tax Refund Escrow Agreement"). The Tax Refund Escrow Agreement would
govern the relative entitlement to certain tax refunds for the Subject Periods
that each company received or may receive in the future. The Tax Refund Escrow
Agreement would amend and supplement the Tax Allocation Agreement and supersede
the Tax Stipulation. Under the terms of the Tax Refund Escrow Agreement, all
such refunds received for Subject Periods would be deposited into an escrow
account with a third-party depository institution. The funds would be used to
satisfy any potential tax liabilities for either company for the Subject
Periods. When audits of the relevant tax periods have been concluded, any
residual amount remaining in the escrow would be shared equally by the Company
and Vencor. See "Note 8--Transactions with Vencor--The Tax Allocation
Agreement, Tax Stipulation and Tax Refund Escrow Agreement."
On October 18, 2000 the Internal Revenue Service completed its review of the
Company's federal income tax returns for the tax years ending December 31, 1995
and 1996. The Company estimates it will receive a refund of approximately $2.4
million (the "Audit Refund") plus interest as a result of the audit adjustments
to the Company's 1995 and 1996 federal income tax returns. On January 16, 2001
the Internal Revenue Service completed its review of the Company's federal
income tax returns for the tax years ending December 31, 1992 through 1994. The
Company estimates it will be entitled to $0.9 million plus interest as a result
of the audit adjustments for these periods.
The Internal Revenue Service is currently reviewing the federal income tax
returns of the Company for tax years ending December 31, 1997 and 1998. There
can be no assurances as to the ultimate outcome of these matters or whether
such outcome will have a Material Adverse Effect on the Company. However, the
resulting tax liabilities, if any, for the tax years ended December 31, 1997
and 1998 will be satisfied first from the loss of NOL carryforwards (including
the NOL carryforwards that were utilized to offset the Company's federal income
tax liability for 1999 and 2000), and if the tax liabilities exceed the amount
of NOL carryforwards, then from
F-21
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the amounts held by the Company in the segregated accounts under the Tax
Stipulation provided that the Tax Stipulation is then in effect or, if the
Final Plan has been consummated, from the escrowed amounts under the Tax Refund
Escrow Agreement. To the extent such NOL carryforwards and the available
amounts under either the Tax Stipulation, if it is then in effect, or the Tax
Refund Escrow Agreement, if the Final Plan has been consummated, are not
sufficient to satisfy such liabilities, Vencor has indemnified the Company for
certain but not all of these tax liabilities under the Tax Allocation
Agreement. There can be no assurance that the NOL carryforwards and the
amounts, if any, under the Tax Stipulation or the Tax Refund Escrow Agreement
will be sufficient to satisfy these liabilities or that Vencor has any
obligation to indemnify the Company for particular liabilities or that Vencor
will have sufficient assets, income and access to financing to enable it to
satisfy its indemnity obligations under the Tax Allocation Agreement or that
Vencor will continue to honor such indemnification obligations.
The provision for income taxes for the period from May 1, 1998 to December
31, 1998 consists of the following (in thousands):
The Period From
May 1, 1998 to
December 31,
1998
---------------
Deferred:
Federal.................................................. $18,602
State.................................................... 2,549
-------
21,151
Current tax benefit of extraordinary loss on extinguishment
of debt:
Federal.................................................. (4,350)
State.................................................... (585)
-------
(4,935)
-------
Provision for income taxes................................. $16,216
=======
The Company's 1998 federal income tax return reflected capital loss
carryforwards of approximately $200.1 million of which $0.6 million was carried
back to 1996 and $52.0 million was provided for tax contingencies; the
remaining $147.5 million can only be utilized against future capital gains, if
any. After fully utilizing NOL carrybacks, the Company also has an NOL
carryforward of $17.0 million, of which approximately $1.0 million and $3.0
million were used to offset taxes for 2000 and 1999, respectively and the
remaining $13.0 million can be used to offset future taxable income (and/or
taxable income for prior years if audits of any prior year's return determine
that amounts are owed), if any, remaining after the dividends paid deduction.
The Company's ability to utilize tax carryforwards will be subject to a variety
of factors, including the Company's dividend distribution policy and the
results of its audit. In general, the Company will be entitled to utilize NOLs
and tax credit carryforwards only to the extent that REIT taxable income
exceeds the Company's deduction for dividends paid. The NOL carryforwards
expire in 2018 and the capital loss carryforwards expire in 2003.
As a result of the uncertainties relating to the ultimate utilization of
favorable tax attributes described above, no net deferred tax benefit has been
ascribed to capital loss and net operating loss carryforwards as of December
31, 2000 and 1999. The IRS may challenge the Company's entitlement to these tax
attributes during its current review of the Company's tax returns for the 1997
and 1998 tax years. The Company believes it is entitled to these tax
attributes, but there can be no assurance as to the outcome of these matters.
F-22
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
The Period From
May 1, 1998 to
December 31,
1998
---------------
Federal statutory rate....................................... 33.05%
State income taxes, net of federal income tax benefit........ 4.75%
-----
Effective income tax rate.................................... 37.80%
=====
8. Transactions with Vencor
The 1998 Spin Off
In order to govern certain of the relationships between the Company and
Vencor after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the 1998 Spin Off, including the Master Leases (collectively, the "Spin
Agreements").
Certain material terms of the Master Leases and certain of the other Spin
Agreements are described below.
Summary of the Terms of Current Agreements with Vencor
Master Lease Agreements
In the 1998 Spin Off, the Company (only with respect to two facilities in
Pennsylvania) and Ventas Realty (collectively, the "Landlord") and Vencor, Inc.
and Vencor Operating, Inc. (collectively, the "Tenant") entered into the four
Master Leases governing the lease of substantially all of the Company's real
property, buildings and other improvements (primarily long-term acute care
hospitals and nursing facilities). The leased properties under the four Master
Leases were divided into groups of properties and a Master Lease was entered
into with respect to each such group of properties. In August 1998, Ventas
Realty and Vencor Nursing Centers Limited Partnership entered into a fifth
Master Lease for a single nursing facility in Corydon, Indiana.
The Company's ability to exercise certain rights and remedies under the
Master Leases described below has been stayed as a result of Vencor's filing
for protection under chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). The Bankruptcy Code, however, generally provides that a
landlord is entitled to receive rent during the pendency of a tenant's
bankruptcy proceeding, subject to such tenant's rights to reject the lease and
its other legal defenses and rights. Vencor has disputed that it is required to
pay rent at the rate set forth in the Master Leases and in the Stipulation
entered into by the Company and Vencor in connection with Vencor's bankruptcy
filing (the "Stipulation") has reserved the right during its chapter 11 case to
challenge such payments in the event the Stipulation is terminated. The
Stipulation, discussed below, provides for Vencor to pay $15.1 million per
month in minimum base rent under the Master Leases while the Stipulation is in
effect. Various provisions of the Master Leases may ultimately be challenged in
Vencor's chapter 11 bankruptcy case, and certain provisions regarding payment
of rent have been modified by the Stipulation in anticipation of the
contemplated restructuring. The terms of the Master Leases would be
substantially amended and restated in the terms the Amended Master Leases (as
defined below) that would be implemented under the Final Plan (defined below),
if the Final Plan is consummated. See "--Recent Developments Regarding Vencor--
Amended Master Leases."
F-23
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all or substantially all insurance, taxes, utilities
and maintenance related to the properties. The base annual contract rent was
approximately $231.2 million, $226.6 million and $222.2 million at December 31,
2000, 1999 and 1998, respectively. Base annual rent increases 2% per annum,
effective May 1 of each year, provided Vencor achieves net patient service
revenue for the applicable year in excess of 75% of net patient service revenue
for the base year of 1997. The initial terms of the Master Leases were for
periods ranging from 10 to 15 years.
Under the terms of each Master Lease, except as noted below, upon the
occurrence of an Event of Default thereunder, the Company may, at its option,
exercise the remedies under a Master Lease on all properties included within
that particular Master Lease. The remedies which may be exercised under a
Master Lease by the Company, at its option, include the following: (i) after
not less than 10 days' notice to Vencor, terminate the Master Lease, repossess
the leased property and relet the leased property to a third party and require
that Vencor pay to the Company, as liquidated damages, the net present value of
the rent for the balance of the term, discounted at the prime rate; (ii)
without terminating the Master Lease, repossess the leased property and relet
the leased property with Vencor remaining liable under the Master Lease for all
obligations to be performed by Vencor thereunder, including the difference, if
any, between the rent under the Master Lease and the rent payable as a result
of the reletting of the leased property and (iii) any and all other rights and
remedies available at law or in equity. The Master Leases require Vencor to
cooperate with the Company in connection with license transfers and certain
other regulatory matters arising from a lease termination.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the property that is the subject of the default
upon the occurrence of any one of the following events of default: (i) the
occurrence of a final non-appealable revocation of Vencor's license to operate
a facility; (ii) the reduction in the number of licensed beds at a facility in
excess of 10% or the revocation of certification of a facility for
reimbursement under Medicare; or (iii) Vencor becomes subject to regulatory
sanctions at a facility and fails to cure the regulatory sanctions within the
applicable cure period. Upon the occurrence of the fifth such event of default
under a Master Lease with respect to any one or more properties, the Master
Lease permits the Company, at its option, to exercise the rights and remedies
under the Master Lease on all properties included within that Master Lease.
The occurrence of any one of the following Events of Default constitutes an
event of default under all Master Leases, permitting the Company, at its
option, to exercise the rights and remedies under all of the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the federal
bankruptcy laws, and (iv) a petition is filed against Vencor under federal
bankruptcy laws and the same is not dismissed within 90 days of its
institution.
Any notice of the occurrence of an Event of Default under a Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the "Leasehold Mortgagee"). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee prior written notice and the
opportunity to cure any such event of default within the cure period for
Leasehold Mortgagees set forth in the Master Leases. Following the expiration
of such cure period, the Company may then terminate a Master Lease by giving at
least 10 days prior written notice of such termination.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a Master
Lease. The Company may not unreasonably withhold its approval to any such
transfer provided (i) the assignee is creditworthy, (ii) the assignee has at
least four years of
F-24
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operational experience, (iii) the assignee has a favorable business and
operational reputation, (iv) the assignee assumes the Master Lease in writing,
(v) the sublease is subject and subordinate to the terms of the Master Lease,
and (vi) Vencor and any guarantor remains primarily liable under the Master
Lease.
Each Master Lease requires Vencor to maintain specified levels of liability,
all risk property and workers' compensation insurance for the properties.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires, will
complete the construction of certain development properties substantially in
accordance with the existing plans and specifications for each such property.
Upon completion of each such development property, the Company has the option
to purchase the development property from Vencor at a purchase price equal to
the amount of Vencor's actual costs in acquiring and developing such
development property prior to the purchase date. If the Company purchases the
development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be 10% of the
actual costs incurred by Vencor in acquiring and developing the development
property. The other terms of the lease for the development property will be
substantially similar to those set forth in the Master Leases. During the years
ended December 31, 2000 and 1999, the Company did not acquire any facilities
under the Development Agreement. During the period from May 1, 1998 to December
31, 1998, the Company acquired one skilled nursing facility under the
Development Agreement for $6.2 million and has entered into a separate Master
Lease with Vencor with respect to such facility. The Development Agreement has
a five year term, and the Company and Vencor each have the right to terminate
the Development Agreement in the event of a change of control. The ability of
the Company to purchase properties pursuant to the terms of the Development
Agreement is restricted by the terms of the Amended Credit Agreement. Any such
future purchases would likely require the consent of the "Required Lenders"
under the Amended Credit Agreement, and there can be no assurance that such
consent would be obtained. The Development Agreement would be terminated under
the Final Plan, if the Final Plan is consummated. See "--Recent Developments
Regarding Vencor--Vencor Bankruptcy."
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing
facility or other health care facility, provided that Vencor and the Company
can negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility. The Participation Agreement also provides, subject to certain terms,
that the Company has a right of first offer to purchase or finance any health
care related real property that Vencor determines to sell or mortgage to a
third party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term, and the Company and Vencor each have the right to
terminate the Participation Agreement in the event of a change of control. The
ability of the Company to purchase or finance properties pursuant to the terms
of the Participation Agreement is restricted by the terms of the Company's
Amended Credit Agreement. Any such future purchases or financings would likely
require the consent of the "Required Lenders" under the Amended Credit
Agreement, and there can be no assurance that such consent would be obtained.
The Participation Agreement would be terminated under the Final Plan, if the
Final Plan is consummated. See "--Recent Developments Regarding Vencor--Vencor
Bankruptcy."
F-25
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax Allocation Agreement and Tax Stipulation
The Tax Allocation Agreement, entered into at the time of the Spin Off,
provides that Vencor will be liable for, and will hold the Company harmless
from and against, (i) any taxes of Vencor and its then subsidiaries (the
"Vencor Group") for periods after the 1998 Spin Off, (ii) any taxes of the
Company and its then subsidiaries (the "Company Group") or the Vencor Group for
periods prior to the 1998 Spin Off (other than taxes associated with the Spin
Off) with respect to the portion of such taxes attributable to assets owned by
the Vencor Group immediately after completion of the 1998 Spin Off and (iii)
any taxes attributable to the 1998 Spin Off to the extent that Vencor derives
certain tax benefits as a result of the payment of such taxes. Vencor will be
entitled to any refund or credit in respect of taxes owed or paid by Vencor
under (i), (ii) or (iii) above. Vencor's liability for taxes for purposes of
the Tax Allocation Agreement will be measured by the Company's actual liability
for taxes after applying certain tax benefits otherwise available to the
Company other than tax benefits that the Company in good faith determines would
actually offset tax liabilities of the Company in other taxable years or
periods. Any right to a refund for purposes of the Tax Allocation Agreement
will be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Company.
The Company will be liable for, and will hold Vencor harmless against, any
taxes imposed on the Company Group or the Vencor Group other than taxes for
which the Vencor Group is liable as described in the above paragraph. The
Company will be entitled to any refund or credit for taxes owed or paid by the
Company as described in this paragraph. The Company's liability for taxes for
purposes of the Tax Allocation Agreement will be measured by the Vencor Group's
actual liability for taxes after applying certain tax benefits otherwise
available to the Vencor Group other than tax benefits that the Vencor Group in
good faith determines would actually offset tax liabilities of the Vencor Group
in other taxable years or periods. Any right to a refund will be measured by
the actual refund or credit attributable to the adjustment without regard to
offsetting tax attributes of the Vencor Group. See "Note 7--Income Taxes."
On February 3, 2000, the Company received a refund (the "February 2000
Refund") of approximately $26.6 million from the Internal Revenue Service
representing the refund of income taxes paid by it from 1996 and 1997 and
accrued interest thereon arising out of the Company's 1998 federal income tax
return. The Company asserted that it was entitled to the February 2000 Refund
pursuant to the terms of Tax Allocation Agreement and on other legal grounds.
Vencor also asserted that it was entitled to the February 2000 Refund pursuant
to the terms of the Tax Allocation Agreement and on other legal grounds.
The Company and Vencor are also engaged in a dispute regarding the
entitlement to additional federal, state and local tax refunds for the Subject
Periods which have been received or which may be received by either company.
The Company, Ventas Realty, and Vencor entered into a Tax Stipulation relating
to certain of these federal, state and local tax refunds (including the
February 2000 Refund) on or about May 23, 2000. Under the terms of the Tax
Stipulation, which was approved by the Vencor Bankruptcy Court on May 31, 2000,
proceeds of certain federal, state and local tax refunds for the Subject
Periods, received by either company on or after September 13, 1999, with
interest thereon from the date of deposit at the lesser of the actual interest
earned and 3% per annum, are to be held by the recipient of such refunds in
segregated interest bearing accounts. The Tax Stipulation contains notice
provisions relating to the withdrawal of funds by either company from the
segregated accounts for the payment of certain federal, state and local taxes
for the Subject Periods and related fees and expenses.
Under the Final Plan, if consummated, the Tax Allocation Agreement would be
amended and the Tax Stipulation would be superseded by a Tax Refund Escrow
Agreement (as defined below), which would be entered into by Vencor and the
Company on the date the Final Plan is consummated (the "Vencor Effective
Date"). See "--Recent Developments Regarding Vencor--Vencor Bankruptcy."
F-26
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Stipulation
In connection with the bankruptcy filing by Vencor, the Company and Vencor
entered into the Stipulation (as defined) for the payment by Vencor to the
Company of approximately $15.1 million per month starting in September 1999, to
be applied against the total amount of minimum monthly base rent that is due
and payable under the Master Leases. The Stipulation was approved by the
Bankruptcy Court. During the period in which the Stipulation is in effect,
Vencor has agreed to fulfill all of its obligations under the Spin Agreements
as such obligations become due, including its obligation to indemnify and
defend Ventas from and against all claims arising out of the Company's former
health care operations or assets or liabilities transferred to Vencor in the
1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to seek to reject such agreements pursuant and
subject to the applicable provisions of the Bankruptcy Code. A termination of
the Stipulation and/or rejection by Vencor of the Spin Agreements could have a
Material Adverse Effect on the Company. Under the Final Plan, if consummated,
Vencor would assume and agree to fulfill its obligations under all Spin
Agreements other than the Development Agreement and the Participation
Agreement. See "--Recent Developments Regarding Vencor."
The payments under the Stipulation are required to be made by the fifth day
of each month, or on the first business day thereafter. Starting in September,
1999, the difference between the amount of minimum monthly base rent due under
the Company's Master Leases with Vencor and the monthly payment of
approximately $15.1 million accrues as a superpriority administrative expense
in Vencor's bankruptcy, junior in right only to the following: (i) any liens or
superpriority claims provided to lenders under Vencor's debtor-in-possession
credit agreement (the "DIP facility"); (ii) any fees due to the Office of the
United States Trustee; (iii) certain fees of Vencor's professionals; (iv) any
liens or superpriority claims granted to pre-petition secured creditors as
adequate protection for their claims under the interim DIP order issued by the
bankruptcy court and the final DIP order; and (v) pre-petition liens granted to
the lenders under Vencor's credit agreement, as amended, and related
agreements, to the extent such pre-petition claims are allowed as secured,
subject to challenge in the Vencor bankruptcy proceeding. The monthly payment
of approximately $15.1 million under the Stipulation is not subject to offset,
recoupment or challenge. August 1999 Rent, in the amount of approximately $18.9
million, remains unpaid and was asserted as a claim in Vencor's chapter 11
case.
The Stipulation by its terms initially would have expired on October 31,
1999, but automatically renews for one-month periods unless either party
provides a fourteen-day notice of its election to terminate the Stipulation. To
date, no such notice of termination has been given. The Stipulation may also be
terminated prior to its expiration upon a payment default by Vencor, the
consummation of a plan of reorganization for Vencor, or the occurrence of
certain events under the DIP facility. There can be no assurance as to how long
the Stipulation will remain in effect or that Vencor will continue to perform
under the terms of the Stipulation. If the Final Plan is consummated, the
Stipulation would be terminated on the Vencor Effective Date. See "--Recent
Developments Regarding Vencor."
The Stipulation also addresses an agreement by Ventas and Vencor concerning
any statutes of limitations and other time constraints. See "--The Tolling
Agreement" below.
The Tolling Agreement
The Company and Vencor also entered into an agreement (the "Tolling
Agreement") pursuant to which they have agreed that any statutes of limitations
or other time constraints in a bankruptcy proceeding, including the assertion
of certain "bankruptcy avoidance provisions" that might be asserted by one
party against the other, are extended or tolled for a specified period. That
period currently terminates on the termination date of the Stipulation.
Pursuant to the Stipulation, the Tolling Agreement does not shorten any time
period otherwise provided under the Bankruptcy Code. If the Final Plan is
consummated, the Tolling Agreement would be terminated on the Vencor Effective
Date. See "--Recent Developments Regarding Vencor."
F-27
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to Vencor
(the "Third Party Leases"). The lessors of these properties may claim that the
Company remains liable on the Third Party Leases assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Leases, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the Third Party Leases
assigned by the Company to Vencor. Either prior to or following the 1998 Spin
Off, the tenant's rights under a subset of the Third Party Leases were assigned
or sublet to unrelated third parties (the "Subleased Third Party Leases"). If
Vencor or such third party subtenants are unable to or do not satisfy the
obligations under any Third Party Lease assigned by the Company to Vencor, and
if the lessors prevail in a claim against the Company under the Third Party
Leases, then the Company may be liable for the payment and performance of the
obligations under any such Third Party Lease. The Company believes it may have
valid legal defenses to any such claim by certain lessors under the Third Party
Leases. However, there can be no assurance the Company would prevail in a claim
brought by a lessor under a Third Party Lease. In the event that a lessor
should prevail in a claim against the Company, the Company may be entitled to
receive revenues from those properties that would mitigate the costs incurred
in connection with the satisfaction of such obligations. The annual minimum
rental payments under the Third Party Leases equals approximately $15.7
million, $6.5 million and $5.9 million for 2001, 2002 and 2003, respectively.
The Third Party Leases relating to nursing facilities, hospitals, offices and
warehouses have remaining terms (excluding renewal periods) of 1 to 10 years
and total aggregate remaining minimum rental payments under those leases amount
to $42.6 million. The Third Party Leases relating to ground leases have
remaining terms from 1 to 80 years and total aggregate remaining minimum rental
payments under those leases amount to $31.8 million.
The total aggregate remaining minimum rental payments under the Third Party
Leases are as follows (in thousands):
Sub-Leased
Skilled Third
Nursing Office Party
Facilities Hospitals Land Leases Leases Other Total
---------- --------- ------- ------ ---------- ------ -------
2001.......... $ 7,774 $ 2,225 $ 1,176 $397 $ 3,826 $ 322 $15,720
2002.......... 1,407 2,225 1,138 50 1,375 296 6,491
2003.......... 1,054 2,225 1,117 -- 1,224 265 5,885
2004.......... 942 2,225 1,110 -- 1,117 265 5,659
2005.......... 716 1,925 1,110 -- 1,117 265 5,133
Thereafter.... 235 3,074 26,172 -- 5,956 88 35,525
------- ------- ------- ---- ------- ------ -------
$12,128 $13,899 $31,823 $447 $14,615 $1,501 $74,413
======= ======= ======= ==== ======= ====== =======
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Leases during the period in which
the Stipulation is in effect, and, except for disputes with Health Care
Property Investors discussed in "Note 9--Commitments and Contingencies", has to
date performed its obligations. There can be no assurance that Vencor will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Agreement of Indemnity--Third Party Leases or that Vencor
will continue to honor its obligations under the Agreement of Indemnity--Third
Party Leases. If Vencor does not satisfy or otherwise honor the obligations
under the Agreement of Indemnity--Third Party Leases, then the Company may be
liable for the payment and performance of such obligations. See "Note 9--
Commitments and Contingencies." Under the Final Plan, if consummated, Vencor
would assume and agree to fulfill its obligations under the Agreement of
Indemnity Third Party Leases. See "--Recent Developments Regarding Vencor."
F-28
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Vencor (the "Third Party Guarantees"). The Company
may remain liable on the Third Party Guarantees assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Contracts, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the Third Party
Guarantees assigned by the Company to Vencor. If Vencor is unable to or does
not satisfy the obligations under any Third Party Guarantee assigned by the
Company to Vencor, then the Company may be liable for the payment and
performance of the obligations under any such agreement. The Third Party
Guarantees were entered into in connection with certain acquisitions and
financing transactions. The aggregate exposure under these guarantees is
approximately $9.2 million.
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Contracts during the period in
which the Stipulation is in effect. There can be no assurance that Vencor will
have sufficient assets, income and access to financing to enable it to satisfy
its obligations incurred in connection with the Agreement of Indemnity--Third
Party Contracts or that Vencor will continue to honor its obligations under the
Agreement of Indemnity--Third Party Contracts. If Vencor does not satisfy or
otherwise honor the obligations under the Agreement of Indemnity--Third Party
Contracts, then the Company may be liable for the payment and performance of
such obligations. Under the Final Plan, if consummated, Vencor would assume and
agree to fulfill its obligations under the Agreement of Indemnity--Third Party
Contracts. See "--Recent Developments Regarding Vencor."
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Vencor agreed in various Spin
Agreements to assume and to indemnify the Company for any and all liabilities
that may arise out of the ownership or operation of the health care operations
either before or after the date of the 1998 Spin Off. The indemnification
provided by Vencor also covers losses, including costs and expenses, which may
arise from any future claims asserted against the Company based on these health
care operations. In addition, at the time of the 1998 Spin Off, Vencor agreed
to assume the defense, on behalf of the Company, of any claims that were
pending at the time of the 1998 Spin Off, and which arose out of the ownership
or operation of the health care operations. Vencor also agreed to defend, on
behalf of the Company, any claims asserted after the 1998 Spin Off which arise
out of the ownership and operation of the health care operations. Vencor has
not agreed to assume the Spin Agreements and has reserved its right to seek to
reject such agreements pursuant and subject to the applicable provisions of the
Bankruptcy Code. Under the Stipulation, Vencor has agreed to fulfill its
obligations incurred in connection with the 1998 Spin Off during the period in
which the Stipulation remains in effect. There can be no assurance that Vencor
will have sufficient assets, income and access to financing to enable it to
satisfy its obligations incurred in connection with the 1998 Spin Off or that
Vencor will continue to honor its obligations incurred in connection with the
1998 Spin Off. If Vencor does not satisfy or otherwise honor the obligations,
the Company may have to assume the defense of such claims. In addition, if the
Final Plan is consummated, it is likely that the Company will be required to
make payments to settle certain government claims which will not be subject to
recovery from or indemnification by Vencor. Under the Final Plan, if
consummated, Vencor would assume and agree to fulfill its obligations incurred
in connection with the 1998 Spin Off. See "--Recent Developments Regarding
Vencor."
F-29
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Developments Regarding Vencor
Vencor Bankruptcy
On September 13, 1999 (the "Petition Date"), Vencor filed for protection
under the Bankruptcy Code with the Bankruptcy Court. At the time, the Company,
Vencor and Vencor's major creditors were engaged in negotiations to restructure
Vencor's debt and lease obligations. Although the parties had not reached an
agreement on the restructuring of Vencor's debt and lease obligations, Vencor
filed a plan of reorganization (the "Preliminary Plan") on September 29, 2000.
At that time, the Company informed Vencor and Vencor's major creditors that the
Company would not vote for the Preliminary Plan or any other plan of
reorganization which was not acceptable to the Company, taking into
consideration all facts and circumstances at the time. After the filing of
Vencor's Preliminary Plan, the Company, Vencor and Vencor's major creditors
continued the discussions to reach a consensual global restructuring of
Vencor's debt and lease obligations.
On November 6, 2000, Vencor filed its first Amended Plan of Reorganization
(the "First Amended Plan") with the Bankruptcy Court incorporating into the
Preliminary Plan certain terms relating to the comprehensive settlement of the
claims by the United States against the Company and Vencor arising from the
Company's prior health care operations and Vencor's health care operations. The
Company reached agreement with Vencor and Vencor's major creditors on the
material economic terms of a plan of reorganization for Vencor in November
2000. On December 1, 2000, Vencor filed a second amended plan of reorganization
with the Bankruptcy Court (the "Second Amended Plan") incorporating into the
First Amended Plan the material economic terms for the restructuring of Vencor
agreed upon by the Company, Vencor and Vencor's major creditors. On December 6,
2000, Vencor filed its third amended plan (the "Third Amended Plan") of
reorganization with the Bankruptcy Court making certain additional changes to
the Second Amended Plan.
On December 14, 2000, Vencor filed its fourth amended plan of reorganization
(the "Fourth Amended Plan") with the Bankruptcy Court, incorporating the final
terms of the restructuring of Vencor's debt and lease obligations into the
Third Amended Plan. On December 15, 2000, the Bankruptcy Court entered an order
approving the disclosure and solicitation materials for distribution to
creditors for approval of the Fourth Amended Plan. The Company voted to accept
the Fourth Amended Plan on March 1, 2001.
A hearing on the confirmation of the Fourth Amended Plan was held before the
Bankruptcy Court on March 1, 2001 (the "Confirmation Hearing"). The Fourth
Amended Plan, which was modified on the record of the Confirmation Hearing, was
confirmed by an order of the Bankruptcy Court signed on March 16, 2001 and
entered on the docket on March 19, 2001 (the "Vencor Confirmation Date"). The
consummation of the Final Plan is subject to the satisfaction of numerous
conditions, many of which are beyond the control of the Company and Vencor.
There can be no assurance (a) that the Final Plan will be consummated, (b) if
the conditions to consummation of the Final Plan are satisfied, of the date
that the Final Plan would be consummated, or (c) that, if the Final Plan is not
amended to provide for a later effective date and the Final Plan is not
consummated, (i) Vencor will pursue or be successful in obtaining the approval
of its creditors or the Company for a plan of reorganization on the same terms
as the Final Plan or on alternate terms, (ii) the terms of any alternate plan
of reorganization will be acceptable to the Company, or (iii) the final terms
of any alternate plan of reorganization will not have a Material Adverse Effect
on the Company. The Final Plan provides that the Vencor Effective Date shall
occur no later than May 1, 2001, but the Final Plan does not address the
consequences if the Vencor Effective Date does not occur on or before May 1,
2001.
It could have a Material Adverse Effect on the Company if the Final Plan is
not consummated. The Company believes that the Final Plan will likely become
effective.
F-30
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Economic Terms of the Final Plan
Under the Final Plan, if consummated, the Company, among other things,
would (i) retain all rent paid by Vencor through the Vencor Effective Date,
(ii) amend and restate its Master Leases with Vencor in the form of four
amended and restated master leases (collectively, the "Amended Master Leases")
and (iii) receive 1,498,500 shares of New Vencor Common Stock (as defined
below) together with certain registration rights. Consummation of the Final
Plan is subject to the satisfaction of numerous conditions, many of which are
outside the control of the Company and Vencor. The Company believes that the
Final Plan will likely become effective.
The annual base rent under the Amended Master Leases would be $180.7
million from the first day of the first month following the Vencor Effective
Date through April 30, 2002. For the period from the first day of the first
month following the Vencor Effective Date through April 30, 2004, annual base
rent, payable in all cash, would escalate 3.5% on May 1 of each year,
commencing May 1, 2002, if certain tenant revenue parameters are achieved.
Assuming such tenant revenue parameters are achieved, annual base rent under
the Amended Master Leases would be $187.0 million from May 1, 2002 to April
30, 2003 and $193.6 million from May 1, 2003 to April 30, 2004. All of the
annual base rent would be paid in cash through April 30, 2004. Commencing May
1, 2004, if a Vencor Bank Refinancing Transaction (as defined below) has
occurred, the 3.5% annual escalator would be paid in cash and the full amount
of the annual base rent would be paid in cash. If a Vencor Bank Refinancing
Transaction has not occurred, then on May 1, 2004 the 3.5% annual escalator
under the Amended Master Leases would be comprised of (a) an annual cash
escalator of approximately 2% on the rent payable in cash during the prior
lease year and (b) a 1.5% annual non-cash rent escalator that would accrue at
the annual rate of LIBOR plus 450 basis points until the occurrence of a
"Vencor Bank Refinancing Transaction," at which time the accrual with interest
shall be due and payable and thereafter the 1.5% rent escalator would convert
to a cash escalator so that the total cash escalator thereafter would equal
3.5% per year. Under the terms of the Final Plan, Vencor would pay $15.1
million in base rent for the month in which the Vencor Effective Date occurs,
which is the monthly base rent amount under the Stipulation. The Company would
also have the one time right to reset the rents under the Amended Master
Leases, exercisable 5 1/4 years after the Vencor Effective Date on an Amended
Master Lease by Amended Master Lease basis, to a then fair market rental rate,
for a total fee of $5.0 million payable on a pro-rata basis at the time of
exercise under the applicable Amended Master Lease. See "--Amended Master
Leases."
As a result of delays in the extended Vencor bankruptcy proceeding and the
determination that such an amount is uncollectible, the Company wrote off
approximately $48.3 million and $34.4 million of rents receivable from tenants
for the years ended December 31, 2000 and 1999, respectively. The write-off
consists of the following ($ in thousands):
2000 1999
------- -------
The difference between the minimum monthly base rent
under the Master Leases and Stipulation................. $48,018 $15,000
August 1999 monthly base rent under the Master Leases.... -- 18,884
Charge for rent due under a lease with Vencor which is
under dispute........................................... (124) 226
Rent due from non-Vencor tenants......................... 434 308
------- -------
$48,328 $34,418
======= =======
Under the Final Plan, if consummated, Ventas Realty would receive 1,498,500
shares of the common stock in Vencor, Inc. as restructured, representing 9.99%
of the issued and outstanding common stock in Vencor, Inc. as of the Vencor
Effective Date (the "New Vencor Common Stock"). The New Vencor Common Stock
issued to Ventas Realty would be subject to dilution from stock issuances
occurring after the Vencor Effective Date. The New Vencor Common Stock would
be issued to the Company and Ventas Realty as additional future rent in
consideration of the Company's agreement to charge the base rent which would
be provided in the Amended Master Leases.
F-31
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as explained below, under the Final Plan, if consummated, Vencor
would assume and agree to continue to perform the Spin Agreements including,
without limitation, the obligation to indemnify and defend the Company for all
litigation and other claims relating to the health care operations and other
assets and liabilities transferred to Vencor in the 1998 Spin Off. See "--Spin
Agreements and Other Arrangements under Final Plan."
If the Final Plan is consummated, on the Vencor Effective Date, certain
federal, state and local tax refund proceeds received on or after September 13,
1999 by Vencor or the Company for tax periods prior to and including the 1998
Spin Off (the "Subject Periods") would be placed into an escrow account to be
used to satisfy any potential tax liabilities for the Subject Period. When
audits of the relevant tax periods have been concluded, any residual amount
remaining in escrow would be shared equally by the Company and Vencor. All
interest accruing on the escrowed amounts would be distributed annually equally
between the Company and Vencor. See "--Tax Allocation Agreement, Tax
Stipulation and Tax Refund Escrow Agreement."
If the Final Plan is consummated, on the Vencor Effective Date the Company
would waive the right to the payment of (a) $18.9 million for the August, 1999
unpaid monthly base rent under the Master Leases and (b) the difference between
the rent required to be paid under the terms of the Master Leases and the rent
paid to the Company after the Petition Date and prior to the first calendar
month following the Vencor Effective Date pursuant to the terms of the
Stipulation.
Spin Agreements and Other Arrangements Under the Final Plan
Set forth below is a description of the material terms of (a) certain of the
Spin Agreements which would be assumed by Vencor under the Final Plan, if
consummated, including the terms of amendments or restatements of such Spin
Agreements, where applicable, (b) those Spin Agreements and other agreements
which would be terminated under the Final Plan, if consummated, and (c) new
agreements which would be entered into between the Company and Vencor in
accordance with the Final Plan, if consummated.
Amended Master Leases
Under the Final Plan, if consummated, the Tenant would assume the Master
Leases and the Tenant and the Landlord would simultaneously amend and restate
the Master Leases in the form of the Amended Master Leases setting forth the
material terms governing the properties covered by the Amended Master Leases.
The Corydon, Indiana facility would be incorporated into Amended Master Lease
#4. The following description of the Amended Master Leases, together with the
disclosure in "Note 2--Real Estate Investments," outlines certain of the
material terms of the form of the Amended Master Leases. The following is a
summary of the form of the amended lease filed with the Bankruptcy Court in
connection with the confirmation of the Final Plan and does not purport to be a
complete description of the Amended Master Leases, the terms of which could
change.
Each Amended Master Lease would include land, buildings, structures and
other improvements on the land, easements and similar appurtenances to the land
and improvements, and permanently affixed equipment, machinery and other
fixtures relating to the operation of the properties covered by the Amended
Master Leases. There would be several renewal bundles of properties under each
Amended Master Lease, with each bundle containing approximately 7 to 12
properties. All properties within a bundle would have primary terms ranging
from 10 to 15 years from May 1, 1998, subject to certain exceptions, and would
be subject to three five-year renewal terms.
During the one-year period commencing on the date which is five years and
ninety days after the Vencor Effective Date, the Landlord would have a one-time
option (the "Reset Right") to reset the Base Rent, Current Rent and Accrued
Rent (as defined in each Amended Master Lease) under any one or more Amended
Master
F-32
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leases to the then fair market rental. Upon exercising this reset right, the
Landlord would have to pay the Tenant a fee equal to a prorated portion of $5.0
million based upon the proportion of Base Rent payable under the Amended Master
Lease(s) with respect to which rent is reset to the total Base Rent payable
under all of the Amended Master Leases. The fair market rental would be
determined through the appraisal procedures in the Amended Master Leases. Once
the fair market rental is so determined, the Landlord, in its sole discretion,
could determine whether to exercise the Reset Right. If the Landlord elected to
exercise the Reset Right, the fair market rental rate would be effective
retroactive on the later of (a) the date the Landlord notified Tenant of its
interest in exercising the Reset Right, and (b) the date which is five years
and ninety days after the Vencor Effective Date. The rental rate for any
renewal term would also be reset in connection with a Reset Right.
The Amended Master Leases would require that the Tenant utilize the leased
properties solely for the provision of health care services and related uses
and as the Landlord may otherwise consent (such consent not to be unreasonably
withheld). The Tenant would be responsible for maintaining or causing to be
maintained all licenses, certificates and permits necessary for it to comply
with various health care regulations. The Tenant would be obligated to operate
continuously each leased property as a provider of health care services.
The Tenant would be required to maintain the leased properties in good
repair and condition, making all repairs, modifications and additions required
by law, including any Capital Addition (as defined in each of the Amended
Master Leases). The Tenant would be required to pay for all capital
expenditures and other expenses for the maintenance, repair, restoration or
refurbishment of a leased property (and any Capital Addition). The Tenant would
also be required to maintain all personal property at each of the leased
properties in good order, condition and repair, as is necessary to operate the
leased property in compliance with all applicable licensure, certification,
legal and insurance requirements and otherwise in accordance with customary
practice in the industry.
The Tenant would be required to maintain liability, all risk property and
workers' compensation insurance for the leased properties at a level at least
comparable to those in place with respect to the leased properties prior to the
1998 Spin Off.
Subject to certain restrictions, each Amended Master Lease would permit the
Landlord, as determined in its sole discretion and for a legitimate business
purpose, to remove properties from the Amended Master Leases and place such
properties in newly created separate lease(s), which newly created lease(s)
would be on the same terms as the Amended Master Leases. Any such new lease
would not be cross-defaulted with the original Amended Master Leases or with
any other new leases. The Tenant would not be permitted to remove properties
from an Amended Master Lease without the consent of the Landlord.
An "Event of Default" would be deemed to have occurred under an Amended
Master Lease if, among other things, (i) the Tenant failed to pay rent or other
amounts when due and failed to cure such default within five days after notice;
(ii) the Tenant failed to comply with covenants, which failure continued for 30
days after notice or, so long as diligent efforts to cure such failure were
being made, such longer period (not over 180 days) as would be necessary to
cure such failure; (iii) certain bankruptcy or insolvency events occurred,
including the filing of a petition of bankruptcy or a petition for
reorganization under the Bankruptcy Code; (iv) the Tenant ceased to operate any
property as a provider of health care services for the particular required use
(e.g., hospital or nursing center); (v) a default occurred under any guaranty
of the lease or the Indemnity Agreement (as defined in the Amended Master
Leases) and was not cured within the cure period specified in the Amended
Master Leases; (vi) the Tenant or its applicable subtenant lost any required
health care licenses, permit or approval or failed to comply with any legal
requirements in each case by a final unappealable determination; (vii) the
Tenant failed to maintain required insurance; (viii) the Tenant created or
suffered to exist certain liens and did not cure the same within the cure
period specified in the Amended Master Leases; (ix) the Tenant failed to
perform any covenant with respect to complying with or contesting any legal
requirements, impositions or insurance
F-33
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
requirements and did not cure the same within the cure period specified in the
Amended Master Leases; (x) Tenant breached any of its material representations
or warranties; (xi) a reduction occurred in the number of licensed beds in
excess of 10% (or 5% in certain cases), or less than 10% if the Tenant
voluntarily banked more than 15% (or, in certain cases, a percentage less than
5% if the Tenant voluntarily banked more than 20%) of licensed beds, of the
number of licensed beds in, or deemed to be in, the applicable facility on the
Commencement Date (as defined in the Amended Master Leases) (subject to certain
exceptions for involuntary reductions in excess of 10%) (a "Licensed Bed Event
of Default"); (xii) certification for reimbursement under Medicare or Medicaid
with respect to a participating facility was revoked and re-certification did
not occur for 120 days (plus an additional 60 days in certain circumstances) (a
"Medicare/Medicaid Event or Default"); (xiii) the appointment of a receiver or
custodian by any federal, state or local government pursuant to a final
unappealable determination; (xiv) the Tenant became subject to regulatory
sanctions and failed to cure such regulatory sanctions within its specified
cure period in any material respect with respect to any facility; (xv) the
Tenant failed to cure its breach of any Permitted Encumbrance (as defined in
the Amended Master Leases) within the applicable cure period and, as a result,
a real property interest or other beneficial property right of the Lessor was
terminated or at material risk of being terminated; (xvi) the Tenant failed to
cure its breach of any of the obligations of the Landlord as lessee under an
Existing Ground Lease (as defined in the Amended Master Leases) within the
applicable cure period and, if such breach was a non-monetary, non-material
breach, such Existing Ground Lease is terminated or at material risk of being
terminated; (xvii) the Tenant failed to pay principal or interest with respect
to the new senior secured notes that would be issued by Tenant on the Vencor
Effective Date or otherwise failed to pay principal or interest when due
(including applicable notice and cure periods) with respect to any indebtedness
for borrowed money of Tenant with an aggregate outstanding principal balance
equal to or exceeding $50.0 million; or (xviii) the maturity of the new senior
secured notes that would be issued by Tenant on the Vencor Effective Date or
any other indebtedness owing under the Tenant's new senior secured credit
agreement or any other indebtedness for borrowed money of Tenant with an
aggregate outstanding principal balance equal to exceeding $50.0 million has
been accelerated. The Amended Master Leases would not be cross-defaulted with
each other.
Except as noted below, upon an Event of Default under one of the Amended
Master Leases, the Landlord could, at its option, exercise the following
remedies: (i) after not less than 10 days notice to the Tenant (less in certain
circumstances), terminate that particular entire Amended Master Lease,
repossess all leased properties under such Amended Master Lease and require
that the Tenant pay to the Landlord, as liquidated damages, the net present
value of the rent for the balance of the term; (ii) without terminating the
particular Amended Master Lease agreement, repossess all leased properties
under such Amended Master Lease and relet the leased properties with the Tenant
remaining liable under the particular Amended Master Lease for all obligations
to be performed by the Tenant thereunder, including the difference, if any,
between the rent under the particular Amended Master Lease and the rent payable
as a result of the reletting of the leased property; and (iii) seek any and all
other rights and remedies available under law or in equity. In the case of an
Event of Default that relates specifically to a particular leased property, in
lieu of terminating the Amended Master Lease and/or dispossessing the Tenant as
to all leased properties under such Amended Master Lease and subject to the
special rules noted below relative to Licensed Bed Events of Default and
Medicare/Medicaid Events of Default, the Landlord could terminate the Amended
Master Lease and/or dispossess Tenant as to the aforesaid leased property. Each
of the Amended Master Leases would include special rules relative to
Medicare/Medicaid Events of Default and Licensed Bed Events of Default. In the
event Medicare/Medicaid Events of Default and/or Licensed Bed Events of Default
should occur and be continuing (i) with respect to not more than two properties
at the same time under an Amended Master Lease that covers 41 or more
properties, and (ii) with respect to not more than one property at the same
time under an Amended Master Lease that covers 21 to and including 40
properties, the Lessor may not exercise termination/dispossession remedies
against any property other than the property(ies) to which the Events of
Default described above relate.
F-34
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
Under the Final Plan, if consummated, Vencor and the Company would enter
into the Tax Refund Escrow Agreement on the Vencor Effective Date, which would
govern their relative entitlement to certain tax refunds for the Subject
Periods that each received or may receive in the future. The Tax Refund Escrow
Agreement would amend and supplement the Tax Allocation Agreement and supersede
the Tax Stipulation. The following summary of the Tax Refund Escrow Agreement
is a summary of the form of such agreement filed with the Bankruptcy Court in
connection with the confirmation of the Final Plan and does not purport to be a
complete description of the Tax Refund Escrow Agreement, the terms of which
could change.
Under the terms of the Tax Refund Escrow Agreement, refunds ("Subject
Refunds") received on or after the Petition Date by either Vencor or the
Company with respect to federal, state or local income, gross receipts,
windfall profits, transfer, duty, value-added, property, franchise, license,
excise, sales and use, capital, employment, withholding, payroll, occupational
or similar business taxes (including interest, penalties and additions to tax,
but excluding certain refunds), for the Subject Periods ("Subject Taxes") would
be deposited into an escrow account with a third-party escrow agent on the
Vencor Effective Date.
The Tax Refund Escrow Agreement would provide that each party must notify
the other of any asserted Subject Tax liability of which it becomes aware, that
either party could request that asserted liabilities for Subject Taxes be
contested, that neither party could settle such a contest without the consent
of the other, that each party would have a right to participate in any such
contest, and that the parties generally must cooperate with regard to Subject
Taxes and Subject Refunds and would mutually and jointly control any audit or
review process related thereto.
The funds in the escrow account (the "Escrow Funds") could be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The Tax Refund Escrow Agreement would provide generally that Vencor and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow Funds,
notwithstanding the indemnification provisions of the Tax Allocation Agreement.
To the extent that the Escrow Funds would be insufficient to satisfy all
liabilities for Subject Taxes that are finally determined to be due (such
excess amount, "Excess Taxes"), the relative liability of Vencor and the
Company to pay such Excess Taxes would be determined as provided in the Tax
Refund Escrow Agreement. Disputes under the Tax Refund Escrow Agreement, and
the determination of the relative liability of Vencor and the Company to pay
Excess Taxes, if any, would be governed by the arbitration provision of the Tax
Allocation Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities would be distributed equally to each of Vencor
and the Company on an annual basis. Any Escrow Funds remaining in the escrow
account after no further claims may be made by governmental authorities with
respect to Subject Taxes or Subject Refunds (because of the expiration of
statutes of limitation or otherwise) would be distributed equally to Vencor and
the Company.
Agreement of Indemnity--Third Party Leases
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party Leases.
There can be no assurance that Vencor would have sufficient assets, income and
access to financing to enable it to satisfy its obligations under the Agreement
of Indemnity--Third Party Leases or that Vencor would continue to honor its
obligations under the Agreement of Indemnity--
F-35
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Third Party Leases. If Vencor did not satisfy or otherwise honor the
obligations under the Agreement of Indemnity--Third Party Leases, then the
Company could be liable for the payment and performance of such obligations.
See "Note 9--Commitments and Contingencies." It is a condition to the
consummation of the Final Plan that Vencor shall not have renewed or extended
any Third Party Lease on or after December 10, 2000 unless it first obtained a
release of the Company from liability under such Third Party Lease.
Agreement of Indemnity--Third Party Contracts
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party
Contracts. There can be no assurance that Vencor would have sufficient assets,
income and access to financing to enable it to satisfy its obligations incurred
in connection with the Agreement of Indemnity--Third Party Contracts or that
Vencor would continue to honor its obligations under the Agreement of
Indemnity--Third Party Contracts. If Vencor did not satisfy or otherwise honor
the obligations under the Agreement of Indemnity--Third Party Contracts, then
the Company could be liable for the payment and performance of such
obligations.
Assumption of Certain Operating Liabilities and Litigation
Under the Final Plan, if consummated, Vencor would assume and agree to
perform its indemnification obligations under the Spin Agreements. There can be
no assurance that Vencor would have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the 1998 Spin Off or that Vencor would continue to honor its obligations
incurred in connection with the 1998 Spin Off. If Vencor did not satisfy or
otherwise honor the obligations under these arrangements, then the Company
could be liable for the payment and performance of such obligations and may
have to assume the defense of such claims.
Registration Rights Agreement
Under the Final Plan, if consummated, 1,498,500 shares of New Vencor Common
Stock would be distributed to Ventas Realty on the Vencor Effective Date. On
the Vencor Effective Date, if it occurs, Vencor would execute and deliver to
Ventas Realty, certain other initial holders of New Vencor Common Stock and
other signatories, a Registration Rights Agreement. The following description
of the Registration Rights Agreement is a summary of the form of such agreement
filed with the Bankruptcy Court in connection with the confirmation of the
Final Plan and does not purport to be a complete description of the
Registration Rights Agreement, the terms of which could change.
The Registration Rights Agreement would, among other things, provide that
(a) Vencor file a shelf registration statement with respect to the securities
subject thereto, including the New Vencor Common Stock as soon as practicable
after the Vencor Effective Date, but in no event later than 120 days following
the Vencor Effective Date and (b) Vencor use its reasonable best efforts to
cause such registration statement to be declared effective as soon as
practicable and to keep such registration statement continuously effective for
a period of two years with respect to such securities (subject to customary
exceptions). Under the Registration Rights Agreement, Ventas Realty would be
entitled to exercise certain demand and "piggyback" registration rights with
respect to the New Vencor Common Stock, subject to customary exceptions and
black-out and suspension periods. In addition, until such time as the New
Vencor Common Stock is listed on a national securities exchange, Vencor would
covenant to comply with certain of the corporate governance requirements in the
rules of the National Association of Securities Dealers, Inc. as if it were
subject to such rules. In the event Vencor failed to comply with its
obligations under the Registration Rights Agreement, the other parties to the
Registration Rights Agreement would be entitled to seek specific performance in
addition to other remedies that might be available.
F-36
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Stipulation
In connection with Vencor's bankruptcy filing on September 13, 1999, the
Company and Vencor entered into the Stipulation providing for the payment by
Vencor to the Company of approximately $15.1 million per month starting
September 1, 1999, to be applied against the total amount of minimum monthly
base rent that was due and payable under the Master Leases. See "--Transactions
with Vencor--Summary of the Terms of Current Agreements with Vencor--The
Stipulation." Under the Final Plan, if consummated, the Stipulation would be
terminated on the Vencor Effective Date and be of no further force or effect.
Transition Services Agreement
The Transition Services Agreement, which expired pursuant to its terms on
December 31, 1998, provided that Vencor would provide the Company with
transitional administrative and support services including, but not limited to,
finance and accounting, human resources, risk management, legal, and
information systems support. The Company paid Vencor $1.6 million for the
period from May 1, 1998 to December 31, 1998 for services provided under the
Transition Services Agreement.
Settlement of United States Claims
Vencor and the Company have been the subject of investigations by the United
States Department of Justice into various aspects of claims for reimbursement
from government payers, billing practices and various quality of care issues in
the hospitals and nursing facilities formerly operated by the Company and
presently operated by Vencor. These investigations cover the Company's former
health care operations prior to the date of the 1998 Spin Off, and include
matters arising from lawsuits filed under the qui tam, or whistleblower,
provision of the Federal Civil False Claims Act, which allows private citizens
to bring a suit in the name of the United States. See "Note 11--Litigation."
The United States Department of Justice, Civil Division, filed two proofs of
claim in the Bankruptcy Court covering the United States' claims and the qui
tam suits. The United States asserted claims for approximately $1.3 billion,
including treble damages, against Vencor in these proofs of claim.
The Final Plan contains a comprehensive settlement of all of the foregoing
United States claims (the "United States Settlement"). The provisions of the
United States Settlement are documented in the Final Plan.
Under the United States Settlement, the Company will pay $103.6 million to
the United States, of which $34.0 million will be paid on the Vencor Effective
Date. The balance of $69.6 million will bear interest at 6% per annum and will
be payable in equal quarterly installments over a five-year term commencing on
the last day of the quarter in which the Vencor Effective Date occurs. The
Company will pay $0.4 million to legal counsel for the relators in the qui tam
actions. In the fourth quarter of 2000, the Company recorded the full amount of
the obligation under the United States Settlement for $96.5 million based on an
imputed interest rate of 10.75%.
If the Company fails to make any payment under the United States Settlement
within five business days of receipt of written notice from the United States
that such payment was delinquent, then the United States could, in its
discretion, by written notice to the Company, declare all unpaid principal and
accrued and unpaid interest payable by the Company under the United States
Settlement to be immediately due and payable.
Under the United States Settlement, the Company agreed with the United
States, that if, from and after the Vencor Effective Date, either:
(a) the loans under the Company's Amended Credit Agreement (the "Ventas
Senior Bank Debt") are amended and, as a result of such amendment, (i) the
final maturity date of the Ventas Senior Bank Debt is scheduled to occur
prior to the final maturity date of the payments due from the Company under
the United
F-37
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
States Settlement, or (ii) less than $100.0 million of the outstanding
principal under the Ventas Senior Bank Debt is scheduled to be paid after
the final maturity date of the obligations due from the Company under the
United States Settlement, or
(b) the Ventas Senior Bank Debt is replaced in whole by new debt (the
"Refinancing Debt"), and (i) the final maturity date of the Refinancing
Debt is scheduled to occur prior to the final maturity date of the payments
due under the United States Settlement, or (ii) less than $100.0 million of
the outstanding principal of the Refinancing Debt are scheduled to be paid
after the final maturity date of the obligations due from the Company under
the United States Settlement,
then in either case, the final maturity date of the obligations payable by the
Company under the United States Settlement and the remaining payments
thereunder shall be proportionately and equitably adjusted in time and amount
so that the final maturity date and the scheduled principal payments of the
Ventas Senior Bank Debt or the Refinancing Debt, as the case may be, and the
remaining obligations of the Company under the United States Settlement shall
have the same proportionate relationship as before such amendment or
replacement, and in any such event, at least $100.0 million of the outstanding
principal balance of the Ventas Senior Bank Debt or the Refinancing Debt, as
applicable, shall be scheduled to be paid after the due date of the final
payment under the United States Settlement.
The United States Settlement provides that if the Company fails to make any
payment required to be paid by the Company under the United States Settlement
as and when due, then, during the period commencing on the due date of the
delinquent payment and continuing to and until such time as the delinquent
payment shall be paid to the United States (such period being referred to as a
"Delinquency Period"), the Company shall suspend the payment of dividends on
account of shares of any class of stock of the Company, provided, however,
during any Delinquency Period, the Company may declare and pay an amount equal
to the minimum REIT dividend for the applicable taxable year (or the unpaid
portion of the minimum REIT dividend for the applicable taxable year) as
necessary for the Company to maintain its status as a REIT under the Code for
the applicable tax year.
The United States Settlement provides that the Company will not be
responsible in any manner for the payments owed by Vencor under the United
States Settlement, and any failure of Vencor to make such payments will not
affect the Company's rights, duties, benefits, and obligations under the United
States Settlement.
9. Commitments and Contingencies
The Company has a third party obligation that arises out of certain bonds
that were, and may continue to be, issued by the Company to residents of an
assisted living facility that is owned by the Company, and leased to and
operated by Atria, Inc. ("Atria"). Proceeds from the bonds are paid to and
utilized by Atria. The obligation to repay the bonds is secured by a certain
Mortgage and Trust Indenture (the "Atria Mortgage") that encumbers (among other
property) the assisted living facility. The aggregate principal amount of the
indebtedness evidenced by the bonds is currently approximately $34.0 million.
Pursuant to a series of documents and instruments executed in connection with
the Company's spin off of its assisted living operations and related assets and
liabilities to Atria in 1996, including the lease by and between Atria and the
Company (the "Atria Lease"), Atria has assumed and agreed to repay the
indebtedness evidenced by the bonds and has agreed to indemnify and hold the
Company harmless from and against all amounts the Company may be obligated to
pay under the Atria Mortgage, including the obligation to repay the bonds. The
Company may remain the primary obligor under the bonds and the Atria Mortgage.
If Atria is unable to satisfy these obligations, the Company may be liable for
such obligations. There can be no assurance that Atria will have sufficient
assets, income and access to financing to enable it to satisfy its obligations
under the Atria Mortgage and the bonds or that Atria will continue to honor its
obligations under the Atria Mortgage and the bonds. If Atria does not perform
or
F-38
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
otherwise honor these obligations, the Company may be liable for the payment
and performance of these obligations. The payment or performance of these
obligations by the Company could have a Material Adverse Effect on the Company.
The Company is currently engaged in efforts to either have itself released from
liability under the bonds and the Atria Mortgage or to cause Atria to provide
additional collateral to secure Atria's obligations regarding the bonds. There
can be no assurance, however, that the Company will be successful in its
attempts to either be released from this liability or to procure such
additional security.
The Company received demands for payment from Health Care Property Investors
("HCPI") by letters dated October 19, 1999, February 4, 2000, March 7, 2000,
April 19, 2000 and July 7, 2000 for obligations alleged to be due under certain
Third Party Leases. Certain of these obligations have either been satisfied by
Vencor or otherwise resolved between HCPI and Vencor. Currently, based solely
upon information supplied by Vencor, the aggregate amount allegedly due to HCPI
is approximately $1.2 million, representing amounts owed for impositions and
deferred maintenance under the Third Party Leases with HCPI. Vencor has advised
the Company that Vencor is currently negotiating with HCPI to resolve the
payment of these amounts. By letter dated October 6, 2000, HCPI notified the
Company that an event of default had occurred under a Third Party Lease for a
facility in Kansas City, Missouri. HCPI advised the Company that it was
exercising its right under such Third Party Lease to require the Company or
Vencor to purchase the facility. HCPI maintains that the repurchase price for
this facility is $8.5 million. Vencor has informed the Company that HCPI had
agreed to postpone the exercise of the repurchase option while the parties
negotiated the extension of the lease for this facility. In accordance with the
terms of the Spin Agreements, the Company has issued written demand to Vencor
for payment, performance, indemnification and defense of the claims,
obligations and allegations asserted by HCPI. There can be no assurance that
Vencor will pay, indemnify and defend these claims or that Vencor will have
sufficient assets, income and access to financing to enable it to satisfy such
claims.
Integrated Health Services, Inc. and a number of its subsidiaries filed a
petition for relief under the Bankruptcy Code in February 2000 (the "IHS
Petition Date"). IHS Acquisition No. 151, Inc. ("IHS Acquisition"), an
affiliate of Integrated Health Services, Inc. included in the bankruptcy
filings, leases a nursing facility from the Company in Marne, Michigan, known
as Birchwood Care Center. The aggregate annual rental under the lease is
approximately $0.5 million. While IHS remains in bankruptcy, the automatic stay
provisions of the Bankruptcy Code prevent the Company from exercising certain
of its contractual rights under the Birchwood lease, including the right to
enforce the payment of past due pre-petition rent. IHS Acquisition filed a
motion in the bankruptcy proceeding to reject the lease with the Company. The
hearing on the motion as it relates to this lease was postponed and has not yet
been rescheduled. To date, the Company has not located a substitute tenant for
the nursing facility. If the Bankruptcy Court approves the IHS motion to reject
the lease and the Company does not locate a substitute tenant for the facility
on terms that are acceptable to the Company, the Company may elect to assume
operations at the facility, sell the facility or take certain other action
relative to the facility. There can be no assurance that the Company will
locate a satisfactory substitute tenant for the facility on terms acceptable to
the Company. The Company's ability to engage in certain of these transactions
is restricted by the terms of the Amended Credit Agreement. Any such
transaction would likely require the consent of the "Required Lenders" under
the Amended Credit Agreement, and there can be no assurance that such consent
would be obtained. On or about August 25, 2000, the Company filed a general
claim (as amended on or about August 28, 2000) against IHS in the bankruptcy
proceeding for, among other things, the fees, costs, expenses and damages
resulting from any rejection of the Company's lease. Applicable bankruptcy law
may limit the amount of any such recovery against IHS. There can be no
assurance the Company will prevail in the claim against IHS or that IHS will
have sufficient assets to satisfy such claim. The Company recorded a $1.9
million real estate impairment for Birchwood Care Center for the year ended
December 31, 1999.
Integrated Health Services of Naples, Inc. ("IHS of Naples"), an affiliate
of IHS, leases a nursing facility from the Company in Las Vegas, Nevada, known
as Shadow Mountain Care Center. The aggregate annual base
F-39
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rental under the lease is approximately $0.3 million. IHS of Naples has not
filed for protection under the Bankruptcy Code. IHS of Naples is in arrears on
the monthly rental payments on the facility since September 2000. Notices of
these payment defaults have been issued to IHS of Naples. There can be no
assurance that IHS of Naples will pay the delinquent rent or any future rental
payments due under the lease. In March 2001, IHS of Naples removed all of the
patients and closed this facility in violation of the terms of the lease. The
Company intends to exercise all available rights and remedies against IHS of
Naples for the non-payment of rent. There can be no assurance that the Company
will be successful in the enforcement of remedies against IHS of Naples or
that, if successful, IHS of Naples will, have sufficient asset to satisfy the
Company's claim. One remedy available to the Company is the termination of the
lease and/or possible repossession of the facility. If the Company should
terminate the lease or repossess the facility, the Company would have to locate
a substitute tenant for the facility. If the Company were unable to locate a
substitute tenant on terms acceptable to the Company, the Company may elect to
assume operations at the facility, sell the facility or take certain other
action relative to the facility. There can be no assurance that the Company
would be able to locate a substitute tenant for the facility upon terms
acceptable to the Company. The Company's ability to engage in certain of these
transactions is restricted by the terms of the Amended Credit Agreement. Any
such transaction would likely require the consent of the "Required Lenders"
under the Amended Credit Agreement, and there can be no assurance that such
consent would be obtained.
Autumnwood Manor, Inc., the Company's tenant at its nursing facility in
Lansing, Michigan, known as Autumnwood Manor, closed the facility on March 9,
2001 and all patients were removed from the facility by the tenant as of that
date. The aggregate annual base rent under the lease for this facility is
approximately $0.3 million. Autumnwood Manor, Inc. is in arrears on the monthly
rental payments on the facility since February 2001. Autumnwood Manor, Inc. has
informed the Company that it will not honor any of its future obligations under
the lease for this facility, including the obligation for the payment of base
rent. The Company intends to exercise all available rights and remedies against
Autumnwood Manor, Inc. for breaching the lease for the facility, although, to
the best of the Company's knowledge, Autumnwood Manor has no assets other than
assets relating to the operation of the facility. There can be no assurance
that the Company will be successful in the enforcement of remedies against
Autumnwood Manor, Inc. or that if successful, Autumnwood Manor, Inc. will have
sufficient assets to satisfy the Company's claim. The Company is presently
considering all available options relative to this facility including reletting
the facility to a substitute tenant and selling the facility. There can be no
assurance that the Company will locate a satisfactory tenant or purchaser for
the facility on terms acceptable to the Company.
Except for a $1.9 million real estate impairment loss reported for the year
ended December 31, 1999 for Birchwood Care Center, no adjustments or additional
provision for liability, if any, resulting from the matters discussed above has
been recorded in the Consolidated Financial Statements for the years ended
December 31, 2000 and 1999.
10. Earnings Per Share
The following table shows the amounts used in computing basic and diluted
earnings per share ($'s in thousands, except per share amounts):
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VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period from
Year Ended Year Ended May 1, 1998 to
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ --------------
Numerator for Basic and Diluted
Earnings Per Share:
Income (loss) before
Extraordinary Item............. $(61,245) $42,535 $34,809
Extraordinary Item.............. (4,207) -- (8,051)
-------- ------- -------
Net Income (loss)............... $(65,452) $42,535 $26,758
======== ======= =======
Denominator:
Denominator for Basic Earnings
Per Share--Weighted Average
Shares......................... 68,010 67,754 67,681
Effect of Dilutive Securities:
Stock Options................. 67 15 46
Time Vesting Restricted Stock
Awards....................... 54 220 138
-------- ------- -------
Dilutive Potential Common
Stock........................ 121 235 184
-------- ------- -------
Denominator for Diluted Earnings
Per Share--Adjusted Weighted
Average........................ 68,131 67,989 67,865
======== ======= =======
Basic Earnings (loss) Per Share...
Income (loss) before
Extraordinary Item............. $ (0.90) $ 0.63 $ 0.51
Extraordinary Item.............. (0.06) -- (0.12)
-------- ------- -------
Net Income (loss)............... $ (0.96) $ 0.63 $ 0.39
======== ======= =======
Diluted Earnings (loss) Per
Share............................
Income before Extraordinary
Item........................... $ (0.90) $ 0.63 $ 0.51
Extraordinary Item.............. (0.06) -- (0.12)
-------- ------- -------
Net Income (loss)............... $ (0.96) $ 0.63 $ 0.39
======== ======= =======
Options to purchase 3.4 million shares of common stock ranging from $5.885
to $26.047 were outstanding at December 31, 2000, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares for the year
ended December 31, 2000 and, therefore, the effect would be anti-dilutive.
Options to purchase 5.1 million shares of common stock ranging from $5.890 to
$27.820, were outstanding at December 31, 1999 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive. Options to purchase 5.3 million shares of
common stock ranging from $13.130 to $27.820, were outstanding at December 31,
1998 but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price
of the common shares and, therefore, the effect would be anti-dilutive.
11. Litigation
Legal Proceedings Defended and Indemnified by Vencor Under the Spin Agreements
The following litigation and other matters arose from the Company's
operations prior to the 1998 Spin Off or relate to assets or liabilities
transferred to Vencor in connection with the 1998 Spin Off. Under the Spin
Agreements, Vencor agreed to assume the defense, on behalf of the Company, of
any claims that (a) were pending at the time of the 1998 Spin Off and which
arose out of the ownership or operation of the health care operations or any
of the assets or liabilities transferred to Vencor in connection with the 1998
Spin Off, or (b) were asserted after the 1998 Spin Off and which arose out of
the ownership and operation of the health care operations or any of the assets
or liabilities transferred to Vencor in connection with the 1998 Spin Off, and
to
F-41
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indemnify the Company for any fees, costs, expenses and liabilities arising out
of such operations (the "Indemnification"). Vencor is presently defending the
Company in the following matters. Under the Stipulation, Vencor assumed and
agreed to abide by the Indemnification and to defend the Company in these and
other matters as required under the Spin Agreements during the period that the
Stipulation is in effect. In addition, under the Final Plan, if consummated,
Vencor would assume and agree to abide by the Indemnification and to defend the
Company in these and other matters as required under the Spin Agreements. See
"Note 8--Transactions with Vencor." However, there can be no assurance that
Vencor will continue to defend the Company in such matters or that Vencor will
have sufficient assets, income and access to financing to enable it to satisfy
such obligations or its obligations incurred in connection with the 1998 Spin
Off. In addition, many of the following descriptions are based primarily on
information included in Vencor's public filings and information provided to the
Company by Vencor. There can be no assurance that Vencor has provided the
Company with complete and accurate information in all instances.
A class action lawsuit entitled Jules Brody v. Transitional Hospital
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a
class consisting of all persons who sold shares of Transitional Hospital
Corporation ("Transitional") common stock during the period from February 26,
1997 through May 4, 1997, inclusive. Transitional was, prior to the 1998 Spin
Off, a subsidiary of the Company. Transitional has been a subsidiary of Vencor
since the 1998 Spin Off. The complaint alleges that Transitional purchased
shares of its common stock from members of the investing public after it had
received a written offer to acquire all of Transitional's common stock and
without making the required disclosure that such an offer had been made. The
complaint further alleges that defendants disclosed that there were
"expressions of interest" in acquiring Transitional when, in fact, at that
time, the negotiations had reached an advanced stage with actual firm offers at
substantial premiums to the trading price of Transitional's stock having been
made which were actively being considered by Transitional's Board of Directors.
The complaint asserts claims pursuant to Sections 10(b), 14(e) and 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and common
law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. In June 1998, the court granted Vencor's motion to
dismiss with leave to amend the Section 10(b) claim and the state law claims
for misrepresentation. The court denied Vencor's motion to dismiss the Section
14(e) and Section 20(a) claims, after which Vencor filed a motion for
reconsideration. On March 23, 1999, the court granted Vencor's motion to
dismiss all remaining claims and the case was dismissed. The plaintiff has
appealed this ruling. Vencor has informed the Company that it intends to defend
this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The putative class action
claims were brought by an alleged stockholder of the Company against the
Company and certain executive officers and directors of the Company. The
complaint alleges that the Company and certain current and former executive
officers of the Company during a specified time frame violated Sections 10(b)
and 20(a) of the Exchange Act, by, among other things, issuing to the investing
public a series of false and misleading statements concerning the Company's
current operations and the inherent value of the Company's common stock. The
complaint further alleges that as a result of these purported false and
misleading statements concerning the Company's revenues and successful
acquisitions, the price of the Company's common stock was artificially
inflated. In particular, the complaint alleges that the Company issued false
and misleading financial statements between February and October of 1997 which
misrepresented and understated the impact that changes in Medicare
reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful
integration of its acquisitions and prospective earnings per share for 1997 and
1998 which the Company knew lacked any reasonable basis and were not being
achieved. The suit seeks damages in an amount
F-42
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to be proven at trial, pre-judgment and post-judgment interest, reasonable
attorneys' fees, expert witness fees and other costs, and any extraordinary
equitable and/or injunctive relief permitted by law or equity to assure that
the plaintiff has an effective remedy. In January 1999 the United States
District Court for the Western District of Kentucky entered a judgment
dismissing the action in its entirety as to all defendants in the case. A
divided three-judge panel of the United States Court of Appeals for the Sixth
Circuit affirmed the dismissal in an opinion dated April 24, 2000. On July 14,
2000, the Sixth Circuit granted plaintiffs' motion for rehearing of their
appeal en banc and vacated its earlier decision, pending the outcome of the en
banc reconsideration. The parties filed en banc briefs pursuant to the Court's
order and oral argument was conducted en banc before the Sixth Circuit on
December 6, 2000. No decision has yet been rendered. Vencor, on behalf of the
Company, is defending this action vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98 C103669 was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
purports to have been brought on behalf of Vencor and the Company against
certain current and former executive officers and directors of Vencor and the
Company. The complaint alleges, among other things, that the defendants
damaged Vencor and the Company by engaging in violations of the securities
laws, including engaging in insider trading, fraud and securities fraud and
damaging the reputation of Vencor and the Company. The plaintiff asserts that
such actions were taken deliberately, in bad faith and constitute breaches of
the defendants' duties of loyalty and due care. The complaint is largely based
on substantially similar assertions to those made in the class action lawsuit
entitled A. Carl Helwig v. Vencor, Inc., et al., discussed above. The suit
seeks unspecified damages, interest, punitive damages, reasonable attorneys'
fees, expert witness fees and other costs, and any extraordinary equitable
and/or injunctive relief permitted by law or equity to assure that the
plaintiff has an effective remedy. The Company believes that the allegations
in the complaint are without merit. Vencor has informed the Company that it
also believes the allegations in the complaint are without merit, and has
defended this action vigorously for and on behalf of the Company.
TheraTx, Incorporated ("TheraTx") was a subsidiary of the Company prior to
the 1998 Spin Off. The Company transferred all of its interest in TheraTx to
Vencor in the 1998 Spin Off. TheraTx is a plaintiff in a declaratory judgment
action entitled TheraTx, Incorporated v. James W. Duncan, Jr., et al., Case
No. 1:95-CV-3193 currently pending in the United States District Court for the
Northern District of Georgia. The defendants in this lawsuit have asserted
counterclaims against TheraTx under breach of contract, securities fraud,
negligent misrepresentation and fraud theories for allegedly not performing as
promised under a merger agreement related to TheraTx's purchase of a company
called PersonaCare, Inc. and for allegedly failing to inform the
defendants/counterclaimants prior to the merger that TheraTx's possible
acquisition of Southern Management Services, Inc. might cause the suspension
of TheraTx's shelf registration under relevant rules of the Securities and
Exchange Commission. The court granted summary judgment for the
defendants/counterclaimants and ruled that TheraTx breached the shelf
registration provision in the merger agreement, but dismissed the defendants'
remaining counterclaims. Additionally, the court ruled after trial that
defendants/counterclaimants were entitled to damages and prejudgment interest
in the amount of approximately $1.3 million and attorneys' fees and other
litigation expenses of approximately $530,077. On May 7, 1999, TheraTx filed a
supersedeas bond in the amount of $1,335,285, which was increased to
$1,865,362 to cover attorneys' fees and the expenses of litigation. On
November 2, 2000, the United States Court of Appeals for the Eleventh Circuit
(1) affirmed the district court's determination of TheraTx's liability for
breaching certain obligations and (2) certified to the Delaware Supreme Court
the question of the appropriate method of calculating damages. The Delaware
Supreme Court has not yet accepted the certification from the Eleventh Circuit
and, therefore, has not yet ruled on the damages issues. Vencor and the
defendants/counterclaimants both have appealed the court's rulings.
On April 14, 1999, a lawsuit entitled Lenox Healthcare, Inc., et al. v.
Vencor, Inc., et al., Case No. BC 208750, was filed in the Superior Court of
Los Angeles, California by Lenox Healthcare, Inc. ("Lenox")
F-43
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
asserting various causes of action arising out of the Company's sale and lease
of several nursing facilities to Lenox in 1997. Lenox subsequently removed
certain of its causes of action and refiled these claims before the United
States District Court for the Western District of Kentucky in a case entitled
Lenox Healthcare, Inc. v. Vencor, Inc., et al., Case No. 3:99 CV-348-H. Vencor,
on behalf of itself and the Company, has asserted counterclaims, including RICO
claims, against Lenox in the Kentucky action. The Company believes that the
allegations made by Lenox in both complaints are without merit. Vencor, on
behalf of itself and the Company, intends to defend these actions vigorously.
Lenox and its subsidiaries filed for protection under Chapter 11 of the
Bankruptcy Code on November 3, 1999. An order was entered in the Kentucky
action on September 21, 1999, staying the Kentucky action until further order
of the court. On September 23, 1999, the Superior Court in the California
action issued an order staying the California case, which stay was extended for
six months by order of the court entered on February 28, 2000. The Company,
Vencor and Lenox entered into a settlement, which was approved by the Lenox and
Vencor Bankruptcy Court. Joint motions to dismiss have been filed in both
courts.
A lawsuit styled Excelsior Care Centers, Inc. v. Ventas, Inc. and Lenox
Healthcare, Inc. was filed in Page County Circuit Court in Virginia on October
8, 1999. The complaint alleges that the Company and Lenox permitted a nursing
facility to fall into a state of disrepair, thereby willfully breaching the
terms of a lease agreement with Excelsior Care Centers. The complaint further
alleges that the Company breached the terms of a guaranty of the lease
agreement and makes a statutory claim for waste against the Company and Lenox.
Until November 1, 1999, the facility was operated by Lenox or one of its
affiliates under a management agreement with the Company. The Company assigned
the subject management agreement and lease agreement with Excelsior Care
Centers to Vencor in connection with the 1998 Spin Off. This action was
dismissed with prejudice as to all parties on February 7, 2001.
Vencor and the Company were informed by the Department of Justice that they
have been the subject of ongoing investigations into various aspects of claims
for reimbursement from government payers, billing practices and various quality
of care issues in the hospitals and nursing facilities formerly operated by the
Company and presently operated by Vencor. These investigations cover the
Company's former health care operations prior to the date of the 1998 Spin Off,
and include matters arising out of the qui tam actions described below and
additional potential claims. Certain of the complaints described below name
other defendants in addition to the Company. The United States Department of
Justice, Civil Division, filed two proofs of claim in the Bankruptcy Court
covering these claims and the qui tam actions. The United States asserted
approximately $1.3 billion, including treble damages, against Vencor in these
proofs of claim.
Under the Final Plan, the United States, Vencor and the Company have agreed
upon the United States Settlement whereby the United States releases the
Company from claims which were being investigated by the United States,
including the claims alleged in the qui tam actions described below (See "Note
8--Transactions with Vencor--Settlement of United States Claims"). Under the
United States Settlement, with respect to the three pending qui tam actions
described in subparagraphs (a), (d) and (g) below, the United States agrees to
move to dismiss such qui tam actions with prejudice as to the United States and
the relators. With respect to all claims in their entirety against any or all
of the Company and its current and former officers, directors and employees, in
each of the other pending qui tam actions described in subparagraphs (a)
through (j), the United States agrees to (i) move to dismiss with prejudice as
to the relators for all claims except claims under 31 U.S.C. (S) 3730(h), (ii)
move to dismiss with prejudice as to the United States for certain conduct
alleged in such qui tam actions which was investigated by the United States
(the "Covered Conduct"), and (iii) move to dismiss without prejudice as to the
United States for any claims other than for the Covered Conduct. The Company
believes that the United States is the real party in interest for all of the
claims in the following qui tam actions and that the United States has the
requisite authority to dismiss these actions as to the United States and the
relators. One of the relators in the qui tam action described in subsection (h)
below has indicated that it may challenge the
F-44
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
authority of the United States to dismiss the claims in such qui tam action on
behalf of the relator. There can be no assurance as to the outcome if the
relator should so challenge the authority of the United States to dismiss the
claims.
(a) American X-Ray, Inc. ("AXR") was a subsidiary of the Company prior
to the 1998 Spin Off. The Company transferred all of its interest in AXR to
Vencor in the 1998 Spin Off. AXR is the defendant in a civil qui tam
lawsuit which was filed in the United States District Court for the Eastern
District of Arkansas and served on the Company on July 7, 1997. The lawsuit
is styled United States ex rel. Doe v. American X-Ray, Inc., No. LR-C-95-
332 (E.D. Ark.). The United States of America has intervened in the suit
which was brought under the Federal Civil False Claims Act. AXR provided
portable X-ray services to nursing facilities (including those operated by
the Company at the time) and other health care providers. The Company
acquired an interest in AXR when The Hillhaven Corporation ("Hillhaven")
was merged into the Company in September 1995 and purchased the remaining
interest in AXR in February 1996. The civil lawsuit alleges that AXR
submitted false claims to the Medicare and Medicaid programs. The suit
seeks damages in an amount of not less than $1,000,000, treble damages and
civil penalties. The court administratively terminated this action without
prejudice pending the settlement among the United States, Vencor and the
Company.
In a related criminal investigation, the United States Attorney's Office
for the Eastern District of Arkansas indicted four former employees of AXR;
those individuals were convicted of various fraud related counts in January
1999. The Company and Vencor received several grand jury subpoenas for
documents and witnesses which Vencor, on behalf of the Company, moved to
quash. The United States Attorney's Office has withdrawn the subpoenas,
which rendered the motion to quash moot.
(b) In United States ex rel. Danley v. Medisave Pharmacies, Inc.,
Hillhaven Corp., and Vencor, Inc., Civil No. 3:00 CV-156-J (W.D. Ky.),
transferred on March 14, 2000 from the United States District Court for the
District of Nevada, Reno Division, filed on March 15, 1996, it is alleged
that Medisave Pharmacies, Inc. ("Medisave"), a former subsidiary of the
Company and now a subsidiary of Vencor, (1) charged the Medicare program
for unit dose drugs when bulk drugs were administered and charged skilled
nursing facilities more for the same drugs for Medicare patients than for
non-Medicare patients; (2) improperly claimed special dispensing fees that
it was not entitled to under Medicaid; and (3) recouped unused drugs from
skilled nursing facilities and returned these drugs to its stock without
crediting Medicare or Medicaid, all in violation of the Federal Civil False
Claims Act. It also alleged that Medisave had a policy of offering
kickbacks such as free equipment to skilled nursing facilities to secure
and maintain their business. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorney's fees and other costs. The
Company disputes the allegations contained in the complaint. On or about
January 7, 2000, the United States intervened in this case for purposes of
representing its interests in the Vencor bankruptcy and to effectuate the
settlement among the United States, Vencor and the Company.
(c) In the lawsuits styled United States ex rel. Roberts v. Vencor, Inc.
et al., Civil Action No. 3:97CV-349-J (W.D. Ky.), filed on June 25, 1996,
consolidated with United States ex rel. Meharg, et al. v. Vencor, Inc., et
al., Civil Action No. 3:98SC-737-H (M.D. Fla.), filed on June 4, 1998, it
is alleged that the Company, Vencor and Vencare, among others, submitted
and conspired to submit false claims to the Medicare program in connection
with their purported provision of respiratory therapy services to skilled
nursing facility residents. The Company and Vencare allegedly billed
Medicare for respiratory therapy services and supplies when those services
were not medically necessary, billed for services not provided, exaggerated
the time required to provide services or exaggerated the productivity of
its therapists. It is further alleged that the Company and Vencare
presented false claims and statements to the Medicare program in violation
of the Federal Civil False Claims Act, by, among other things, allegedly
causing skilled nursing facilities with which they had respiratory therapy
contracts to present false claims to Medicare for
F-45
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respiratory therapy services and supplies. The complaint seeks treble
damages, other unspecified damages, civil penalties, attorney's fees and
other costs. The Company disputes the allegations contained in the
complaint. On or about January 7, 2000, the United States intervened in
this case for purposes of representing its interests in the Vencor
bankruptcy and to effectuate the settlement among the United States, Vencor
and the Company.
(d) In United States ex rel. Kneepkens v. Gambro Healthcare, Inc., et
al., No. 97-10400-GAO, filed in the United States District Court for the
District of Massachusetts on October 15, 1998, Transitional, the Company's
former subsidiary which was transferred to Vencor in the 1998 Spin Off, and
two unrelated entities, Gambro Healthcare, Inc. and Dialysis Holdings,
Inc., are defendants. This suit alleges that the defendants violated the
Federal Civil False Claims Act and the Anti-Kickback Statute and committed
common law fraud, unjust enrichment and payment by mistake of fact.
Specifically, the complaint alleges that a predecessor to Transitional
formed a joint venture with Damon Clinical Laboratories to create and
operate a clinical testing laboratory in Georgia that was then used to
provide lab testing for dialysis patients, and that the joint venture
billed at below cost in return for referral of substantially all non-
routine testing in violation of the Anti-Kickback Statute. It is further
alleged that a predecessor to Transitional and Damon Clinical Laboratories
used multiple panel testing of end stage renal disease rather than single
panel testing that allegedly resulted in the generation of additional
rental revenues from Medicare and that the entities allegedly added non-
routine tests to tests otherwise ordered by physicians that were not
requested or medically necessary but resulted in additional revenue from
Medicare in violation of the Anti-Kickback Statute. Transitional has moved
to dismiss the case. Transitional disputes the allegations in the complaint
and is defending the action vigorously.
(e) The Company is a defendant in the case captioned United States ex
rel. Huff, et. al. v. Vencor, Inc., et al., Civil No. 97-4358 AHM(MCX)
filed in the United States District Court for the Central District of
California on June 13, 1997. The complaint alleges, among other things,
that the defendants violated the Federal Civil False Claims Act by
submitting false claims to Medicare, Medicaid and CHAMPUS programs by
allegedly (1) falsifying patient bills and submitting the bills to
Medicare, Medicaid and CHAMPUS programs, (2) submitting bills for intensive
and critical care not actually administered to patients, (3) the falsifying
of patient charts in relation to the billing, (4) charging for physical
therapy services allegedly not provided and pharmacy services allegedly
provided by non-pharmacists, and (5) billing for sales calls made by nurses
to prospective patients. The complaint further alleges the improper
establishment of TEFRA rates. The complaint seeks treble damages, other
unspecified damages, civil penalties, attorney's fees and other costs. The
Company disputes the allegations contained in the complaint. On or about
January 7, 2000, the United States intervened in this case for purposes of
representing its interests in the Vencor bankruptcy and to effectuate the
settlement among the United States, Vencor and the Company.
(f) The Company is a defendant in the proceeding captioned United States
ex rel. Brzycki v. Vencor, Inc., Civil No. 97-451-JD, filed in the United
States District Court for the District of New Hampshire on September 8,
1997. In this lawsuit the Company is accused of knowingly violating the
Federal Civil False Claims Act by submitting and conspiring to submit false
claims to the Medicare program. The complaint includes allegations that the
Company (1) fabricated diagnostic codes by ordering and providing medically
unnecessary ancillary services (such as respiratory therapy), (2) changed
referring physicians' diagnoses in order to qualify for Medicare
reimbursement; (3) billed for products or services not received or not
received in the manner billed, and (4) paid illegal kickbacks to referring
health care professionals in the form of medical consulting service
agreements as an alleged inducement to refer patients in violation of the
Anti-Kickback Act and Stark laws. The complaint seeks unspecified damages,
civil penalties, attorney's fees and other costs. The Company disputes the
allegations contained in the complaint. On or about January 7, 2000, the
United States intervened in this case for purposes of representing its
interests in the Vencor bankruptcy and to effectuate the settlement among
the United States, Vencor and the Company.
F-46
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) On November 24, 1997, a civil qui tam lawsuit was filed against the
Company in the United States District Court for the Middle District of
Florida. This lawsuit was brought under the Federal Civil False Claims Act
and is styled United States of America ex rel. Virginia Lee Lanford and
Gwendolyne Cavanaugh v. Vencor, Inc., et al., No. 97-CV-2845. The United
States of America intervened in the lawsuit on May 17, 1999. On July 23,
1999, the United States filed its Amended Complaint in the lawsuit. The
lawsuit alleges that the Company and Vencor knowingly submitted false
claims and false statements to the Medicare and Medicaid programs,
including, but not limited to, claims for reimbursement of costs for
certain ancillary services performed in Vencor's nursing facilities and for
third party nursing facility operators that the United States of America
claims are not reimbursable costs. The lawsuit involves the Company's
former health care operations. The complaint does not specify the amount of
damages claimed by the plaintiffs. The Company disputes the allegations
contained in the complaint.
(h) In United States, et al., ex rel., Phillips-Minks, et al. v.
Transitional Hospitals Corp., et al., Case No. 98CV1012-IEG (LAB) filed in
the Southern District of California on July 23, 1998, it is alleged that
the defendants submitted and conspired to submit false claims and
statements to Medicare, Medicaid, and other federally and state funded
programs during a period commencing in 1993 and certain other state law
claims. The conduct complained of allegedly violates the Federal False
Claims Act, the California False Claims Act, the Florida False Claims Act,
the Tennessee Health Care False Claims Act, and the Illinois Whistleblower
Reward and Protection Act. Defendants allegedly submitted improper and
erroneous claims to Medicare, Medicaid and other programs, for improper,
unnecessary and false services, excess collections associated with billing
and collecting bad debts, inflated and nonexistent laboratory charges,
false and inadequate documentation of claims, splitting charges, shifting
revenues and expenses, transferring patients to hospitals that reimburse at
a higher level, and improperly allocating hospital insurance expenses. In
addition, the complaint avers that defendants were inconsistent in their
reporting of cost report data, paid out kickbacks to increase patient
referrals to defendant hospitals, and incorrectly reported employee
compensation resulting in inflated employee 401(k) contributions. The
complaint seeks unspecified damages and expenses. The Company disputes the
allegations contained in the complaint.
(i) In Gary Graham on Behalf of the United States of America v. Vencor
Operating, Inc. et. al. (S.D. Fla.), filed on or about June 8, 1999, it is
alleged that the defendants, including the Company, presented or caused to
be presented false or fraudulent claims for payment to the United States
under the Medicare program in violation of, among other things, the Federal
Civil False Claims Act. The complaint claims that Medisave, a former
subsidiary of the Company which was transferred to Vencor in the 1998 Spin
Off, systematically up-charged for drugs and supplies dispensed to Medicare
patients. The complaint seeks unspecified damages, civil penalties,
interest, attorney's fees and other costs. The Company disputes the
allegations contained in the complaint. On or about January 7, 2000, the
United States intervened in this case for purposes of representing its
interests in the Vencor bankruptcy and to effectuate the settlement among
the United States, Vencor and the Company.
(j) United States ex rel. George Mitchell et al. v. Vencor, Inc. et al.
Civil Case No. C2-00-0015 (S.D. Ohio), filed with the United States
District Court for the Southern District of Ohio on August 13, 1999, was
brought under the Federal Civil False Claims Act. The lawsuit alleges that
the Company and its former subsidiaries, Vencare, Inc. ("Vencare") and
Vencor Hospice, Inc. (the Company transferred both subsidiaries to Vencor
in the 1998 Spin Off), submitted false statements to the Medicare program
for, among other things, reimbursement for costs for patients who were not
"hospice appropriate." The complaint alleges damages in excess of
$1,000,000. The Company disputes the allegations contained in the
complaint. On or about January 7, 2000, the United States intervened in
this case for purposes of representing its interests in the Vencor
bankruptcy and to effectuate the settlement among the United States, Vencor
and the Company.
F-47
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vencor is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. Neither the Company nor Vencor is
able to predict the ultimate outcome of pending litigation and regulatory
investigations. In addition, there can be no assurance that the United States
Health Care Financing Administration ("HCFA") or other regulatory agencies will
not initiate additional investigations related to Vencor's business in the
future, nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
material adverse effect on Vencor's liquidity, financial position or results of
operations, which in turn could have a Material Adverse Effect on the Company.
The Company is a party to certain legal actions and regulatory
investigations which arise from the normal course of its prior health care
operations. The Company is unable to predict the ultimate outcome of pending
litigation and regulatory investigations. In addition, there can be no
assurance that other regulatory agencies will not initiate additional
investigations related to the Company's prior health care business in the
future, nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
Material Adverse Effect on the Company. The Company is party to various other
lawsuits, both as defendant and plaintiff, arising in the normal course of
business. It is the opinion of management that, except as set forth in this
Note 11, the disposition of these other lawsuits will not, individually or in
the aggregate, have a Material Adverse Effect on the Company. If management's
assessment of the Company's liability with respect to these actions is
incorrect, such actions could have a Material Adverse Effect on the Company.
Unasserted Claims--Potential Liabilities Due to Fraudulent Transfer
Considerations, Legal Dividend Requirements and Other Claims
Vencor
Although no claims have been formally asserted, legal counsel for Vencor and
certain of its creditors raised questions relating to potential fraudulent
conveyance or obligation issues and other claims relating to the 1998 Spin Off.
If a court in a lawsuit by Vencor or a representative of Vencor's creditors
were to determine that, as a result of the 1998 Spin Off, Vencor did not
receive fair consideration or reasonably equivalent value for the liabilities
it assumed (such as the Master Leases or the Indemnification obligation), and,
at the time of the 1998 Spin Off, Vencor (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, then such court could among other things void some or all
of such liabilities. At the time of the 1998 Spin Off, the Company obtained an
opinion from an independent third party that addressed issues of Vencor's
solvency and adequate capitalization. Nevertheless, if a fraudulent conveyance
or obligation claim or other claim is ultimately asserted by Vencor, its
creditors, or others, the ultimate outcome of any such claim cannot presently
be determined. The Company intends to defend these claims vigorously if they
are asserted in a court, arbitration or mediation proceeding. These potential
claims of Vencor would be released by Vencor and its creditors under the terms
of the Final Plan, if consummated. Consummation of the Final Plan is subject to
the satisfaction of numerous conditions, many of which are outside the control
of the Company and Vencor. There can be no assurance that the Final Plan will
be consummated, or if all such conditions are satisfied, the date the Final
Plan would be consummated.
The Company
The 1998 Spin Off, including the simultaneous distribution of the Vencor
common stock to the Ventas stockholders (the "Distribution"), is subject to
review under fraudulent conveyance laws. Under these laws, if a court in a
lawsuit by an unpaid creditor or a representative of creditors (such as a
trustee or debtor-in-possession
F-48
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in bankruptcy of the Company or any of its respective subsidiaries) were to
determine that, as of the 1998 Spin Off, the Company did not receive fair
consideration or reasonably equivalent value for distributing the stock
distributed in the 1998 Spin Off and, at the time of the 1998 Spin Off, the
Company or any of its subsidiaries (i) was insolvent or was rendered
insolvent, (ii) had unreasonably small capital with which to carry on its
business and all businesses in which it intended to engage, or (iii) intended
to incur, or believed it would incur, debts beyond its ability to repay such
debts as they would mature, then such court could among other things order the
holders of the stock distributed in the 1998 Spin Off to return the value of
the stock and any dividends paid thereon and/or invalidate, in whole or in
part, the 1998 Spin Off as a fraudulent conveyance.
Legal Dividend Requirements
In addition, the 1998 Spin Off is subject to review under state corporate
distribution and dividend statutes. Under Delaware law, a corporation may not
pay a dividend to its stockholders if (i) the net assets of the corporation do
not exceed its capital, unless the amount proposed to be paid as a dividend is
less than the corporation's net profits for the current and/or preceding
fiscal year in which the dividend is to be paid, or (ii) the capital of the
corporation is less than the aggregate amount allocable to all classes of its
stock.
The Company believes that (i) the Company and each of its subsidiaries were
solvent (in accordance with the foregoing definitions) at the time of the 1998
Spin Off, were able to repay their debts as they matured following the 1998
Spin Off and had sufficient capital to carry on their respective businesses
and (ii) the 1998 Spin Off was consummated entirely in compliance with
Delaware law. There is no certainty, however, that a court would reach the
same conclusions in determining whether the Company was insolvent at the time
of, or after giving effect to, the 1998 Spin Off or whether lawful funds were
available for the 1998 Spin Off.
The Spin Agreements
The Spin Agreements provide for the allocation, immediately prior to the
1998 Spin Off, of certain debt of the Company. Further, pursuant to the Spin
Agreements, from and after the date of the 1998 Spin Off, each of the Company
and Vencor is responsible for the debts, liabilities and other obligations
related to the businesses which it owns and operates following the
consummation of the 1998 Spin Off. It is possible that a court would disregard
the allocation agreed to among the parties and require the Company or Vencor
to assume responsibility for obligations allocated to the other, particularly
if the other were to refuse or to be unable to pay or perform the subject
allocated obligations.
Other Legal Proceedings
The Company is a plaintiff in an action seeking a declaratory judgment and
damages entitled Ventas Realty, Limited Partnership et al. v. Black Diamond
CLO 1998-1 Ltd., et al., Case No. 99C107076, filed November 22, 1999 in the
Circuit Court of Jefferson County, Kentucky. Two of the three defendants in
that action, Black Diamond International Funding, Ltd. and BDC Finance, LLC
(collectively "Black Diamond"), have asserted counterclaims against the
Company under theories of breach of contract, tortious interference with
contract and abuse of process. These counterclaims allege, among other things,
that the Company wrongfully, and in violation of the terms of the Bank Credit
Agreement, (a) failed to recognize an assignment to Black Diamond of certain
notes issued under the Bank Credit Agreement, (b) failed to issue to Black
Diamond new notes under the Bank Credit Agreement, and (c) executed the Waiver
and Extension Agreement between the Company and its lenders in October 1999.
The counterclaims further claim that the Company acted tortiously in
commencing the action against the defendants. The counterclaims specifically
allege that the foregoing actions wrongfully interfered with
F-49
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Black Diamond's profitable ongoing business relations with a third party and
seek damages of $11,796,875 (the principal amount of the Company's Bridge Loan
under the Bank Credit Agreement claimed to have been held by Black Diamond),
plus interest, costs, and fees and additional unspecified amounts to be proven
at trial; in addition Black Diamond is seeking a declaration that the 1999
Waiver and Extension Agreement is void and unenforceable.
On March 9, 2000, the defendants filed a motion for summary judgment on the
Company's claims, contending that all such claims were released by the Company
as part of the Amended Credit Agreement, to which defendants Black Diamond CLO
1998-1 Ltd. and Black Diamond International Funding Ltd. (but not defendant BDC
Finance LLC) were signatories. By opinion and order entered May 9, 2000, the
Jefferson Circuit Court denied the defendants' motion for summary judgment. The
Company disputes the material allegations contained in Black Diamond's
counterclaims and the Company intends to pursue its claims and defend the
counterclaims vigorously.
The Company is party to various lawsuits arising in the normal course of the
Company's business. It is the opinion of management that, except as set forth
in this Note 11, the disposition of these lawsuits will not, individually or in
the aggregate, have a Material Adverse Effect on the Company. If management's
assessment of the Company's liability with respect to these actions is
incorrect such lawsuits could have a Material Adverse Effect on the Company.
Except for the United States Settlement, no provision for liability, if any,
resulting from the aforementioned litigation has been made in the financial
statements for the year ended December 31, 2000.
12. Capital Stock
The authorized capital stock of the Company at December 31, 2000 and 1999
consisted of 180,000,000 shares of Common Stock, par value of $0.25 per share,
and 10,000,000 shares of preferred stock of which 300,000 shares have been
designated Series A Participating Preferred Stock.
In order to preserve the Company's ability to maintain REIT status, the
Company's certificate of incorporation provides that if a person acquires
beneficial ownership of greater than 9% of the outstanding stock of the
Company, the shares that are beneficially owned in excess of such 9% limit are
deemed to be "Excess Shares." Excess Shares are automatically deemed
transferred to a trust for the benefit of a charitable institution or other
qualifying organization selected by the Board of Directors of the Company. The
trust is entitled to all dividends with respect to the Excess Shares and the
trustee may exercise all voting power over the Excess Shares.
The Company has the right to buy the Excess Shares for a purchase price
equal to the lesser of (1) the price per share in the transaction that created
the Excess Shares, or (2) the market price on the date the Company buys the
shares. The Company has the right to defer payment of the purchase price for
the Excess Shares for up to five years. If the Company does not purchase the
Excess Shares, the trustee of the trust is required to transfer the Excess
Shares at the direction of the Board of Directors. The owner of the Excess
Shares is entitled to receive the lesser of the proceeds from the sale of the
Excess Shares or the original purchase price for such Excess Shares; any
additional amounts are payable to the beneficiary of the trust.
Under the Company's certificate of incorporation, certain holders ("Existing
Holders") who owned the Company's common stock in excess of the foregoing
limits on the date of the 1998 Spin Off, are not subject to the general
ownership limits applicable to other stockholders. Existing Holders are
generally permitted to own up to the same percentage of the Company's common
stock that was owned on the date of the 1998 Spin Off, provided such ownership
does not jeopardize the Company's status as a REIT. The only Existing Holder is
Tenet
F-50
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Healthcare Corporation ("Tenet"). Tenet owned approximately 12% of the
Company's common stock on the date of the 1998 Spin Off. Tenet still currently
owns approximately 12% of the Company's common stock. There are certain
provisions under the Code that provide that any ownership interest that Tenet
may purchase in Vencor may be attributed to the Company. If any such
attribution should occur at a time when the Company owns 9.99% of the issued
and outstanding New Vencor Common Stock, the Company may lose its REIT status.
Under the Company's certificate of incorporation, under a formal interpretation
by the Board of Directors, if Tenet purchases any New Vencor Common Stock while
Tenet owns 10% or more of the Company's issued and outstanding common stock,
then all of Tenet's holdings of the Company's common stock in excess of 9.99%
will automatically become "Excess Shares" in the Company and would be deemed to
be owned by a trust for the benefit of a third party and Tenet will have no
legal title to such "Excess Shares" in the Company. Tenet would have the
limited right to receive certain distributions on and a certain portion of the
proceeds of a sale of such "Excess Shares" in the Company. The Company believes
that, based upon applicable tax authorities and decisions and advice from the
Internal Revenue Service, all common stock underlying warrants and options
which may be issued by Vencor on or after the Vencor Effective Date and
performance shares which may be issued by Vencor on or after the Vencor
Effective Date would be deemed outstanding for purposes of calculating the
Company's ownership percentage under the 10% securities test. Accordingly, if
the Final Plan is consummated and the New Vencor Common Stock is issued to the
Company on the Vencor Effective Date, the Company believes that for purposes of
the 10% securities test, its ownership percentage in Vencor on and after the
Vencor Effective Date would be materially less than 9.99%.
The Board of Directors is empowered to grant waivers from the Excess Share
provision of the Certificate of Incorporation, and certain holders of in excess
of 9% of the common stock prior to the 1998 Spin Off are subject to different
limitations. Subsequent to the 1998 Spin Off, the Board of Directors granted
such waivers to certain holders of the Company's Common Stock. These waivers
initially permitted such stockholders to own over 10% of the Common Stock of
the Company but in no event more than 15% of the Common Stock. These waivers
have either been terminated in their entirety or have been subsequently revised
to restrict such stockholders to owning less than 10% of the Common Stock of
the Company. The Company believes that no stockholder, other than Tenet,
currently owns 10% or more of the Company's Common Stock.
The Company has issued Preferred Stock Purchase Rights (the "Rights")
pursuant to the terms of the Rights Agreement, dated July 20, 1993, as amended,
with National City Bank as Rights Agent (the "Rights Agreement"). Under the
terms of the Rights Agreement, the Company declared a dividend of one Right for
each outstanding share of Common Stock of the Company to common stockholders of
record on August 1, 1993. Each Right entitles the holder to purchase from the
Company one-hundredth of a share of Series A Preferred Stock at a purchase
price of $110.
The Rights have certain anti-takeover effects and are intended to cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of the Rights being acquired.
Under the terms of the Rights Agreement, if at such time as any person
becomes the beneficial owner of 9.9% or more of the Common Stock (an "Acquiring
Person"), (i) the Company is involved in a merger or other business combination
in which the Common Stock is exchanged or changed (other than a merger with a
person or group which both (a) acquired Common Stock pursuant to a Permitted
Offer (as defined below) and (b) is offering not less than the price paid
pursuant to the Permitted Offer and the same form of consideration paid in the
Permitted Offer) or (ii) 50% or more of the Company's assets or earning power
are sold, the Rights become exercisable for that number of shares of common
stock of the acquiring company which at the time of such transaction would have
a market value of two times the exercise price of the Right (such right being
called the "Flip-over"). A "Permitted Offer" is a tender or exchange offer
which is for all outstanding shares of Common
F-51
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock at a price and on terms determined, prior to the purchase of shares under
such tender or exchange offer, by at least a majority of the members of the
Board of Directors who are not officers of the Company and who are not
Acquiring Persons or affiliates, associates, nominees or representatives of an
Acquiring Person, to be adequate and otherwise in the best interests of the
Company and its stockholders (other than the person or any affiliate or
associate thereof on whose behalf the offer is being made) taking into account
all factors that such directors deem relevant.
In the event any person becomes an Acquiring Person, for a 60 day period
after such event, if the Flip-over right is not also triggered, the Rights
become exercisable for that number of shares of Common Stock having a market
value of two times the exercise price of the Right, to the extent available,
and then (after all authorized and unreserved shares of Common Stock have been
issued), a common stock equivalent having a market value of two times the
exercise price of the Right.
Upon any person becoming an Acquiring Person (other than pursuant to a
Permitted Offer), any rights issued to or beneficially owned by such Acquiring
Person become null and void and thereafter may not be transferred to any other
person.
Certain persons and transactions are exempted from the operation of the
Rights. Prior to a person becoming an Acquiring Person, the Board has the power
to amend the Rights Agreement or cause the redemption of the Rights, at a
purchase price of $0.01 in cash per Right. After the time a person becomes an
Acquiring Person, the Board can only amend the Rights Agreement to make changes
that do not adversely affect the interests of the holders of Rights. For
purposes of the Rights Agreement a person is not deemed to be the beneficial
owner of securities designated as Excess Shares under the Company's Certificate
of Incorporation.
13. Related Party Transactions
At December 31, 2000 and 1999, the Company had receivables of approximately
$3.4 and $3.6 million, respectively, due from certain current and former
executive officers of the Company. The loans include interest provisions (with
a 5.7% average rate) and were to finance the income taxes payable by the
executive officers resulting from: (i) the 1998 Spin Off and (ii) vesting of
Restricted Shares. The loans are payable over periods ranging from four years
to ten years with the majority of the obligations amortizing quarterly.
Interest expense on the 1998 Spin Off note in the principal amount of $3.0
million at December 31, 2000, is forgiven on a periodic basis, provided that
the officer remains an employee of the Company. Interest expense on the note
relating to taxes paid for the vested portion of Restricted Shares (the
"Restricted Share Note") is payable annually out of and only to the extent of
dividends from the vested restricted shares. In the event of a change in
control of the Company (as defined in the relevant employment agreement) or
upon termination of the officer without cause (as defined in the relevant
employment agreement), the principal balance of the Restricted Share Note is
forgiven.
On October 15, 1998, the Company acquired eight personal care facilities and
related facilities for approximately $7.1 million from Tangram Rehabilitation
Network, Inc. ("Tangram"). Tangram is a wholly owned subsidiary of Res-Care,
Inc. ("Res-Care") of which a director of the Company is the Chairman, President
and Chief Executive Officer and another director of the Company is a member of
its board of directors. The Company leases the Tangram facilities to Tangram
pursuant to a master lease agreement which is guaranteed by Res-Care. For the
years ended December 31, 2000 and 1999 and the period from May 1, 1998 to
December 31, 1998, Tangram has paid the Company approximately $754,000,
$733,800 and $155,000, respectively, in rent payments.
On February 29, 2000, the Company entered into a Separation and Release
Agreement (the "Separation Agreement") with the former Executive Vice President
and Chief Financial Officer ("CFO") of the Company.
F-52
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Separation Agreement was entered into in connection with his resignation
as Executive Vice President and CFO of the Company, effective February 9, 2000
(the "Termination Date"). The Separation Agreement provided for a lump sum
severance payment of approximately $510,000 and certain other consideration
from the Company, and an extension of certain employee benefits for a one-year
period following the Termination Date.
The Company entered into a Separation Agreement and Release of Claims (the
"Ladt Separation Agreement") with Thomas T. Ladt pursuant to which Mr. Ladt
resigned as President, Chief Executive Officer and Chief Operating Officer of
the Company and from the Board of Directors of the Company as of March 5,
1999. The Ladt Separation Agreement provides for a lump sum payment of
approximately $1.3 million and certain other consideration from the Company,
and an extension of certain employee benefits for a two-year period following
the date of his resignation. The Company further agreed to amend a tax loan
that the Company had made to Mr. Ladt to provide that no principal or interest
payments would be due under such tax loan prior to March 5, 2004.
14. Quarterly Financial Information (Unaudited)
Summarized unaudited consolidated quarterly information for the years ended
December 31, 2000 and 1999 is provided below (amounts in thousands, except per
share amounts).
For the Quarters ended 2000
---------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Revenues................................. $59,100 $59,974 $60,879 $ 62,369
Income (Loss) before Extraordinary Item.. $ 6,940 $ 7,512 $ 8,581 $(84,278)(1)
Extraordinary Item....................... (4,207) -- -- --
Net Income (Loss)........................ $ 2,733 $ 7,512 $ 8,581 $(84,278)(1)
Earnings per share.......................
Basic...................................
Income (Loss) before Extraordinary
Item.................................. $ .10 $ .11 $ .13 $ (1.24)(1)
Extraordinary Item..................... (.06) -- -- --
Net Income (Loss)...................... $ .04 $ .11 $ .13 $ (1.24)(1)
Diluted.................................
Income (Loss) before Extraordinary
Item.................................. $ .10 $ .11 $ .13 $ (1.24)(1)
Extraordinary Item..................... (.06) -- -- --
Net Income (Loss)...................... $ .04 $ .11 $ .13 $ (1.24)(1)
For the Quarters ended 1999
---------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Revenues................................. $56,633 $57,909 $59,057 $ 59,392
Net Income (Loss)........................ $20,338 $20,166 $13,027 $(10,996)(2)
Earnings per share.......................
Basic...................................
Net Income (Loss)...................... $ .30 $ .30 $ .19 $ (.16)(2)
Diluted.................................
Net Income (Loss)...................... $ .30 $ .30 $ .19 $ (.16)(2)
- --------
(1) Reflects the charge for the United States Settlement and the waiver fee on
the Amended Credit Agreement.
(2) Reflects the write-off of uncollectible amounts due from tenants and loss
from impairment of assets as described in Notes 8 and 9.
F-53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VENTAS, INC.
/s/ DEBRA A. CAFARO
By: _________________________________
Debra A. Cafaro
Chief Executive Officer and
President
Date: April 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Walter F. Beran Director April 16, 2001
______________________________________
Walter F. Beran
/s/ Douglas Crocker, II Director April 16, 2001
______________________________________
Douglas Crocker, II
/s/ Ronald G. Geary Director April 16, 2001
______________________________________
Ronald G. Geary
/s/ Sheli Z. Rosenberg Director April 16, 2001
______________________________________
Sheli Z. Rosenberg
/s/ W. Bruce Lunsford Chairman of the Board and April 16, 2001
______________________________________ Director
W. Bruce Lunsford
/s/ Debra A. Cafaro Chief Executive Officer, April 16, 2001
______________________________________ President (Principal
Debra A. Cafaro Executive Officer and
Acting Principal
Financial Officer) and
Director
/s/ Mary L. Smith Principal Accounting April 16, 2001
______________________________________ Officer
Mary L. Smith
SCHEDULE III*
VENTAS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(Dollars in Thousands)
Gross Amount
Initial Cost to Carried at Close
Location Company of Period
- ------------------------------------- ---------------- ----------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ------------- ----- ------ --------- -------------- ------ ---------
VENCOR SKILLED NURSING FACILITIES
Rehab. &
Healthc. Ctr. of
Huntsville...... Huntsville AL $ 534 $4,216 -- $ 534 $4,216
Rehab. &
Healthc. Ctr. of
Birmingham...... Birmingham AL -- 1,921 -- -- 1,921
Rehab. &
Healthcare Ctr.
Of Mobile....... Mobile AL 5 2,981 -- 5 2,981
Valley
Healthcare &
Rehab. Center... Tucson AZ 383 1,954 -- 383 1,954
Sonoran Rehab &
Care Center..... Phoenix AZ 781 2,755 -- 781 2,755
Desert Life
Rehab & Care
Center.......... Tucson AZ 611 5,117 -- 611 5,117
Villa Campana
Health Center... Tucson AZ 533 2,201 -- 533 2,201
Kachina Point
Health Care &
Rehab........... Sedona AZ 364 4,179 -- 364 4,179
Nob Hill
Healthcare
Center.......... San Francisco CA 1,902 7,531 -- 1,902 7,531
Canyonwood
Nursing & Rehab.
Ctr. ........... Redding CA 401 3,784 -- 401 3,784
Californian Care
Center.......... Bakersfield CA 1,439 5,609 -- 1,439 5,609
Magnolia Gardens
Care Center..... Burlingame CA 1,832 3,186 -- 1,832 3,186
Lawton
Healthcare
Center.......... San Francisco CA 943 514 -- 943 514
Valley Gardens
HC & Rehab...... Stockton CA 516 3,405 -- 516 3,405
Alta Vista
Healthcare
Center.......... Riverside CA 376 1,669 -- 376 1,669
Maywood Acres
Healthcare
Center.......... Oxnard CA 465 2,363 -- 465 2,363
La Veta
Healthcare
Center.......... Orange CA 47 1,459 -- 47 1,459
Bay View Nursing
& Rehab.
Center.......... Alameda CA 1,462 5,981 -- 1,462 5,981
Village Square
Nsg. & Rehab.
Ctr. ........... San Marcos CA 766 3,507 -- 766 3,507
Cherry Hills
Health Care
Center.......... Englewood CO 241 2,180 -- 241 2,180
Aurora Care
Center.......... Aurora CO 197 2,328 -- 197 2,328
Castle Garden
Care Center..... Northglenn CO 501 8,294 -- 501 8,294
Brighton Care
Center.......... Brighton CO 282 3,377 -- 282 3,377
Andrew House
Healthcare...... New Britain CT 247 1,963 -- 247 1,963
Camelot Nursing
& Rehab.
Center.......... New London CT 202 2,363 -- 202 2,363
Hamilton Rehab.
& Healthcare
Center.......... Norwich CT 456 2,808 -- 456 2,808
Windsor Rehab. &
Healthcare
Center.......... Windsor CT 368 2,520 -- 368 2,520
Nutmeg Pavilion
Healthcare...... New London CT 401 2,777 -- 401 2,777
Location
- -------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
VENCOR SKILLED NURSING FACILITIES
Rehab. &
Healthc. Ctr. of
Huntsville...... $1,610 1968 1998 25 years
Rehab. &
Healthc. Ctr. of
Birmingham...... 964 1971 1998 20 years
Rehab. &
Healthcare Ctr.
Of Mobile....... 942 1967 1998 29 years
Valley
Healthcare &
Rehab. Center... 670 1964 1998 28 years
Sonoran Rehab &
Care Center..... 757 1962 1998 29 years
Desert Life
Rehab & Care
Center.......... 2,386 1979 1998 37 years
Villa Campana
Health Center... 589 1983 1998 35 years
Kachina Point
Health Care &
Rehab........... 1,637 1983 1998 45 years
Nob Hill
Healthcare
Center.......... 2,368 1967 1998 28 years
Canyonwood
Nursing & Rehab.
Ctr. ........... 990 1989 1998 45 years
Californian Care
Center.......... 1,220 1988 1998 40 years
Magnolia Gardens
Care Center..... 981 1955 1998 28.5 years
Lawton
Healthcare
Center.......... 217 1962 1998 20 years
Valley Gardens
HC & Rehab...... 1,024 1988 1998 29 years
Alta Vista
Healthcare
Center.......... 583 1966 1998 29 years
Maywood Acres
Healthcare
Center.......... 719 1964 1998 29 years
La Veta
Healthcare
Center.......... 461 1964 1998 28 years
Bay View Nursing
& Rehab.
Center.......... 1,854 1967 1998 45 years
Village Square
Nsg. & Rehab.
Ctr. ........... 661 1989 1998 42 years
Cherry Hills
Health Care
Center.......... 830 1960 1998 30 years
Aurora Care
Center.......... 706 1962 1998 30 years
Castle Garden
Care Center..... 2,370 1971 1998 29 years
Brighton Care
Center.......... 982 1969 1998 30 years
Andrew House
Healthcare...... 551 1967 1998 29 years
Camelot Nursing
& Rehab.
Center.......... 622 1969 1998 28 years
Hamilton Rehab.
& Healthcare
Center.......... 841 1969 1998 29 years
Windsor Rehab. &
Healthcare
Center.......... 770 1965 1998 30 years
Nutmeg Pavilion
Healthcare...... 889 1968 1998 29 years
S-1
Gross Amount
Initial Cost to Carried at Close
Location Company of Period
- -------------------------------------- ---------------- ----------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- -------------- ----- ------ --------- -------------- ------ ---------
Parkway Pavilion
Healthcare..... Enfield CT $ 337 $3,607 -- $ 337 $3,607
Courtland
Gardens Health
Ctr., Inc. .... Stamford CT 1,126 9,399 -- 1,126 9,399
Homestead Health
Center......... Stamford CT 511 2,764 -- 511 2,764
East Manor
Medical Care
Center......... Sarasota FL 390 5,499 -- 390 5,499
Healthcare &
Rehab Ctr of
Sanford........ Sanford FL 329 3,074 -- 329 3,074
Titusville
Rehab. &
Nursing
Center......... Titusville FL 398 3,810 -- 398 3,810
Bay Pointe
Nursing
Pavilion....... St. Petersburg FL 750 4,392 -- 750 4,392
Colonial Oaks
Rehab. Ctr-Ft.
Myers.......... Ft. Meyers FL 1,058 5,754 -- 1,058 5,754
Carrollwood Care
Center......... Tampa FL 268 4,128 -- 268 4,128
Evergreen Woods
Health &
Rehab.......... Springhill FL 234 3,566 -- 234 3,566
Rehab. &
Healthcare Ctr.
of Tampa....... Tampa FL 355 8,291 -- 355 8,291
Rehab & Health
Ctr. of Cape
Coral.......... Cape Coral FL 1,002 4,153 -- 1,002 4,153
Windsor Woods
Convalescent
Center......... Hudson FL 859 3,172 -- 859 3,172
Casa Mora Rehab.
& Ext Care..... Bradenton FL 823 6,093 -- 823 6,093
North Broward
Rehab. & Nsg.
Ctr. .......... Pompano Beach FL 1,360 5,913 -- 1,360 5,913
Highland Pines
Rehab. Center.. Clearwater FL 863 5,793 -- 863 5,793
Pompano
Rehab/Nursing
Ctr............ Pompano Beach FL 890 3,252 -- 890 3,252
Abbey Rehab. &
Nsg. Center.... St. Petersburg FL 563 2,842 -- 563 2,842
Savannah Rehab.
& Nursing
Center......... Savannah GA 213 2,772 -- 213 2,772
Specialty Care
of Marietta.... Marietta GA 241 2,782 -- 241 2,782
Savannah
Specialty Care
Center......... Savannah GA 157 2,219 -- 157 2,219
Lafayette Nsg. &
Rehab. Ctr..... Fayetteville GA 598 6,623 -- 598 6,623
Tucker Nursing
Center......... Tucker GA 512 8,153 -- 512 8,153
Hillcrest Rehab.
Care Center.... Boise ID 256 3,593 -- 256 3,593
Cascade Care
Center......... Caldwell ID 312 2,050 -- 312 2,050
Emmett
Rehabilitation
and
Healthcare..... Emmett ID 185 1,670 -- 185 1,670
Lewiston
Rehabilitation
and Care
Ctr. .......... Lewiston ID 133 3,982 -- 133 3,982
Nampa Care
Center......... Nampa ID 252 2,810 -- 252 2,810
Weiser
Rehabilitation
and Care
Ctr. .......... Weiser ID 157 1,760 -- 157 1,760
Moscow Care
Center......... Moscow ID 261 2,571 -- 261 2,571
Mountain Valley
Care and
Rehab.......... Kellogg ID 68 1,281 -- 68 1,281
Rolling Hills
Health Care
Center......... New Albany IN 81 1,894 -- 81 1,894
Royal Oaks
Healthcare &
Rehab Ctr. .... Terre Haute IN 418 5,779 -- 418 5,779
Southwood Health
& Rehab
Center......... Terre Haute IN 90 2,868 -- 90 2,868
Vencor Corydon.. Corydon IN 125 6,068 -- 125 6,068
Valley View
Health Care
Center......... Elkhart IN 87 2,665 -- 87 2,665
Wildwood
Healthcare
Center......... Indianapolis IN 134 4,983 -- 134 4,983
Meadowvale
Health & Rehab.
Ctr. .......... Bluffton IN 7 787 -- 7 787
Location
- --------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Parkway Pavilion
Healthcare..... $1,115 1968 1998 28 years
Courtland
Gardens Health
Ctr., Inc. .... 898 1956 1998 45 years
Homestead Health
Center......... 287 1959 1998 20 years
East Manor
Medical Care
Center......... 1,631 1966 1998 28 years
Healthcare &
Rehab Ctr of
Sanford........ 933 1965 1998 29 years
Titusville
Rehab. &
Nursing
Center......... 1,155 1966 1998 29 years
Bay Pointe
Nursing
Pavilion....... 892 1984 1998 35 years
Colonial Oaks
Rehab. Ctr-Ft.
Myers.......... 752 1995 1998 45 years
Carrollwood Care
Center......... 1,288 1986 1998 37.5 years
Evergreen Woods
Health &
Rehab.......... 988 1988 1998 25 years
Rehab. &
Healthcare Ctr.
of Tampa....... 1,980 1969 1998 28 years
Rehab & Health
Ctr. of Cape
Coral.......... 1,215 1978 1998 32 years
Windsor Woods
Convalescent
Center......... 873 N/A 1998 45 years
Casa Mora Rehab.
& Ext Care..... 591 1977 1998 45 years
North Broward
Rehab. & Nsg.
Ctr. .......... 525 1965 1998 45 years
Highland Pines
Rehab. Center.. 544 1965 1998 20 years
Pompano
Rehab/Nursing
Ctr............ 287 1975 1998 45 years
Abbey Rehab. &
Nsg. Center.... 523 1962 1998 35 years
Savannah Rehab.
& Nursing
Center......... 846 1968 1998 28.5 years
Specialty Care
of Marietta.... 935 1968 1998 28.5 years
Savannah
Specialty Care
Center......... 784 1972 1998 26 years
Lafayette Nsg. &
Rehab. Ctr..... 1,252 1989 1998 20 years
Tucker Nursing
Center......... 799 1972 1998 45 years
Hillcrest Rehab.
Care Center.... 570 1977 1998 45 years
Cascade Care
Center......... 319 1974 1998 45 years
Emmett
Rehabilitation
and
Healthcare..... 1,068 1960 1998 28 years
Lewiston
Rehabilitation
and Care
Ctr. .......... 1,335 1964 1998 29 years
Nampa Care
Center......... 1,760 1950 1998 25 years
Weiser
Rehabilitation
and Care
Ctr. .......... 1,247 1963 1998 25 years
Moscow Care
Center......... 1,056 1955 1998 25 years
Mountain Valley
Care and
Rehab.......... 839 1971 1998 25 years
Rolling Hills
Health Care
Center......... 562 1984 1998 25 years
Royal Oaks
Healthcare &
Rehab Ctr. .... 741 1995 1998 45 years
Southwood Health
& Rehab
Center......... 758 1988 1998 25 years
Vencor Corydon.. 340 N/A 1998 45 years
Valley View
Health Care
Center......... 760 1985 1998 25 years
Wildwood
Healthcare
Center......... 1,335 1988 1998 25 years
Meadowvale
Health & Rehab.
Ctr. .......... 119 1962 1998 22 years
S-2
Gross Amount
Carried at
Initial Cost Close of
Location to Company Period
- ---------------------------------------- -------------- --------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ---------------- ----- ---- --------- -------------- ---- ---------
Columbia
Healthcare
Facility....... Evansville IN $416 $6,317 -- $416 $6,317
Bremen Health
Care Center.... Bremen IN 109 3,354 -- 109 3,354
Windsor Estates
Health & Rehab
Ctr. .......... Kokomo IN 256 6,625 -- 256 6,625
Muncie Health
Care & Rehab... Muncie IN 108 4,202 -- 108 4,202
Parkwood Health
Care Center.... Lebanon IN 121 4,512 -- 121 4,512
Wedgewood
Healthcare
Center......... Clarksville IN 119 5,115 -- 119 5,115
Westview Nursing
& Rehab.
Center......... Bedford IN 255 4,207 -- 255 4,207
Columbus Health
& Rehab.
Center......... Columbus IN 345 6,817 -- 345 6,817
Rosewood Health
Care Center.... Bowling Green KY 248 5,371 -- 248 5,371
Oakview Nursing
& Rehab.
Ctr. .......... Calvert City KY 124 2,882 -- 124 2,882
Cedars of
Lebanon Nursing
Center......... Lebanon KY 40 1,253 -- 40 1,253
Winchester
Centre for
Health/Rehab... Winchester KY 137 6,120 -- 137 6,120
Riverside Manor
Health Care.... Calhoun KY 103 2,119 -- 103 2,119
Maple Manor
Healthcare
Center......... Greenville KY 59 3,187 -- 59 3,187
Danville Centre
for Health &
Rehab.......... Danville KY 322 3,538 -- 322 3,538
Lexington Centre
for Health &
Rehab.......... Lexington KY 647 4,892 -- 647 4,892
North Centre for
Health &
Rehab.......... Louisville KY 285 1,555 -- 285 1,555
Hillcrest Health
Care Center.... Owensboro KY 544 2,619 -- 544 2,619
Woodland Terrace
Health Care
Fac. .......... Elizabethtown KY 216 1,795 -- 216 1,795
Harrodsburg
Health Care
Center......... Harrodsburg KY 137 1,830 -- 137 1,830
Laurel Ridge
Rehab. &
Nursing Ctr. .. Jamaica Plain MA 194 1,617 -- 194 1,617
Blue Hills
Alzheimer's
Care Center.... Stoughton MA 511 1,026 -- 511 1,026
Brigham Manor
Nursing & Rehab
Ctr ........... Newburyport MA 126 1,708 -- 126 1,708
Presentation
Nursing &
Rehab. Ctr. ... Brighton MA 184 1,220 -- 184 1,220
Country Manor
Rehab. & Nsg.
Center......... Newburyport MA 199 3,004 -- 199 3,004
Crawford Skilled
Nsg. & Rehab.
Ctr. .......... Fall River MA 127 1,109 -- 127 1,109
Hallmark Nursing
& Rehab.
Ctr. .......... New Bedford MA 202 2,694 -- 202 2,694
Sachem Nursing &
Rehab. Ctr. ... East Bridgewater MA 529 1,238 -- 529 1,238
Hammersmith
House Nsg. Care
Ctr. .......... Saugus MA 112 1,919 -- 112 1,919
Oakwood Rehab. &
Nursing
Center......... Webster MA 102 1,154 -- 102 1,154
Timberlyn
Heights Nsg. &
Alz. Ctr. ..... Great Barrington MA 120 1,305 -- 120 1,305
Star of David
Nsg. &
Rehab/Alz
Ctr. .......... West Roxbury MA 359 2,324 -- 359 2,324
Brittany
Healthcare
Center......... Natick MA 249 1,328 -- 249 1,328
Briarwood Health
Care Nursing
Ctr. .......... Needham MA 154 1,502 -- 154 1,502
Westridge
Healthcare
Center......... Marlborough MA 453 3,286 -- 453 3,286
Bolton Manor
Nursing Home... Marlborough MA 222 2,431 -- 222 2,431
Hillcrest
Nursing
Facility....... Fitchburg MA 175 1,461 -- 175 1,461
Country Gardens
Sk. Nsg. &
Rehab. ........ Swansea MA 415 2,675 -- 415 2,675
Location
- ----------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Columbia
Healthcare
Facility....... $1,619 1983 1998 35 years
Bremen Health
Care Center.... 662 1982 1998 45 years
Windsor Estates
Health & Rehab
Ctr. .......... 1,334 1962 1998 35 years
Muncie Health
Care & Rehab... 1,020 1980 1998 25 years
Parkwood Health
Care Center.... 1,148 1977 1998 25 years
Wedgewood
Healthcare
Center......... 862 1985 1998 35 years
Westview Nursing
& Rehab.
Center......... 1,099 1970 1998 29 years
Columbus Health
& Rehab.
Center......... 2,486 1966 1998 25 years
Rosewood Health
Care Center.... 1,820 1970 1998 30 years
Oakview Nursing
& Rehab.
Ctr. .......... 973 1967 1998 30 years
Cedars of
Lebanon Nursing
Center......... 424 1930 1998 30 years
Winchester
Centre for
Health/Rehab... 2,051 1967 1998 30 years
Riverside Manor
Health Care.... 724 1963 1998 30 years
Maple Manor
Healthcare
Center......... 1,084 1968 1998 30 years
Danville Centre
for Health &
Rehab.......... 884 1962 1998 30 years
Lexington Centre
for Health &
Rehab.......... 1,516 1963 1998 28 years
North Centre for
Health &
Rehab.......... 601 1969 1998 30 years
Hillcrest Health
Care Center.... 1,985 1963 1998 22 years
Woodland Terrace
Health Care
Fac. .......... 1,326 1969 1998 26 years
Harrodsburg
Health Care
Center......... 855 1974 1998 35 years
Laurel Ridge
Rehab. &
Nursing Ctr. .. 645 1968 1998 30 years
Blue Hills
Alzheimer's
Care Center.... 785 1965 1998 28 years
Brigham Manor
Nursing & Rehab
Ctr ........... 753 1806 1998 27 years
Presentation
Nursing &
Rehab. Ctr. ... 828 1968 1998 28 years
Country Manor
Rehab. & Nsg.
Center......... 1,325 1968 1998 27 years
Crawford Skilled
Nsg. & Rehab.
Ctr. .......... 689 1968 1998 29 years
Hallmark Nursing
& Rehab.
Ctr. .......... 1,227 1968 1998 26 years
Sachem Nursing &
Rehab. Ctr. ... 900 1968 1998 27 years
Hammersmith
House Nsg. Care
Ctr. .......... 786 1965 1998 28 years
Oakwood Rehab. &
Nursing
Center......... 706 1967 1998 31 years
Timberlyn
Heights Nsg. &
Alz. Ctr. ..... 737 1968 1998 29 years
Star of David
Nsg. &
Rehab/Alz
Ctr. .......... 1,635 1968 1998 26 years
Brittany
Healthcare
Center......... 753 1996 1998 31 years
Briarwood Health
Care Nursing
Ctr. .......... 817 1970 1998 30 years
Westridge
Healthcare
Center......... 1,972 1964 1998 28.5 years
Bolton Manor
Nursing Home... 1,225 1973 1998 34.5 years
Hillcrest
Nursing
Facility....... 988 1957 1998 25 years
Country Gardens
Sk. Nsg. &
Rehab. ........ 1,138 1969 1998 27 years
S-3
Gross Amount
Carried at
Initial Cost Close of
Location to Company Period
- ---------------------------------------- -------------- --------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ---------------- ----- ---- --------- -------------- ---- ---------
Quincy Rehab. &
Nursing
Center......... Quincy MA $216 $2,911 -- $216 $2,911
West Roxbury
Manor.......... West Roxbury MA 91 1,001 -- 91 1,001
Newton and
Wellesley
Alzheimer
Ctr. .......... Wellesley MA 297 3,250 -- 297 3,250
Den-Mar Rehab. &
Nursing
Center......... Rockport MA 23 1,560 -- 23 1,560
Eagle Pond
Rehab. & Living
Center......... South Dennis MA 296 6,896 -- 296 6,896
Blueberry Hill
Healthcare..... Beverly MA 129 4,290 -- 129 4,290
Colony House
Nsg. & Rehab.
Ctr. .......... Abington MA 132 999 -- 132 999
Embassy House
Sk. Nsg. &
Rehab. ........ Brockton MA 166 1,004 -- 166 1,004
Franklin Sk.
Nsg. & Rehab.
Center......... Franklin MA 156 757 -- 156 757
Great Barrington
Rehab. & Nsg.
Ctr. .......... Great Barrington MA 60 1,142 -- 60 1,142
River Terrace... Lancaster MA 268 957 -- 268 957
Walden Rehab. &
Nursing
Center......... Concord MA 181 1,347 -- 181 1,347
Harrington House
Nsg. & Rehab.
Ctr. .......... Walpole MA 4 4,444 -- 4 4,444
Eastside Rehab.
and Living
Center......... Bangor ME 316 1,349 -- 316 1,349
Winship Green
Nursing
Center......... Bath ME 110 1,455 -- 110 1,455
Brewer
Rehabilitation
& Living
Center......... Brewer ME 228 2,737 -- 228 2,737
Augusta
Rehabilitation
Center......... Augusta ME 152 1,074 -- 152 1,074
Kennebunk
Nursing
Center......... Kennebunk ME 99 1,898 -- 99 1,898
Norway
Rehabilitation
& Living
Center......... Norway ME 133 1,658 -- 133 1,658
Shore Village
Rehab. &
Nursing Ctr. .. Rockland ME 100 1,051 -- 100 1,051
Westgate Manor.. Bangor ME 287 2,718 -- 287 2,718
Brentwood Rehab.
& Nsg. Center.. Yarmouth ME 181 2,789 -- 181 2,789
Fieldcrest Manor
Nursing
Center......... Waldoboro ME 101 1,020 -- 101 1,020
Park Place
Health Care
Center......... Great Falls MT 600 6,311 -- 600 6,311
Parkview Acres
Care & Rehab
Ctr. .......... Dillon MT 207 2,578 -- 207 2,578
Pettigrew Rehab.
& Healthcare
Ctr. .......... Durham NC 101 2,889 -- 101 2,889
LaSalle
Healthcare
Center......... Durham NC 140 3,238 -- 140 3,238
Sunnybrook
Alzheimer's &
HC Spec. ...... Raleigh NC 187 3,409 -- 187 3,409
Blue Ridge
Rehab. &
Healthcare
Ctr. .......... Asheville NC 250 3,819 -- 250 3,819
Raleigh Rehab. &
Healthcare
Center......... Raleigh NC 316 5,470 -- 316 5,470
Rose Manor
Health Care
Center......... Durham NC 201 3,527 -- 201 3,527
Cypress Pointe
Rehab & HC
Center......... Winmington NC 233 3,710 -- 233 3,710
Winston-Salem
Rehab & HC
Center......... Winston-Salem NC 305 5,142 -- 305 5,142
Silas Creek
Manor.......... Winston-Salem NC 211 1,893 -- 211 1,893
Lincoln Nursing
Center......... Lincoln NC 39 3,309 -- 39 3,309
Guardian Care of
Roanoke
Rapids......... Roanoke Rapids NC 339 4,132 -- 339 4,132
Guardian Care of
Henderson...... Henderson NC 206 1,997 -- 206 1,997
Rehab. & Nursing
Center of
Monroe......... Monroe NC 185 2,654 -- 185 2,654
Location
- ----------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Quincy Rehab. &
Nursing
Center......... $1,586 1965 1998 24 years
West Roxbury
Manor.......... 841 1960 1998 20 years
Newton and
Wellesley
Alzheimer
Ctr. .......... 1,355 1971 1998 30 years
Den-Mar Rehab. &
Nursing
Center......... 792 1963 1998 30 years
Eagle Pond
Rehab. & Living
Center......... 1,954 1985 1998 50 years
Blueberry Hill
Healthcare..... 1,908 1965 1998 40 years
Colony House
Nsg. & Rehab.
Ctr. .......... 727 1965 1998 40 years
Embassy House
Sk. Nsg. &
Rehab. ........ 664 1968 1998 40 years
Franklin Sk.
Nsg. & Rehab.
Center......... 556 1967 1998 40 years
Great Barrington
Rehab. & Nsg.
Ctr. .......... 796 1967 1998 40 years
River Terrace... 726 1969 1998 40 years
Walden Rehab. &
Nursing
Center......... 998 1969 1998 40 years
Harrington House
Nsg. & Rehab.
Ctr. .......... 976 1991 1998 45 years
Eastside Rehab.
and Living
Center......... 567 1967 1998 30 years
Winship Green
Nursing
Center......... 639 1974 1998 35 years
Brewer
Rehabilitation
& Living
Center......... 1,057 1974 1998 33 years
Augusta
Rehabilitation
Center......... 555 1968 1998 30 years
Kennebunk
Nursing
Center......... 749 1977 1998 35 years
Norway
Rehabilitation
& Living
Center......... 687 1972 1998 39 years
Shore Village
Rehab. &
Nursing Ctr. .. 530 1968 1998 30 years
Westgate Manor.. 1,090 1969 1998 31 years
Brentwood Rehab.
& Nsg. Center.. 1,109 1945 1998 45 years
Fieldcrest Manor
Nursing
Center......... 537 1963 1998 32 years
Park Place
Health Care
Center......... 1,940 1963 1998 28 years
Parkview Acres
Care & Rehab
Ctr. .......... 790 1965 1998 29 years
Pettigrew Rehab.
& Healthcare
Ctr. .......... 932 1969 1998 28 years
LaSalle
Healthcare
Center......... 895 1969 1998 29 years
Sunnybrook
Alzheimer's &
HC Spec. ...... 1,255 1971 1998 25 years
Blue Ridge
Rehab. &
Healthcare
Ctr. .......... 1,096 1977 1998 32 years
Raleigh Rehab. &
Healthcare
Center......... 2,025 1969 1998 25 years
Rose Manor
Health Care
Center......... 1,251 1972 1998 26 years
Cypress Pointe
Rehab & HC
Center......... 1,228 1966 1998 28.5 years
Winston-Salem
Rehab & HC
Center......... 1,878 1968 1998 25 years
Silas Creek
Manor.......... 585 1966 1998 28.5 years
Lincoln Nursing
Center......... 1,360 1976 1998 35 years
Guardian Care of
Roanoke
Rapids......... 1,485 1967 1998 25 years
Guardian Care of
Henderson...... 618 1957 1998 29 years
Rehab. & Nursing
Center of
Monroe......... 965 1963 1998 28 years
S-4
Gross Amount
Initial Cost to Carried at Close
Location Company of Period
- ----------------------------------------- ---------------- ----------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ---------------- ----- ------ --------- -------------- ------ ---------
Guardian Care of
Kinston........ Kinston NC $ 186 $3,038 -- $ 186 $3,038
Guardian Care of
Zebulon........ Zebulon NC 179 1,933 -- 179 1,933
Guardian Care of
Rocky Mount.... Rocky Mount NC 240 1,732 -- 240 1,732
Rehab. & Health
Center of
Gastonia....... Gastonia NC 158 2,359 -- 158 2,359
Guardian Care of
Elizabeth
City........... Elizabeth City NC 71 561 -- 71 561
Chapel Hill
Rehab. &
Healthcare
Ctr. .......... Chapel Hill NC 347 3,029 -- 347 3,029
Homestead Health
Care & Rehab
Ctr. .......... Lincoln NE 277 1,528 1,178 277 2,706
Dover Rehab. &
Living Center.. Dover NH 355 3,797 -- 355 3,797
Greenbriar
Terrace
Healthcare..... Nashua NH 776 6,011 -- 776 6,011
Hanover Terrace
Healthcare..... Hanover NH 326 1,825 -- 326 1,825
Las Vegas
Healthcare &
Rehab. Ctr. ... Las Vegas NV 454 1,018 -- 454 1,018
Torrey Pines
Care Center.... Las Vegas NV 256 1,324 -- 256 1,324
Franklin Woods
Health Care
Center......... Columbus OH 190 4,712 -- 190 4,712
Chillicothe
Nursing &
Rehab. Center.. Chillicothe OH 128 3,481 -- 128 3,481
Pickerington
Nursing &
Rehab. Ctr. ... Pickerington OH 312 4,382 -- 312 4,382
Logan Health
Care Center.... Logan OH 169 3,750 -- 169 3,750
Winchester Place
Nsg. & Rehab.
Ctr. .......... Canal Winchestr. OH 454 7,149 -- 454 7,149
Minerva Park
Nursing &
Rehab. Ctr. ... Columbus OH 210 3,684 -- 210 3,684
West Lafayette
Rehab & Nsg
Ctr. .......... West Lafayette OH 185 3,278 -- 185 3,278
Cambridge Health
& Rehab.
Center......... Cambridge OH 108 2,642 -- 108 2,642
Coshocton Health
& Rehab.
Center......... Coshocton OH 203 1,979 -- 203 1,979
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. ...... Akron OH 341 5,491 -- 341 5,491
Lebanon Country
Manor.......... Lebanon OH 105 3,617 -- 105 3,617
Sunnyside Care
Center......... Salem OR 1,519 2,688 -- 1,519 2,688
Medford Rehab. &
Healthcare
Center......... Medford OR 362 4,610 -- 362 4,610
Wyomissing Nsg.
& Rehab.
Ctr. .......... Reading PA 61 5,095 -- 61 5,095
Health Havens
Nursing &
Rehab. Ctr. ... E. Providence RI 174 2,643 -- 174 2,643
Oak Hill Nursing
& Rehab.
Ctr. .......... Pawtucket RI 91 6,724 -- 91 6,724
Madison
Healthcare &
Rehab Ctr. .... Madison TN 168 1,445 -- 168 1,445
Cordova Rehab. &
Nursing
Center......... Cordova TN 322 8,830 -- 322 8,830
Primacy
Healthcare &
Rehab Ctr. .... Memphis TN 1,222 8,344 -- 1,222 8,344
Masters Health
Care Center.... Algood TN 524 4,370 -- 524 4,370
San Pedro
Manor.......... San Antonio TX 602 4,178 -- 602 4,178
Wasatch Care
Center......... Ogden UT 374 596 -- 374 596
Crosslands
Rehab. & Health
Care Ctr. ..... Sandy UT 334 4,300 -- 334 4,300
St. George Care
and Rehab.
Center......... St. George UT 420 4,465 -- 420 4,465
Federal Heights
Rehab. & Nsg.
Ctr. .......... Salt Lake City UT 201 2,322 -- 201 2,322
Wasatch Valley
Rehabilitation.. Salt Lake City UT 389 3,545 -- 389 3,545
Location
- -----------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Guardian Care of
Kinston........ $ 907 1961 1998 29 years
Guardian Care of
Zebulon........ 591 1973 1998 29 years
Guardian Care of
Rocky Mount.... 514 1975 1998 25 years
Rehab. & Health
Center of
Gastonia....... 769 1968 1998 29 years
Guardian Care of
Elizabeth
City........... 444 1977 1998 20 years
Chapel Hill
Rehab. &
Healthcare
Ctr. .......... 1,041 1984 1998 28 years
Homestead Health
Care & Rehab
Ctr. .......... 1,851 1961 1998 45 years
Dover Rehab. &
Living Center.. 1,562 1969 1998 25 years
Greenbriar
Terrace
Healthcare..... 2,270 1963 1998 25 years
Hanover Terrace
Healthcare..... 549 1969 1998 29 years
Las Vegas
Healthcare &
Rehab. Ctr. ... 221 1940 1998 30 years
Torrey Pines
Care Center.... 424 1971 1998 29 years
Franklin Woods
Health Care
Center......... 1,140 1986 1998 38 years
Chillicothe
Nursing &
Rehab. Center.. 1,430 1976 1998 34 years
Pickerington
Nursing &
Rehab. Ctr. ... 1,034 1984 1998 37 years
Logan Health
Care Center.... 1,143 1979 1998 30 years
Winchester Place
Nsg. & Rehab.
Ctr. .......... 2,388 1974 1998 28 years
Minerva Park
Nursing &
Rehab. Ctr. ... 549 1973 1998 45 years
West Lafayette
Rehab & Nsg
Ctr. .......... 577 1972 1998 45 years
Cambridge Health
& Rehab.
Center......... 779 1975 1998 25 years
Coshocton Health
& Rehab.
Center......... 585 1974 1998 25 years
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. ...... 1,755 1970 1998 28 years
Lebanon Country
Manor.......... 1,192 1984 1998 43 years
Sunnyside Care
Center......... 824 1981 1998 30 years
Medford Rehab. &
Healthcare
Center......... 1,402 N/A 1998 34 years
Wyomissing Nsg.
& Rehab.
Ctr. .......... 501 1966 1998 45 years
Health Havens
Nursing &
Rehab. Ctr. ... 264 1962 1998 45 years
Oak Hill Nursing
& Rehab.
Ctr. .......... 668 1966 1998 45 years
Madison
Healthcare &
Rehab Ctr. .... 464 1968 1998 29 years
Cordova Rehab. &
Nursing
Center......... 3,210 1979 1998 39 years
Primacy
Healthcare &
Rehab Ctr. .... 2,162 1980 1998 37 years
Masters Health
Care Center.... 1,537 1981 1998 38 years
San Pedro
Manor.......... 448 1985 1998 45 years
Wasatch Care
Center......... 389 1964 1998 25 years
Crosslands
Rehab. & Health
Care Ctr. ..... 916 1987 1998 40 years
St. George Care
and Rehab.
Center......... 1,435 1976 1998 29 years
Federal Heights
Rehab. & Nsg.
Ctr. .......... 728 1962 1998 29 years
Wasatch Valley
Rehabilitation.. 989 1962 1998 29 years
S-5
Gross Amount
Initial Cost to Carried at Close
Location Company of Period
- ---------------------------------------- ----------------- -----------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ---------------- ----- ------- --------- -------------- ------- ---------
Nansemond Pointe
Rehab. & HC
Ctr. .......... Suffolk VA $ 534 $ 6,990 -- $ 534 $ 6,990
Harbour Pointe
Med. & Rehab.
Ctr. .......... Norfolk VA 427 4,441 -- 427 4,441
River Pointe
Rehab. &
Healthc.
Ctr. .......... Virginia Beach VA 770 4,440 -- 770 4,440
Bay Pointe
Medical &
Rehab. Centre.. Virginia Beach VA 805 2,886 -- 805 2,886
Birchwood
Terrace
Healthcare..... Burlington VT 15 4,656 -- 15 4,656
Arden
Rehabilitation
& Healthcare
Ctr. .......... Seattle WA 1,111 4,013 -- 1,111 4,013
Northwest
Continuum Care
Center......... Longview WA 145 2,563 -- 145 2,563
Bellingham
Health Care &
Rehab. Svc. ... Bellingham WA 442 3,823 -- 442 3,823
Rainier Vista
Care Center.... Puyallup WA 520 4,780 -- 520 4,780
Lakewood
Healthcare
Center......... Lakewood WA 504 3,511 -- 504 3,511
Vencor of
Vancouver HC &
Rehab. ........ Vancouver WA 449 2,964 -- 449 2,964
Heritage Health
& Rehab.
Center......... Vancouver WA 76 835 -- 76 835
Edmonds Rehab. &
Healthcare
Ctr. .......... Edmonds WA 355 3,032 -- 355 3,032
Queen Anne
Healthcare..... Seattle WA 570 2,750 -- 570 2,750
San Luis Medical
& Rehab
Center......... Greenbay WI 259 5,299 -- 259 5,299
Eastview Medical
& Rehab.
Center......... Antigo WI 200 4,047 -- 200 4,047
Colonial Manor
Medical & Rehab
Ctr. .......... Wausau WI 169 3,370 -- 169 3,370
Colony Oaks Care
Center......... Appleton WI 353 3,571 -- 353 3,571
North Ridge Med.
& Rehab.
Center......... Manitowoc WI 206 3,785 -- 206 3,785
Vallhaven Care
Center......... Neenah WI 337 5,125 -- 337 5,125
Kennedy Park
Medical &
Rehab. Ctr. ... Schofield WI 301 3,596 -- 301 3,596
Family Heritage
Med. & Rehab.
Ctr. .......... Wisconsin Rapids WI 240 3,350 -- 240 3,350
Mt. Carmel
Medical &
Rehab. Ctr. ... Burlington WI 274 7,205 -- 274 7,205
Mt. Carmel
Medical &
Rehab. Ctr. ... Milwaukee WI 2,356 22,571 -- 2,356 22,571
Sheridan Medical
Complex........ Kenosha WI 282 4,910 -- 282 4,910
Woodstock Health
& Rehab.
Center......... Kenosha WI 562 7,424 -- 562 7,424
Mountain Towers
Healthcare &
Rehab. ........ Cheyenne WY 342 3,814 -- 342 3,814
South Central
Wyoming HC. &
Rehab. ........ Rawlins WY 151 1,738 -- 151 1,738
Wind River
Healthcare &
Rehab. Ctr. ... Riverton WY 179 1,559 -- 179 1,559
Sage View Care
Center......... Rock Springs WY 287 2,392 -- 287 2,392
------- -------- ----- ------- --------
TOTAL VENCOR NURSING FACILITIES........ 74,942 731,365 1,178 74,942 732,543
Location
- ----------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Nansemond Pointe
Rehab. & HC
Ctr. .......... $ 2,026 1963 1998 32 years
Harbour Pointe
Med. & Rehab.
Ctr. .......... 1,384 1969 1998 28 years
River Pointe
Rehab. &
Healthc.
Ctr. .......... 1,753 1953 1998 25 years
Bay Pointe
Medical &
Rehab. Centre.. 856 1971 1998 29 years
Birchwood
Terrace
Healthcare..... 1,822 1965 1998 27 years
Arden
Rehabilitation
& Healthcare
Ctr. .......... 1,220 1950's 1998 28.5 years
Northwest
Continuum Care
Center......... 807 1955 1998 29 years
Bellingham
Health Care &
Rehab. Svc. ... 1,153 1972 1998 28.5 years
Rainier Vista
Care Center.... 1,124 1986 1998 40 years
Lakewood
Healthcare
Center......... 815 1989 1998 45 years
Vencor of
Vancouver HC &
Rehab. ........ 956 1970 1998 28 years
Heritage Health
& Rehab.
Center......... 241 1955 1998 29 years
Edmonds Rehab. &
Healthcare
Ctr. .......... 1,079 1961 1998 25 years
Queen Anne
Healthcare..... 864 1970 1998 29 years
San Luis Medical
& Rehab
Center......... 1,433 N/A 1998 25 years
Eastview Medical
& Rehab.
Center......... 1,451 1962 1998 28 years
Colonial Manor
Medical & Rehab
Ctr. .......... 1,102 1964 1998 30 years
Colony Oaks Care
Center......... 1,186 1967 1998 29 years
North Ridge Med.
& Rehab.
Center......... 1,170 1964 1998 29 years
Vallhaven Care
Center......... 1,648 1966 1998 28 years
Kennedy Park
Medical &
Rehab. Ctr. ... 2,218 1966 1998 29 years
Family Heritage
Med. & Rehab.
Ctr. .......... 2,260 1966 1998 26 years
Mt. Carmel
Medical &
Rehab. Ctr. ... 2,016 1971 1998 30 years
Mt. Carmel
Medical &
Rehab. Ctr. ... 7,394 1958 1998 30 years
Sheridan Medical
Complex........ 1,808 1964 1998 25 years
Woodstock Health
& Rehab.
Center......... 2,862 1970 1998 25 years
Mountain Towers
Healthcare &
Rehab. ........ 1,070 1964 1998 29 years
South Central
Wyoming HC. &
Rehab. ........ 521 1955 1998 29 years
Wind River
Healthcare &
Rehab. Ctr. ... 462 1967 1998 29 years
Sage View Care
Center......... 739 1964 1998 30 years
------------
TOTAL VENCOR NURSING 230,272FACILITIES........
S-6
Gross Amount
Initial Cost to Carried at Close
Location Company of Period
- --------------------------------------- ----------------- -----------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- --------------- ----- ------- --------- -------------- ------- ---------
NON-VENCOR SKILLED NURSING FACILITIES
Birchwood Care
Center......... MI $ 291 $ 6,187 -- $ 285 $ 3,095
Clara Barton
Terrace........ MI 375 2,219 -- 375 2,219
Mary Avenue Care
Center......... MI 162 1,744 -- 162 1,744
Woodside
Convalescent
Center......... MN 639 3,440 56 639 3,496
Hillhaven
Convalescent
Center......... NV 121 1,181 -- 121 1,181
Marietta
Convalescent
Center......... OH 158 3,266 -- 158 3,266
------- -------- ------ ------- --------
TOTAL NON-VENCOR SKILLED NURSING
FACILITIES........................... 1,746 18,037 56 1,740 15,001
------- -------- ------ ------- --------
TOTAL FOR SKILLED NURSING FACILITIES.. 76,688 749,402 1,234 76,682 747,544
======= ======== ====== ======= ========
VENCOR HOSPITALS
Vencor
Hospital--
Phoenix........ Phoenix AZ 226 3,359 -- 226 3,359
Vencor
Hospital--
Tucson......... Tucson AZ 130 3,091 -- 130 3,091
Vencor
Hospital--
Ontario........ Ontario CA 523 2,988 -- 523 2,988
Vencor
Hospital--San
Leandro........ San Leandro CA 2,735 5,870 -- 2,735 5,870
Vencor
Hospital--
Orange County.. Westminster CA 728 7,384 -- 728 7,384
THC--Orange
County......... Orange County CA 3,144 2,611 -- 3,144 2,611
Vencor
Hospital--San
Diego.......... San Diego CA 670 11,764 -- 670 11,764
Recovery Inn of
Menlo Park..... Menlo Park CA -- 2,799 -- -- 2,799
Vencor
Hospital--
Denver......... Denver CO 896 6,367 -- 896 6,367
Vencor
Hospital--Coral
Gables......... Coral Gables FL 1,071 5,348 -- 1,071 5,348
Vencor
Hospital--St.
Petersburg..... St. Petersburg FL 1,418 17,525 7 1,418 17,532
Vencor
Hospital--Ft.
Lauderdale..... Ft. Lauderdale FL 1,758 14,080 -- 1,758 14,080
Vencor
Hospital--North
Florida........ Green Cove Spr. FL 145 4,613 -- 145 4,613
Vencor
Hospital--
Central Tampa.. Tampa FL 2,732 7,676 -- 2,732 7,676
Vencor
Hospital--
Hollywood...... Hollywood FL 605 5,229 -- 605 5,229
Vencor
Hospital--
Sycamore....... Sycamore IL 77 8,549 -- 77 8,549
Vencor
Hospital--
Chicago North.. Chicago IL 1,583 19,980 -- 1,583 19,980
Vencor
Hospital--Lake
Shore.......... Chicago IL 1,513 9,525 -- 1,513 9,525
Vencor
Hospital--
Northlake...... Northlake IL 850 6,498 -- 850 6,498
Vencor
Hospital--
LaGrange....... LaGrange IN 173 2,330 -- 173 2,330
Vencor
Hospital--
Indianapolis... Indianapolis IN 985 3,801 -- 985 3,801
Vencor
Hospital--
Louisville..... Louisville KY 3,041 12,330 -- 3,041 12,330
Vencor
Hospital--New
Orleans........ New Orleans LA 648 4,971 -- 648 4,971
Vencor Hosp--
Boston
Northshore..... Peabody MA 543 7,568 -- 543 7,568
Vencor
Hospital--
Boston......... Boston MA 1,551 9,796 -- 1,551 9,796
Vencor
Hospital--
Detroit........ Detroit MI 355 3,544 -- 355 3,544
Vencor
Hospital--Metro
Detroit........ Detroit MI 564 4,896 -- 564 4,896
Location
- ---------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
NON-VENCOR SKILLED NURSING FACILITIES
Birchwood Care
Center......... $ 1,241 N/A 1998 36 years
Clara Barton
Terrace........ 2,115 N/A 1998 21 years
Mary Avenue Care
Center......... 1,578 N/A 1998 21 years
Woodside
Convalescent
Center......... 2,283 N/A 1998 28 years
Hillhaven
Convalescent
Center......... 784 N/A 1998 40 years
Marietta
Convalescent
Center......... 840 N/A 1998 25 years
------------
TOTAL NON-VENCOR SKILLED NURSING
FACILITIES..... 8,841
------------
TOTAL FOR SKILLED NURSING
FACILITIES...... 239,113
============
VENCOR HOSPITALS
Vencor
Hospital--
Phoenix........ 1,134 N/A 1998 30 years
Vencor
Hospital--
Tucson......... 1,158 N/A 1998 25 years
Vencor
Hospital--
Ontario........ 903 N/A 1998 25 years
Vencor
Hospital--San
Leandro........ 3,276 N/A 1998 25 years
Vencor
Hospital--
Orange County.. 2,858 N/A 1998 20 years
THC--Orange
County......... 268 1990 1998 40 years
Vencor
Hospital--San
Diego.......... 3,227 N/A 1998 25 years
Recovery Inn of
Menlo Park..... 1,123 1992 1998 20 years
Vencor
Hospital--
Denver......... 2,556 N/A 1998 20 years
Vencor
Hospital--Coral
Gables......... 2,168 N/A 1998 30 years
Vencor
Hospital--St.
Petersburg..... 3,758 1968 1998 40 years
Vencor
Hospital--Ft.
Lauderdale..... 5,061 N/A 1998 30 years
Vencor
Hospital--North
Florida........ 1,266 N/A 1998 20 years
Vencor
Hospital--
Central Tampa.. 1,031 1970 1998 40 years
Vencor
Hospital--
Hollywood...... 1,030 1937 1998 20 years
Vencor
Hospital--
Sycamore....... 2,389 N/A 1998 20 years
Vencor
Hospital--
Chicago North.. 5,038 N/A 1998 25 years
Vencor
Hospital--Lake
Shore.......... 3,262 1995 1998 20 years
Vencor
Hospital--
Northlake...... 2,392 N/A 1998 30 years
Vencor
Hospital--
LaGrange....... 1,619 N/A 1998 25 years
Vencor
Hospital--
Indianapolis... 1,429 N/A 1998 30 years
Vencor
Hospital--
Louisville..... 3,327 N/A 1998 20 years
Vencor
Hospital--New
Orleans........ 2,209 1968 1998 20 years
Vencor Hosp--
Boston
Northshore..... 1,047 1974 1998 40 years
Vencor
Hospital--
Boston......... 4,293 N/A 1998 25 years
Vencor
Hospital--
Detroit........ 1,513 N/A 1998 20 years
Vencor
Hospital--Metro
Detroit........ 511 1980 1998 40 years
S-7
Gross Amount
Initial Cost to Carried at Close of
Location Company Period
- ------------------------------------ ------------------- -------------------
Buildings Cost Buildings
and Capitalized and
Improve- Subsequent Improve-
Facility name City State Land ments to Acquisition Land ments
------------- ------------- ----- -------- ---------- -------------- -------- ----------
Vencor
Hospital--
Minneapolis.... Golden Valley MN $ 223 $ 8,120 -- $ 223 $ 8,120
Vencor
Hospital--
Kansas City.... Kansas City MO 277 2,914 -- 277 2,914
Vencor
Hospital--St.
Louis.......... St. Louis MO 1,126 2,087 -- 1,126 2,087
Vencor
Hospital--
Greensboro..... Greensboro NC 1,010 7,586 -- 1,010 7,586
Vencor
Hospital--
Albuquerque.... Albuquerque NM 11 4,253 -- 11 4,253
THC--Las Vegas
Hospital....... Las Vegas NV 1,110 2,177 -- 1,110 2,177
Vencor
Hospital--
Oklahoma City.. Oklahoma City OK 293 5,607 -- 293 5,607
Vencor
Hospital--
Philadelphia... Philadelphia PA 135 5,223 -- 135 5,223
Vencor
Hospital--
Pittsburgh..... Oakdale PA 662 12,854 -- 662 12,854
Vencor
Hospital--
Chattanooga.... Chattanooga TN 757 4,415 -- 757 4,415
Vencor
Hospital--San
Antonio........ San Antonio TX 249 11,413 -- 249 11,413
Vencor
Hospital--Ft.
Worth
Southwest...... Ft. Worth TX 2,342 7,458 -- 2,342 7,458
Vencor
Hospital--
Houston
Northwest...... Houston TX 1,699 6,788 -- 1,699 6,788
Vencor
Hospital--
Mansfield...... Mansfield TX 267 2,462 -- 267 2,462
Vencor
Hospital--Ft.
Worth West..... Ft. Worth TX 648 10,608 -- 648 10,608
Vencor
Hospital--
Houston........ Houston TX 33 7,062 -- 33 7,062
Vencor
Hospital--
Arlington, VA.. Arlington VA 3,025 3,105 -- 3,025 3,105
Vencor
Hospital--Mt.
Carmel......... Mt. Carmel WI 322 3,296 -- 322 3,296
TOTAL FOR VENCOR HOSPITALS PERSONAL
CARE FACILITIES.................... 42,853 301,920 7 42,853 301,927
ResCare--
Tangram--8
sites.......... San Marcos TX 616 6,512 4 616 6,521
-------- ---------- ------ -------- ----------
$120,157 $1,057,834 $1,245 $120,151 $1,055,992
======== ========== ====== ======== ==========
Location
- ------------------------------------
Life on Which
Depreciation
in Income
Accumulated Date of Date Statement is
Facility name Depreciation Construction Acquired Computed
------------- ------------ ------------ -------- -------------
Vencor
Hospital--
Minneapolis.... $ 1,621 1952 1998 40 years
Vencor
Hospital--
Kansas City.... 1,135 N/A 1998 30 years
Vencor
Hospital--St.
Louis.......... 971 N/A 1998 40 years
Vencor
Hospital--
Greensboro..... 2,619 N/A 1998 20 years
Vencor
Hospital--
Albuquerque.... 505 1985 1998 40 years
THC--Las Vegas
Hospital....... 271 1980 1998 40 years
Vencor
Hospital--
Oklahoma City.. 1,669 N/A 1998 30 years
Vencor
Hospital--
Philadelphia... 926 N/A 1998 35 years
Vencor
Hospital--
Pittsburgh..... 2,365 N/A 1998 40 years
Vencor
Hospital--
Chattanooga.... 1,691 N/A 1998 22 years
Vencor
Hospital--San
Antonio........ 3,185 N/A 1998 30 years
Vencor
Hospital--Ft.
Worth
Southwest...... 1,873 1987 1998 20 years
Vencor
Hospital--
Houston
Northwest...... 1,182 1986 1998 40 years
Vencor
Hospital--
Mansfield...... 822 N/A 1998 40 years
Vencor
Hospital--Ft.
Worth West..... 2,725 N/A 1998 34 years
Vencor
Hospital--
Houston........ 2,284 N/A 1998 20 years
Vencor
Hospital--
Arlington, VA.. 1,127 N/A 1998 28 years
Vencor
Hospital--Mt.
Carmel......... 935 1989 1998 20 years
TOTAL FOR VENCOR HOSPITALS PERSONAL
CARE FACILITIES.....87,752
ResCare--
Tangram--8
sites.......... 733 N/A 20 years
------------
$327,598
============
S-8
For the years ended
December 31,
----------------------
2000 1999
---------- ----------
Reconciliation of real estate:
Carrying cost:
Balance at beginning of period.......................... $1,182,547 $1,185,969
Additions during period:
Acquisitions........................................... -- --
Dispositions:
Asset impairment....................................... (3,422)
Sale of facility....................................... (6,404) --
---------- ----------
Balance end of period................................... $1,176,143 $1,182,547
========== ==========
Accumulated depreciation:
Balance at beginning of period.......................... $ 287,756 $ 246,509
Additions during period:
Depreciation expense................................... 42,188 42,742
Dispositions:
Asset impairment....................................... (1,495)
Sale of facility....................................... (2,346) --
---------- ----------
Balance end of period................................... $ 327,598 $ 287,756
========== ==========
- --------
* Pursuant to the terms of the Amended Credit Agreement, a mortgage was granted
on all properties, effective February 28, 2000.
S-9